John G

Olsen is absolutely correct. I went back and looked at my response and realized that I forgot to respond to the particular issue of borrowing. But, I hope readers will think long and hard about why they opened the Roth to begin with. Early withdrawals for any reason tend to be long term dumb.

I hope you explained to your client how using a Roth for a house purchase could very well be the biggest financial mistake he might make. The true value of a tax shelter comes with the passage of time. Some alternatives: (1) use the equity in the fiances house, (2) buying something less expensive, (3) waiting a few years until they build up additional cash, (4) asking for some help from relatives such as a loan from Mom&Dad who probably have some money siting in CDs earning 5%, and (5) putting less down in this era of very low mortgage rates. Roth assets should not be looked at like other assets. They are special. Your client may not be able to fund a Roth in future years. I would be very very reluctant to tap this extraordinary tax shelter to own a home.

Don't expect a NST to find all of the hidden or underground economy. We already have state and local sales taxes in most locations, and sales tax collection is a problem. NST and VAT are dramatic shifts for the US. I don't see it happening. We probably can't get there from where we are today. And every citizen with significant ROTH assets becomes another opponent of these tax changes. [This message has been edited by John G (edited 05-03-99).]

The answer from a couple of different sources that I consulted was to treat the 1/4 in each year as comming in uniformly in each quarter.... 1/16 of the total conversion each quarter for the next three years.

Daled, I am assuming that you are talking about stock and mutual funds that are part of a retirement plan. If that is correct then..... You might want to think carefully about how you tax rates may be jumping around. For example, if you plan to go to grad school, you might want to wait until next year to convert. Another issue would be if you meet the income qualifications in 1999, but might not next year. There are also some issues involving company stock. Under some circumstances you can sell the stock as a long term gain with a lower tax rate. This is only an issue if (1) you are eligible, and (2) you want the trade off of long term capital gains over ordinary income. Keeping the 50k sheltered for the long haul is wise. Paying the tax out of pocket maximizes the size of the tax shelter. You may want to use some of the internet based calulators to run some scenarios. There are complicated circumstances where you might be best off not converting. The 2K limit applies to both Roth and regular IRA contributions. That you stuck this in your paragraph makes me wonder if the other funds were tax shelter. I would recommend that you buy a hour of CPA time after tax season blows over and discuss your options.... in addition to talking with your plan administrator. Good luck.

You should know that small cap stocks have been depressed for about one year. All those stock market records have come from the 100 or so biggest companies, new internet firms or other "technology" companies. One of the benefits of a Roth is that there are no mandatory distributions when you hit 70. If you do not plan to tap into this money and assume that it will be left in your estate, then the tax shelter will extend a long time. You would like to convert the regular IRA in a year when your taxes are low. If your not yet retired, then waiting a couple of years may be advantagous. You are correct that you want to use non-IRA funds to pay the taxes. This maximizes the assets kept in the tax shelter. If your estate is over 650,000 then this strategy also reduces estate taxes, since the overall size of your estate shrinks by the amount of taxes paid. For the amount you described, this would be a negligible benefit. You mentioned "my boys". One thing that you might want to consider if you have surplus funds is to start Roth IRA accounts for any children or grandchildren if they do not have any or do not fully fund their IRAs. You can utilize the annual $10,000 transfer allowance. This also reduces your estate and may stimulate lifelong investing habits. When you convert a regular IRA, you subtract any non-deductable contributions that were made to your IRAs. For example, if you made non-deductable contributions of 2,000 in two different years, then you would only pay the tax on $111 ($4111-2000*2=111)if you convert to a Roth. (Note, the IRS calculation requires that all IRAs are pooled together and the non-deductable portion is the fraction of the total. You can't cherry pick one account or mutual fund.)

Good news. IF you have NOT YET filed your tax return for 1998, you can start a Roth for 1998 by walking into any brokerage, mutual fund or bank. In fact, you can open both your 1998 and also add the max amount for 1999 at the same time. Roth IRAs are expected to be offered in future years, regular IRAs have been around for two decades. If you live in a city of atleast 500,000 population, you will have many choices. Get going TODAY, as your time is about to expire. Your lack of time limits you to walk-in options. Look in the yellow pages for the brokerages or mutual funds that are in your town. If you live in a small town, you may have to rely on options offered at your bank. You can always transfer your account at a later date if you find you like some other institution.

Did this occur because of a court settlement, such as a divorce? Or, are you talking about becoming the beneficiary after the original IRA owner has died? I may be reaching beyond my expertise, but I can't imagine that you would be restricted from transfering the assets from one custodian to another. For example, the assets might be located a brokerage with poor service, sloppy record keeping, poor record with trades, or above market commissions/fees. Why would a customer not be entitled to move to another custodian? Kathy, please jump in again if I am not on target.

Deadline for 1998 conversions is past, regardless of what option you might wanted to take for taxes. Conversions are still possible for the 1999 year with the same rules as before (some legislation is proposed). A 1999 conversion must be completed by Dec 31 this year, and at this time the same income thresholds apply. Don't wait until year end to get the paperwork done as many institutions have earlier cutoff dates... and it is up to you to make sure it is not just done, but done correctly.

John Olson's prior comments are right on target. TIME is your number one friend in investing. One of the great examples of this is the story of two imaginary brothers one puts money into the market on the absolute best day of the year (lowest S&P500 or Dow 30) and the other always buys on the highest point of the year. To paraphrase the results, after 35 years the average annual return of the "lucky" brother is about 11.5% and the unlucky guy is 10.5% annual return. The value of the accounts will be different, but both results are respectable. Time is the dominant factor. As one who is new to investing, let me suggest a very simple approach for the first few years. Plug in your 2000 each year. For the first 3 to 5 years buy either (1) a very broad based index fund (such as Vanguards SP500) or (2) broad based stock fund (look at Consumer Reports, Money, Kiplinger for ideas on no load funds). Then let it work. You have good diversification. Its simple. You do not need to pay a lot of attention to it. You do not need to own six funds if your first choice is broad based. When the total $$ grow to $20,000 you may want to consider splitting the total into two different funds. You don't have to be an active investor that makes weekly evaluations of market action to get off to a good start. Not everyone wants to study the stock market an hour or more each week. If you start to do everything on a monthly basis (your example) then you are going to have a lot of paperwork to check to make sure it is being done correctly. I would vote for the one annual contribution just to keep life simple. The single best thing you can do right now is get started. Don't spend a lot of time trying to find the "best way of doing things". Perfection is not obtainable in the world of investing.

First, find out from your current employer what options they provide. You might be able to keep the $ in their system. If you worked for Intel, Cisco Systems or some other growing concern, that might be an attractive option. Alternatively, you could role the $ into an IRA, either cashing out before you make the rollover or taking the stock with you. Next, you have the Roth option. It is probably safe to assume that as a student you will qualify for a Roth conversion. Depending upon the amount involved, you might be able to convert it at a very low tax rate. Normally, you want to have suficient funds outside your IRA to pay the taxes. I suggest that you first talk with your employer. Then before you do anything, talk to atleast two potential custodians (after the IRA/tax season). If big $$ are involved, you probably want to get an hour of CPA/accountant advice. Good luck with your investments and your education.

Sorry, that is not how the math works. All of your regular IRA assets (including other accounts, if any) are pooled into one theoretical IRA to do the calculation. By "basis" I am assuming that you mean prior non-deductable contributions (such as 5 yrs * 2000). If you convert only 10,000 then you will be taxed on 71.4% of that amount since 28.6% of you IRA was previously after tax contributions. You just can't convert the original contributions by themselves. For other readers, remember the pooling occurs even if you have different mutual funds. No selective conversions or gaming the system is allowed. [This message has been edited by John G (edited 04-09-99).]

The 2000 roth contribution is not subtracted from your AGI. However, the Roth conversion is not included in you AGI either the full amount or the 1/4 option. If you must recharacterize because you expect to be over 100K, then do not file your tax return until you see your IRA custodian. If you have any doubts about your qualifications or the math, see an accountant. You probably should file an official request for an extension with the IRS given the few days left to April 15.

Lyric: bravo, you reached the right conclusion. No need to get all excited until perhaps a decade passes and your assets have grown... and maybe not even then. Good luck.

Unless your defered comp plan is decent, it may be time to look for a different employer. There is a huge long term difference between being in a modern private sector firm with various retirement/410k/thrift plans and the governmental arena. At the extreme end, you have clerks at Microsoft that after a decade can have accumulated massive assets. In the governmental arena, you are often stuck with limited choices.... some government flaks think low performing annuities are "exciting". Its sad, because some many important jobs (teachers, fire/rescue, police, etc.) you better love 'cause you don't get $$.

Another Q I would ask is what would you do with the 2,000 if you don't Roth? I like the Roth a lot better than a regular IRA given your age. I am presuming that your alternative would not be spending it. I also value my time highly and would not want to complete two tax returns (even simple ones) instead of just one. The $140 seems awfully small compared to the 30+ years of tax free compounding and subsequent tax free payout. The 2,000 invested now at 10% per year doubles every 7 years... that mean 4,8,14,32..... $64,000 after tax when you are 66 yrs old. That $2,000 might be equivalent to one years living expense in retirement, depending upon inflation and how you might spend your $.

You may be confusing the "rollover" between IRA custodian and a rollover of a maturing CD. You have an unlimited number of allowed rollovers of IRA to IRA (not involving IRA -> Roth which is a conversion) as long as you never touch the funds and it is processed strictly by the two institutions. If institution A cuts a check for you, then you have 60 days to rollover the funds to another institution. I always suggest that you use the first option, which some call a direct transfer. If you have an existing CD, you probably do not want to incur the "substantial penalties" of early termination. Therefore, if you plan to switch institutions, time it to your maturity date. Your bank probably charges an exit or termination fee on transfered IRAs. If you are staying within the same bank and your maturity date is close, talk to the customer reps. A small bank or thrift will probably want to be good to their customer. With large (or out-of-state) institutions, you may not get such a positive response. Some banks may allow you to upgrade a CD, but this is based upon their marketing program not US law or regulations.

Not sure about your wifes eligibility. But, all IRA accounts (reg or Roth) are INDIVIDUAL accounts. There are thousands of places offering IRAs so you just have to compare about fees, service and investment options. Often the no fee is with very conservative options (low interest CDs at a bank) or if your total IRA assets exceed $10,000. My experience is that the annual fees range from 0 to $35. Shop around. Brokerage account IRA will allow you to trade stocks, but it sounds like you are just getting started. It is hard to efficiently or wisely invest less than $10,000 in stocks. Try mutual funds until you build up your assets. With less than 10K you get eaten up with commissions and have a hard time building a portfolio. You may want to consider an index type fund which has very low overhead costs. Just anyone? well, no. The level of service, convenience, annual charges, range of choices vary a lot. Following my prior suggestion: try Vanguard, T Rowe Price, Janus or one of the other NO LOAD family of mutual funds. Each offers lots of choices for investing. Responding to your final comment. Anytime the government sets up something new there is ussually a prolonged period of fixing admin and technical glitches. They just don't consider all of the potential variables (market drops, people dying prematurely, divorce, etc.) Everytime I say something about tax simplification, my accountant falls off his chair laughing. Don't expect it to get any easier... people want to talk about flat taxes more than tax simplification. They are not the same.

Good points. With two teenagers (2 yrs apart) I think the disclaim function makes the most sense. We are along way off from tapping the funds, the disclaim gives us a last second choice to push $ to them if we don't need it. Is there such a thing as a partial disclaim? Ie, keep 100K but disclaim all the rest? Thanks John Olsen -- good ideas.

Also add a letter of explaination to your 1998 return. IRS will not spend a lot of effort tracking down small $$ if they get a simple explaination. You give them an excuse to drop a possible inquiry. This first year of Roths is just going to be a big headache for the IRS.

I think your answer is one clock. From the IRS perspective, they don't see all your mutual funds... its all reported as one combined retirement asset. Well perhaps two collections: (1) Roths and (2) regular IRAs.

More questions: do you have only a single IRA account with all your IRA assets? Or do you have more than one, and you are only talkings about converting some of your IRA assets. Lots of folks don't realize that the IRS pools all of your IRA assets into one pile. When you convert, the IRS does not see this as changing a single account but changing part of the entire blended IRA assets. This can get messy, so I suggest that you see a CPA or accountant, you probably need a specialist to get it right. I do not recommend the tax prep mills -- too many mistakes.

Alk1, you will find a wide range in annual fees. I don't see any pattern by institution. Remember, other possible fees include commissions, mutual fund loads, account closing fees, etc. Concerning the annual fees. They range from zero (yes zero) to $35/year from my experience. Many brokerages and mutual fund families will drop their fees if you have other funds with them or when your IRA assets grow to more than $10,000. You may want to ask an institution to waive their IRA fees. If they want your business, they may just say yes. Shop around, but don't focus solely on annual fees. Investment options, level of service, and www access to your account, are some of the things you want to consider. If you don't like your initial choice you can always transfer your funds... for a fee of course.

John, thanks for the additional info. I have read about "disclaiming" and can see how it might give you a clever option if the wife's assets exceeded the $650K tax threshold. Why do you suggest splitting an IRA so to match the number of children? Does this have something to do with they being able to take the funds over their lifetime? Thanks.

It sounds like you are new to the world of investment. Generally, the annual return of investments correlates to the level of risk you accept. The web site at the bank probably included mutual fund or bond investments which are not insured and can increase or decrease in value. The closest thing to a guarenteed investment would be bank certificates of deposit (insured by FDIC) or government bonds (you are OK as long as the USA is OK). These investments are very very low risk, but not zero risk. The problem with these "safe" investments is that they do not provide a very good return. Over the long haul, they may only slightly outperform the long term rate of inflation. If you are looking for a higher return (say 8% to 12% per year) then you have a range of choices: Ginnie Maes, corporate paper, bonds and stocks to name a few. While the good years generally outnumber the bad years, in any one year you can get a significant swing in value. But time is your friend: over 20+ years you expect to do well. You still have to be able to stomach the swings and not loose sleep. It sounds like you need to educate yourself about long term investing. You can be self taught (reading Money, Kiplinger, Wall St Journal) or you might want to sign up for some classes at community college. The retirement assets of successful people can grow in their lifetime to astonishing size, a million or more is not all that unusual. It makes sense to get the training to make good decisions. One last word, don't do anything if you don't understand the choice. There are lots of folks eager to sell you things like annuities and high cost mutual funds that may not be in your interest. Good luck.