John G

This sounds something like the options my wife got for a 403B as a teacher... all annuities except one option with Fidelity (which the school district wants to drop). You said that if you terminate employment you could withdraw these assets, pay taxes and reinvest? You should also have an option to either transfer the assets to another retirement account or keep it with them as an independent person retirement account maintaining the shelter. Talk to the firm that would hold the annuity, ask about the options under your scenario. If the answer still stinks, you have a pretty compelling reason to find a better employer. Before you say yes to the next job, ask about their deferred comp, 401K, thrift savings, ESOP etc. These plans can easily amount to a hidden 20% of your compensation in the long term. The private sector is often more generous and flexible. If that doesn't help, run for president for one term, give a speech in Asia and take pre-IPO stock in leu of your $80k speaker fee. George Bush has $14 million more from that recent arrangement... which makes the fees Reagan collects pale by comparison. What a country. [This message has been edited by John G (edited 03-30-99).]

Thanks John. Can you or anyone else comment on the issues on who are named beneficiaries. Specifically, the differences between naming your kids or your wife, from an IRA/Roth and inheritance perspective. Thanks.

The some factors that are more likely to dominate a choice will be your planning horizon, risk tolerance, investment experience/knowledge and how willing you are to spend time doing your own research. I would suppose that many Roths or regular IRAs are going to be held for the very long term (compared to saving for a house downpayment or college). Therefore, you can be less worried about the short term volitility of your investments, which favors growth stocks. Only a few investments are inappropriate (such as tax sheltered muni bonds), your investment style is more important. One factor to remember, within any IRA, the holding time on your investments has not tax impact or even bookkeeping impact. Short term, long term have no distinction.

Tell us what you don't like about your 403b/401k or other deferred comp choices and you will get some useful feedback. For example, do you have any of the following: an index fund, blue chip, growth, bond, etc set of choices. Are you getting any kind of match on your contributions? [This message has been edited by John G (edited 03-29-99).]

Clarification: $2000 is the maximum IRA contribution, not a threshold for income. You can set up an IRA for a child for a small amount, as long as it does not exceed their earned income. For example, kid age 3 makes $300 in modeling allows the parents to open a Roth for $300. Great idea. For most families, the practical implication is that as your teenager begins to work part time or summers you can establish an IRA. You can use your funds to create the IRA, you are not forced to use their paycheck. For higher income families, this can build an inheritance via Roth option. Downside issues: you kid can be incontrol of big $$ when they become 21 and these assets will have a greater impact on scholarship chances than if they were in the parents name. Kids enhance the tax shelter aspect of the Roth in that they have a very long period of time for the investments blossom. [This message has been edited by John G (edited 03-29-99).]

I just read the "Inheriting a Roth Ira" list of 11 messages and found it confusing. I don't think much has been said about inheritance issues for people in the 40s 30s that have substantial Roth IRAs. What are the key issues? Thanks

Simple answer: check your custodian. The custodian rules will govern your personal degrees of freedom. Custodian rules can be no less strict then Federal/IRS rules, they can be more restrictive. [This message has been edited by John G (edited 03-26-99).]

You can have any combination of Roth and regular IRAs as long as you qualify to begin with. For example, you can have two Roth IRAs at 500 each and five regular ones at 200 each. But, Roth and regular IRAs often have annual fees and you don't really want to be buried in a pile of reports/prospecti etc. Think of all your retirement assets as one pool and look at how you are allocating your investments. If your 401k is sizeable and all in one stock, you don't do much by splitting 2,000 into lots of pieces. A few years from now when you have built up the size of your IRA accounts, you might want to rethink your allocation. The first few years, I would keep it simple.

Lets try and simplify your problem. If you deduct the $2000 regular IRA this year you get an immediate tax savings of $560. If you elect to go the Roth route, you pass up this immediate benefit for future tax free income. If you wait 42 years (age 73) your Roth assets will grow to $128,000 (using 10%/yr). With a Roth, no tax is owed. Remember, you will undoubtably have made other IRA or retirement contributions and could easily surpase $1 or $2 million in your account. You can guess at a likely tax rate, but the more successful you have become the more likely the rate would be atleast the 28%. Roth wins big over the long haul because your $560 savings is left out in the taxable world and can not keep pace with the Roth tax shelter.

Kathy, because this is not something I do with IRAs, I checked with Schwab about their policy. My prior comment was based upon their info. It has not been clear to me what rules are set by IRS/SEC or what is imposed by brokerages. With both covered calls and married puts, the account does not face unlimited exposure, which makes sense since you just can't add money to an IRA to make up for a bad investment decision. My information is anecdotal, so please correct me if I am wrong.

All of the brokerage houses offer Roth and regular IRA. If you expect to trade a lot, you might want to consider low cost internet stock trading. There are hundreds of options such as Schwab, Ameritrade, Etrade, DLJ, etc. I am not sure which if any support DRIP programs. Each custodian can have their own rules of what they will allow or support. Best way to find out is to make a few calls.

I don't know if it is Federal law/regulation, SEC rules or brokerage rules but I am not aware of any custodian that will consider "margin" capabilities on IRA accounts. Some, but not all custodians, will allow covered calls and "married puts".

You opened your Roth in 1998. You only have a problem if your income last year (1998) increased above the threshold amount. If this is your situation, then you must see your custodian ASAP (before you file your 98 tax return) to switch the Roth back to regular IRA $$. This reverted IRA may be able to be converted this year to a Roth if you meet the separate income limit for Roth conversions in 1999. You must reverse, there is no option to pay a tax a keep the Roth. If your income increased this year, it does not effect actions taken in 1998.

Pause before you bust up an IRA or Roth IRA. You just created this wonderful tax shelter... if at all possible, give it the 30, 40, 50 or more years to work its wonder. You have other options such as student loans, working more hours, etc. I would want to exhaust all my other options before I dipped into IRA/Roth accounts. Ten years from now you may kick yourself for not considering other options. Back in the mid 1980s, I had a chance to take out a lump sum (job schange) that was tax sheltered and pay tax on a ten year average (a tax option then). Sounds wonderful? The big mistake was that for the last 14 years I have paid taxes on all the wonderful gains that could have been sheltered. The total tax bill in 14 years grew to twice! what I made in 1985. Ouch. I hope you now understand why I recommend not spending your IRA assets now. Good Luck.

I want to tag on with a few comments. First, bracket creep is unfortunate, but the big picture is that you have a wonderful tax shelter for the long haul. When you start spending your assets in retirement, the Roth should be the last asset that you want to touch. Some people will never touch their Roth and will pass it on to their family. For planning purposes you might want to add 5, 10 or 15 years to your retirement date. For example, you retire at age 60 but don't start taking $$ out of your Roth until age 70. I think it is a common error to assume that the Roth shelter ends the day you retire. For some people, they will effectively shelter investment gains for twice as long as some simple calculators presume. For example, if you are age 45 you may be talking about 35 years of tax shelter. The "rule of 72" (investment period in years to double is 72/%rate) says that at 10% annual investment will double every 7 years. For 35 years, that means 32x the original assets... which ussually dwards the tax creap problem.

Duplicate erased. [This message has been edited by John G (edited 03-22-99).]

The IRS treats all IRA funds as one big bundle of retirement assets. The 4 year election applies to all converted assets, no specific transactions. If you have four IRAs at four different institutions, IRS math at tax time blends them all together. If one was 100% deductable and the rest were not, and they are all at $2000, then you have a blend of 25% deductable. My accountant has pointed out that husband and wife each make an election for one year or 4 yr average. Each election applies to all converted $$, but for only that spouse. Therefore, wife can 4 year and husband can 1 year if you wish.

Melanie, nice short Q. I am assuming that you are either new to investing or just asking about interest rate type investments. There is no simple answer to your question, because investments involve a tradeoff between expected returns and risk. If you are extremely risk adverse, you should be in money market funds, bank CDs or other government paper. Returns will be in the 4% to 6% depending upon the type of investment and the length of time you tie up your funds. If you are young, or more of a risk taker, you should be selecting higher risk/reward investment options. The long term average for a diversified stock fund is 10%/year or possibly a little higher. In any given year, however, you could see a 30% drop or a 45% gain. The bad years occur less often than the positive ones, which is how the average is 10+%. If you stay invested for 20 years, you really can ignor the few bad years. I believe that there is no 20 year period of time since 1920 when the stock market was overall down... not even for those people who first invested in 1929. If your IRA assets are less than $20K, I would recommend that you use no load mutual funds. There are 7000+ mutual funds. A list of 100 good ones can be found in Consumer's Reports this last month. Money, Kiplinger and Morningstar are all good souces of fund phone numbers. No load means that there are no 3% or 6 1/2% fees up front. Other fees to watch out for are the annual IRA fee and the annual management fee.

If you switched to a Roth in 1998, then the income threshold is your MAGI for 1998. Your MAGI for 1999 has no impact on the Roth conversion you did last year, even if you elect the four year average. If your 98 income is beyond $100K, and your Roth conversion was also in 98, then you do have a problem that must be corrected before you file your tax return. One solution, recharacterize now and then try and shift/defer compensation or bonuses out of the year you want to convert. Please note that the income threshold for annual contributions is considerably higher than the $100K max level allowed for Roth conversions.

You may need to expand of the facts associated with your question. Cost basis does not apply to IRAs, the accounting is different with non-IRA investing. Once your funds a deposited in an IRA you can forget about long term and short term trades. There is no distinction between interest, dividends, short term gains, or long term gains. You also can ignor stock splits in an IRA. They all just increase the eventual size of the account. You track IRA investments primarily for your own investment understanding, the accounting records are less complicated in my view then "regular" investing. What is important is the amount of initial and subsequent investment that was previously taxed. With a regular IRA, the previously taxed part is not taxed when you withdraw funds. With a Roth, nothing is taxed. (Of course, I am assuming that you meet the various timing requirements.) In your case, I assume that the $2,000 refers to an annual contribution. If you deducted it on your previous tax filings, then you will pay tax on the withdrawal. If you did not deduct the $2K, then in retirement, it passes out of a regular IRA tax free.

I believe the answer is no. The investments that you can make with a Roth IRA are limited by both Federal IRA limitations (such as collectables) and the constraints imposed by the institution you choose as a custodian. Stock options, pink sheet stocks, commodities and sometimes IPOs will be not allowed. Talk with your custodian about what they will support. They should also be aware of the federal limits as well. If the deal your company offers is good, the simple answer is do both if you can.

Yes, you can face a change in tax rates. However, after playing with various spreadsheets and Roth calculators, I have concluded that the length of time you keep your investment sheltered is the primary driving factor for anyone under the age of 50 who converts. The second most important factor is "how" you invest, especially if you weight towards stocks. These two factors tend to dwarf differences in tax rates. My experience has been that families are not very good at predicting their long term tax rates because too many circumstances change. Promotions, inheritances, investment success, change in federal policy, and change in deductions can change your tax circumstances. I suggest that you plug your numbers into a couple of Roth conversion calculators to see the results. I have run some scenarios for friends in their mid 40s where they were much better off even with a double tax rate jump. Remember, the Roth also has some very attractive estate planning options and no forced payouts during your lifetime. Finally, you also have another option, to return part of your 1998 Roth conversion back to regular IRA status if you are more comfortable at the 28% rate. I only offer these comments so that you crunch the numbers before you assume that you are worse off. Good luck.

Depends on the two states. You will probably need to talk with an accountant/tax preparer on this Q. Factors that may effect the answer: your state of residence on the date of the conversion, were you employed in both states, etc. Since some CPAs scan this message board, you should add some details. While you can talk with the two state revenue/tax offices, don't be surprised if they are not sure of the answer due to the newness of Roth conversions.

You will need to further explain your question. Roth IRAs do not provide a tax deduction. Contributory Roths have income restrictions. The assets when withdrawn later in life are federal (state laws may echo the federal policy, best to check with your state) tax free. Tax free for both the original contributions, interest, dividends and capital gains. I hope that answers your questions, if not try to clarify your concern so I or others may respond.

You are making a wise move, an IRA is a great vehicle for retirement savings. Sources of info: banks, mutual funds or fund families (such as T Rowe, Vanguard, Janus, etc.) and brokerages. Bank options are likely to be very conservative such as CDs and basic mutual funds. There are about 8,000 mutual funds, and they come in more flavors then Baskin Robins ice cream. Brokerages can offer stocks, bonds and often mutual funds as well. Each type of IRA custodian will offer some type of basic info on how to get started. I suggest that you call at least three different firms and ask them to send you their "just getting started" IRA package. The topic of IRAs is frequently covered in Money, Worth, Kiplinger and other magazines. You will also find the WWW to be a good source. WWW.fundspot.com for a list of mutual funds WWW.rothira.com for a wide range of articles of Roth IRAs. Privacy! The only people who are likely to know that you opened an IRA (Roth or regular) are your accountant/tax preparer, your wife (hopefully) and anyone who brings in your mail. It is not your employers business. They shouldn't ask, you shouldn't tell. See other listings on 401K and Roth conversions... or wait for a CPA to answer the last part of your question.