John G

You can only make contributions to your Roth if you (or your spouse) have earned income. If you have none, then you can not make contributions to your Roth. You may be able to convert your IRA to a Roth, but you would have to meet income and tax filing rules. Conversion can be desireable, a "wash" or negative.... it depends upon your specific circumstances and what future scenario you use.

cjharison - I think the reference was to not paying Federal taxes on normal retirement dispursements from a Roth. Perhaps the language was a little sloppy, but I read it as referring to Roths and no taxes due on either contributions or earnings would be correct. Your comment about one plan is superior to another is somewhat misleading and should not be offered as definitive guidance. The value of each retirement approach is significantly influenced by individual circumstances: Income and filing status scenarios: future likely income, retirement income, marital status Tax scenarios: current tax rate, future tax rate Personal data: life expectance, long term goal, estate planning options Employer plan issues: match (if any), portability, and investment options Expectations about plans: current threshold limits and possible future restrictions/plans Plan flexibility: control over distributions is a big one here That is a big matrix of ovelapping considerations and requires a lot of "assumptions". Because many of the variables can not be accurately predicted, it is virtually impossible to say today what is the "best choice" for anyone. You are correct to point out that there are tradeoffs between using after tax money (which means you paid the taxes now) vs paying the taxes later. Company plans are often best with most of the following: good investment choices, portability when you leave that employer, and a good match. Roths are generally best when the individual expects to be in much higher tax brackets in the future, the taxpayer wants control over dispursements, or wants to use the Roth as part of an inheritance plan. IRAs are attractive when your current tax rate is high but you expect much lower tax rates in retirement. (Note: If we could count on capital gains taxes being extremely low for decades to come, long term taxable stock accounts might beat out IRAs as your tax rate on "distributions" could be way below the tax rate on ordinary income. But hey, why complicate things with another scenario.) Which approach works best may vary over your lifetime. Sometimes a combination or hybrid approach works... especially if the taxpayer wants to sock away a large amount each year.

8K for federal tax seems high given what you have said. You did not indicate if you are married or have children, but personal expemptions and deductions should reduce your taxable income. You did not indicate if you used the standard deduction or itemize. The single best way to answer your question is to run some tax preparation software and develop a couple of scenarios. The deduction for an IRA is never 50%, but rather related to your marginal tax rate. Do understand that you might be better off opening up a Roth IRA (forgoing the tax deduction) which could grow tax sheltered... plus Roth distributions in retirement are not taxed. If you expect to move to higher tax brackets down the road, this might work better. You can find a lot of posts on this message board that talk about Roths. Yes, there are differences between types of IRAs - the two common choices are regular IRAs (completely or partially deductible) and Roth IRAs. There are also special types of IRAs (SEP IRAs) for self employed and coming soon employer Roth 401k. The options don't change every year, but you often have a couple of new options each decade. If your differences question relates to investment options - oh baby, there are enough choices to make your head spin.... mutual funds, stocks, bonds, ETFs, to name the major choices. If you need more about investment decisions, post again.

Whooaa nellie! Now this is a strange post. Who told you? I sure hope you are not being drawn into some kind of scam. Don't give any money to anyone until you post some clarifications. If you are really talking about a Roth, someone is seriously misleading you. You never send money to the IRS for a Roth. All funds must be deposited with a custodian, which is a legal entity (such as a bank, mutual fund or brokerage) that can act in a fiduciary capacity for you. The IRS rules determine if you are eligible and the maximum you can contribute for each year. It is up to you to decide what to contribute. You could be eligible to the max and contribute zero. You can not exceed you annual maximum. You can make one payment, monthly payments or any number of payments as long as you don't exceed your maximum. For example, if you are under the age of 50 and have "earned income" over $4,000 (payroll typically, not interest capital gains or dividends) you can contribute $4,000 for 2006. Since you are over age 50, you can contribute $4,500 for 2006, as Congress gives you a "catch up option". The max amount is the smaller of your earned income or the annual maximum. You can add to your Roth after you retire only if you have earned income. Same rules apply. So, if you take a part time job (like a summer camp counselor) that would allow you to continue to fund your Roth. There is no five year period associated with contributory Roths, nor are there any mandated distribution formulas. Do you already have a Roth? Are you single or married? Is this somehow related to a company matching program or a spousal IRA? Does this have something to do with a minimum initial deposit established by a custodian? You left me scratching my head over what is behind your post. Please post again.

A client with no liquid assets wants to start a business.... There seems to be many things wrong with that statement. I don't think we are talking about a public IPO where the IRA holdings might be inconsequential. Where to begin? 1. The planet is currently drowning in private equity funds and venture capital money. What about family money? If this business is a great idea, there will be money to fund it. 2. I would rather own stock and eventually pay long term capital gains then have all that effort get taxed as ordinary income. 3. If this is a risky enterprise, then why would you ever want to bet the farm. A few years back, the fellow who lived next to me "bet the farm" and lost his car, house, wife (she divorced him) and became unemployed in one year. He made a foolish bet on a marginal business and lost two decades of financial achievement. You did not post enough details to answer the question of was there some format under which this might be allowed. From the little you said, this sounds more like a dream than a realistic idea. PS: I have started three businesses and been involved in the creation of three others. Money was never a big issue in the start up on any of these. The "idea" was the key driver, followed by the significant mgmt figures.

This thread has gone far afield of the original question. Mountainman, did you get your original question answered? It is helpful to hear back from the original author. - - - - - PS from one of the moderators: I suggest that political leaders be addressed as position + last name. Referring to one person by the first name and another by their full title is inappropriate and less confusing. We want this message board to be factual and void political slants.

And.... it is not uncommon for the basic staff and front desk clerks at any organization to get it 1/2 right. Its a complicated subject with a lot of subtle distinctions. There is a difference between "conversion" Roths and contributory Roths. A "conversion" is when you flip an existing IRA over to a Roth and pay taxes on the amount moved. Fidelity may have said it wrong, or your ears may not have realized the differences. Same goes with "withdrawing", "contributions" and "earnings". It is not hard to have one party talking about one circumstance and the other talking about something very different. If you are talking about a contributory Roth, you can withdraw you contributions at any time without penalty. There are also first time home buyer and education exceptions. That is a lot of flexibility, and it gets better when you reach the minimum age and can completely control how much and when you take out funds. BUT... a more fundamental question is why do you want to take funds out of your Roth. The basic value of a tax shelter is using it to shelter assets. Have you considered other sources of money? You have low interest signature loans, home equity loans, home refinancing, and even short term teaser credit cards with zero interest for 4-6 months. Some folks also have internal family sources - "hey ma! I can pay you 6%, which is a lot better than 3.5% you are getting at the bank!"

The IRS cares about taxes owed and following the rules. They don't ask about how you invest. You can see this for yourself by reading Pub 590 on IRA/Roths which has not even one sentence on how you should invest. Maybe this fellow is trying to steer you away from a narrow investment idea. It is common for people to pick up essentially "urban legends" concerning something and believe very firmly is something that is just not true. YOU are in charge. Not the IRS. Not your banker, not your broker.... YOU are in charge, its your money and you need to be involved in making investment decisions. Do not confuse this with a knock on diversification. I have never heard of any time where the IRS has required or commented on how people invest. I also agree that a lot of folks make huge mistakes in investing because they are ill informed. Some of the big mistakes include: [1] Chasing last years performance. On study showed that a group of mutual fund investors fell way short of the industry average returns because they kept chasing what was hot. The hotest area (value, market size, country, sector, etc.) is often a the bottom of performance the following year. [2] Keeping too much money in cash. You don't lose money in cash, or do you? Inflation erodes the value of cash, so if you cash return is meager, you can be "losing" money. [3] Failure to diversify - to great an emphasis on one stock, often related to pension plans based upon company stock (like Enron). But, if you GOOGLE under NFI (Novistar), you will find articles where folks had placed 50 to 100% of their retirement assets into a sub-prime mortgage company because they paid very high dividends. NFI dropped from $50 to under $8 in the sub-prime meltdown in the past 2 months. [4] Too conservative a portfolio. If you are investing for decades (and even if you are 50 that might be true because you don't spend all your retirement income the year you retire) you need to have a substantial part of your assets in equities. Folks that don't understand investing often confuse short term volatility with long term performance and shy away from stocks or mutual funds with substantial stock holdings. If you are fearful of having a down year (or overreact to a down year), then you do not know enough about long term investing success. Investment success is long term - years, decades and even generations. [5] Inadequate time spent learning how to invest. Think about how much time folks spend planning a 1 week vacation, shopping for a big screen TV, or buying a car. How much time do you think people spend reading about how to invest? In my experience, it is not rare to find someone age 45 with a 400K retirement account that spends less than a hour a year thinking about this asset. You don't have to be a full time investor - everyone has a life to lead. But how can you justify spending zero time on learning about investing? I suggest that folks start with committing 2 hours a month to reading a personal finance magazine like Kiplinger. Even 1 hour a month would be a start.

Investing in your home is generally a good idea, more so if you are putting in sweat equity and get to enjoy the improvements. I think your primary problem is on the income side. You might want to look around for a way to boost your income by a home based job for your wife, part time on weekends, or a summer temp position. If you could find a way to generate 4K or 8K, you could more aggressively fund your Roth. Given you limited cash resources, I would be inclined to sell the stock and put those funds 1/2 into your Roth and 1/2 into cash reserve. You will have a tax hit, but frankly the certificate isn't helping you.

The best answer is no one can tell. Markets are unpredictable. Health, medical devices and pharmaceuticals have had a couple bad years after many years of above average performance. The performance of a specific drug company is effected by new drugs, government regulations of drugs, government supported health care programs, drugs coming off patents, law suits, etc. This could be a turnaround year... or not. I can tell. No one can tell with any kind of certainty. You do need to continue to put some funds into your Roth each year. It sounds like that is a strain, but a small regular contribution will help build this future nest egg. The problem with owning a small number of shares in one company include lack of diversification and transaction costs (commissions) to sell. If your Roth is with a discount broker, you may be able to get them to sell the shares with a commission under $30. Then you need to remember that you will have a tax obligation. You can then decide if you need those dollars as an emergency reserve or if you can put some into your Roth. Don't forget to look into your school districts 403b or similar plan. Programs with a match should get a high priority.

Thon Update - Unbelievable, Thon at Penn State raised $5.2 million this year, an increase of over $1 million over last year. I have a lot of pride in PSU students for a monsterous amount of work - all year long. The benficiaries are families with children struck by cancer. http://live.psu.edu/story/22413

Are you asking? 1.) just about deductible aspects of regular IRAs and how much you can reduce your federal taxes? 2.) the amount you should set aside for some retirement goal? 3.) investment choices in IRA/Roth? See publication 590 for more info on 1. If you want more responses here, you need to post your 2006 income, marital status and likely filing status. Ditto for 2007 if you want a foreward going answer. If you want more on #2, you need to provide some info on your age, other retirement assets, and some idea of your retirement goals (age, income). More details helps folks craft a better answer.

On legality, I yield to the citation. It sure does not make any sense to me. The Roth is a wonderful tax shelter. Why would you want to raid it to fund an HSA?

A very rural life indeed. I grew up going to VT to a "cabin" with no running water or electricity - and it was probably 12 x 15... but just for summers. You may not need to make any hard choices right now, but may face them down the road. You have virtually no spare dollars for the unexpected expenses. And, vacant land and the "cabin" are not easily transacted quickly. There are jobs that you can do based out of your house. First place to start is not folks who advertise home based businesses as most of these just suck up front end fees. Try networking with others at your church, local businesses, town hall, etc. Working even 12 hours a week would give you a modest cushion. Feel free to post again or email. Good luck with your decisions.

You need to call the IRA dept at your custodian. Don't talk to a general sales person or anyone at the front counter of a walk up. The back office is more familiar with IRA accounting and conversions. The Roth conversion should be valued as a net account value on the exact date the conversion was made... not the end of year value or the value when you made the request. Your monthly statements should help you get close to this number. You can also use the "historic prices" option on the internet to try and replicate the values at the close on the day before and the day of your conversion. It is not clear from your facts that the custodian made a wrong calculation. I am not sure that you can offset the covered call "loss" unless you bought it back - - that's an accounting issue that others can address. There is also the question of the conversion date vs the option expiration date. I also had a valuation problem with part of a Roth conversion. The custodian never made a note of the valuation of a thinly traded stock on the date of conversion and instead just used the year end stock price - which was about 34% higher. They were able to correct the error - but it took a few phone calls and a letter. Start now on this issue. If you can't get it resolved, you have the option of reversing the conversion and instead converting in 2007. Options? You say nothing about you other investments or investment experience. If this is your only investment, I would not be holding one stock and selling covered calls. There are higher transaction costs and bigger percent spreads with options. In the asset range you show, it is not terrible efficient to use options. You refer to your option as a "short position" which is not technically correct. You sold a call for a stock you held (a covered call) and kept the premium. Because the stock rose in value, buying back the call would have cost more than the premium you recieved when you sold the call. It looks like holding the stock and not selling the covered call was the better choice in this example. You can not "sell short" or use margin in an IRA/Roth account.

Thanks for the additional info. You are fortunate to have low living expenses given the hit your income has taken. If you were sitting on a $1000/month mortgage, you would be definitely in a hole. You have no mortgage payment (but I do hope you have home owner insurance) and apparently local wood for heating. No credit card or other debt - which is excellant. That leaves food, utilities, insurance, medical? and property taxes. The single best thing you could do to give you more spendable money is to ditch the cigarettes. I'm a non-smoker... I can't imagine spending about 1/3 of my monthly income on cigarettes. Wow. You did not say anything about income from the investment properties. If there are no revenues from these properties, you might be better off selling these assets and putting those funds to work. See last paragraph. Your only safety net funds are either the investment property or the IRA/Roth. That leaves you exposed to any problems like a car replacement, home repair or further medical costs. It is difficult to navigate many years without having some kind of surprise. Lack of reserves means you may need to liquidate your investment properties or draw from the IRA in an emergency. I think you are correct that you can convert the IRA to a Roth... if not all in one year, then part in 2007 and part in 2008 if you find you will owe some taxes on a full conversion. BUT, the benefit of doing this may be modest. You have indicated that your income is going to be very small in the coming years and therefore your taxes (if any) will be very low. It could very well be that you have a zero and zero comparison. SSDI Withholding If your income is likely to remain as you have explained, there is no good reason to give Uncle Sam an interest free loan all year long. You can drop the witholding and build your "reserve". Mutual Fund Choice Fidelity has many solid mutual funds that you can consider. All choices would be easy to liquidate if you needed to tap these funds. The target retirement year option is ok, but understand that the industry is using these target retirement fund choices as mostly a marketing gimic to capture uncertain investors. You could also just pick one or two general purpose mutual funds and do fine. The target funds are supposed to shift slowly to more bonds as you get older. They are designed for the average households retirement timing and may not best match your specific needs. Investment Properties You indicated that these were worth about 100k. Assuming that you have held these for more than a year, you could sell them and perhaps have 85,000 or more to invest after taxes. If you put 1/2 in a dividend/income fund and 1/2 in a bond fund you might be able to earn about 6% a year or about $5,000. Think about how that matches up against your costs (property taxes plus ?) versus your current revenues or annual appreciation.

STOP! You are mixing different issues and your lay person terms don't match IRA/Roth jargon. First, it is true that there is no specific limit on the number of IRA or Roth accounts, or the number of custodians you use. Practical considerations like annual fees and tracking weigh against lots of accounts, but there are often other reasons for having multiple IRA/Roth accounts such as due to rollovers or access to mutual funds. The number of accounts/custodians has nothing to do with the annual limit on contributions to the combination of ALL IRAs and ALL ROTHS. In other words, you don't get to contribute more because you have more accounts. The contribution ceiling and eligibility is a function of your earned income, age and tax filing status. See IRS Publication 590 for more details. Second, be careful with your terminology. You don't CONVERT mutual funds to a Roth. You convert an IRA (in whole or part) to a Roth. Yours to yours. Your spouses to hers. No mixing across gender! You can not "shift" an existing mutual fund to a Roth. Contributions to a Roth are made in cash. If the mutual funds you are referring to are IRA accounts, then you might be able to CONVERT these assets to a Roth(s). Note, the income threshold and tax filing status for a conversion are different that for contributions. Again, there is more information in IRS Publication 590. (the 2006 version is not yet available as of last week in Colorado) Now, even if you have IRA mutual funds and meet the 2007 rules for conversions - - that does not mean that conversion is a great idea. It is good to convert in a year when your income and taxes are low (such as if you shift jobs and have a partial year, or your wife stops working to start a family). It is good to convert when you reside in a no income tax state but expect to move. It may be reasonable to convert if you expect your future income tax brackets to be higher in retirement. You may be able to set up a simple spreadsheet and try different assumptions about income, taxes, future income, future tax rates, etc. When conversions were first proposed, they were often talked about as some kind of "free money". They are not. For a lot of folks, its the trade off between paying taxes now or growing the account (including the funds that would have paid the taxes) and paying the taxes in the future. If the expected tax rates (now and decades into the future) are the same, much of the advantages of a Roth are a "wash".

I am not familiar with the tax treatment of disability income and would advise looking for a local person for specific tax advice. (try your church or look for any taxpayer assistance offered by the local CPAs) It is often a good idea to do a CONVERSION to a Roth in a year of very low income, which sounds like your 2007. That is a long term strategy if you have the other bases covered and have ample assets. I think your scenario is incomplete. Do you have any cash reserves? Will you need to tap into these assets in an emergency? Are you (or your husband) expecting to go back to work at some time? What do you think will be your income in 2008 and beyond? What are your ages? Are these assets your primary retirement funds or do you have other accounts? (you mentioned accounts a Fidelity) Perhaps some of our accountants can comment on the rules governing access to either IRA or Roths for persons with a disability.

Allan is correct. You often will fail to get a conversion done if you wait to the last couple of weeks in December as custodians get backlogged. If you want a conversion done in 2007, start before Thanksgiving. Once you submitt the letter of instructions, you need to monitor your account to make sure the process is completed. Custodians do make mistakes, and you have an obligation to read your statements and try to correct any mistakes before the deadline.

Custodian choices: banks, mutual funds and brokerages are the big three I would probably skip banks because they tend to offer conservative products like CDs or commission based mutual funds. At your age, the bulk of your assets should be in equities (aka stocks) and be best way to do that is via a NO LOAD mutual fund. No Load means a fund that does not have a front end or exit commission. There are thousands of no load funds. Does that sound like I am steering you to a mutual fund custodian? Not really. Because you can get access to many mutual funds via modern discount brokers (Etrade, Scottrade, Fidelity, Schwab, TD Waterhouse... etc.). Again - key word search on this web site for index, mutual fund, beginner, novice and started and you will find a lot of comments about choices. Don't worry about a perfect choice - you can't find it in a year of searching and neither can I. You just need one good no load mutual fund to get started - a general fund covering the market. Avoid any sector, country, or otherwise narrowly defined fund. Stick with your fund for two years while you learn more. You can always switch later. Switch custodians, switch funds or switch both. I highly recommend that you subscribe (about $15 per year) to Kiplinger Financial - a magazine that covers early career development, stock investing, IRAs, 401ks, home buying, debt/credit and a host of financially related issues for 20 and 30 somethings.

Good points mjb. When considering the impact on low income families, the income tax not neccesarily the driving factor. There are lots of other taxes and user fees (taxes under a different name). Excise taxes, tolls, licenses, recreation useage fees, real estate transaction taxes, property taxes, school district charges, vehicle taxes, gasoline taxes, sales taxes.... While lower income households pay either no or only a small percent in income taxes, all of these other taxes/fees are significant. I don't think the 2010 conversion rules will stand unchanged. One reason Congress might not act is that the open season on conversions will produce a noticeable revenue increase in that year and they may want decide they want to extra revenue.

Good point Belgarath. I just noted the "flat tax" comment, which is mixing apples and oranges. "Flat" refers to a single tax rate rather than the current system of tiered rates. To know how a flat tax would impact households, you would have to resolve a second issue of what is defined as income and what if any deductions/exemptions might be allowed. Congress has long promoted a range of social goals (reduce taxes on the pour, tax "evils" like tobacco/whiskey, stimulate home ownership with deductions for mortgage interest) by very explicitly not having a flat tax. I recall hearing flat tax arguments many decades ago - its sort of a theoretical argument like are you safer or worse off in owning a gun. My personal view is that we are no where near inacting anything remotely like a flat tax. Ditto the value added tax. There is no universal agreement of the superiority of any of these approaches. I think its hard to make a dramatic change, partly because we live in a complex world and it is hard to get from point A to B. Let's assume that a flat tax is passed. I doubt that it would ever be applied to Roth IRAs because households have pre-paid the taxes on a Roth, either at time of conversion or because after tax funds were used in contributions. Someone created the term "going postal" for folks who just went crazy as part of a highly routine job. What do you think would happen if Congress tried to tax a family twice on the same money? Fa Fa - if you have questions about how to set up a Roth and make investment choices, do a keyword search on any of these terms on this site: beginner, novice, getting started, custodian, mutual funds, index funds, or Vanguard.

As moderator, I have closed this message thread. As some lawyers might say, the original question was "asked and answered". A range of opinions were voiced. We are now spiralling into the vague areas of future public policy, statistical analysis of taxes, and voter responses to actions yet to be taken. I think we have gone "off topic" enough to merit ending this thread.

J4 - I don't think anyone is talking about 1/2 the population not paying taxes. Frankly, some of the discussion when the Roth was created was aimed at weaning households from relying upon social security. Due to changes in demographics and life spans, SS doesn't work with 2 workers for 1 retired. The trend I see is more of the "You are in charge", with 401k, ESOP, and Roths all moving towards more self-reliant financial planning. More portability of pensions - faster vesting schedules. Etc. With regards to the taxation of Roth conversions, I think there is a significant body of legal precendent that supports that you already paid your taxes and therefore should not be taxed again. The notion that Roth converters are not paying taxes is phoney. They elected to prepay their taxes.

Well, I may be age 55.... but heck, I too am a Penn Stater ('74) Yes, a Roth is a fantastic vehicle for building wealth. Go for it. We are.... Roth State! (inside joke) I also agree with the idea of stretching to put in the max 4k. Think of a few things bought on sale, a couple of cheaper substitutes, waiting a little longer for the next car, one less speeding ticket, buying off season, it doesn't take much. Especially when you are single and don't have those family/home obligations. Starting early is a big advantage - that 4k at 10% a yr grows to $265,000 when you are 65. The next 4K grows to $265,000 the following year. That's two max contributions putting you over 1/2 million - just those two early contributions. [you can do this kind of simple projection with a spreadsheet or the N/I/PV/PMT/FV functions of an HP 12c calculator] Now, if you continue the 4K each year for 45 years... you get over the 3 million mark. Marry wisely - a spouse who also started her Roth at age 21 of course! - and you are building a $6 million nest egg. Remember those are future dollars, and inflation will not give you the same buying power, but that is still a lot of money. If your long term performance is a notch higher, it is not inconceivable that you might amass over $10 million. I don't remember anyone teaching this at PSU, maybe they should. Moving on... New topic - look also at your employer based plans. Some companies have 50% or even 100% matching contributions for participants in 401K. New topic - I also hope along the way you write a few checks to PSU and Thon.** With success, I believe comes an obligation to what got you launched, and your community. Good luck with your career. John Grossmann '74 BArch ** THON is a student developed event at Penn State that has been raising funds for juvenile cancer treatment and family support for the past 34 years. It started as a dance marathon but has grown into a year round cause. Thon is the largest student organized philanthropic program in the world, raising over $4 million last year and involving thousands of students. A great way for students to be involved with their communities. Thon might even eclipse Joe Paterno some day as the first thing that people think about when you say Penn State... and he would probably like that. See: http://www.thon.org/ PS: You might also want to pay $15 for an annual subscription to Kiplinger Financial magazine. It covers a lot of things like credit, home buying, starting your career, Roth/IRAs, vacations and solving financial issues.