Kathy

Help. My marketing department is putting together something on IRAs and wants to reference the first tax year for which you could have made an IRA contribution and what law created them. I'm drawing a complete blank - I've been in the business for 14+ years and they've been around as long as I remember - I know I should know this but don't. Can you help, please? Thank you in advance, Kathy

The earnings that were withdrawn will be taxable on your 1998 tax return even though you won't get a Form 1099-R until early 2000. That form should have a code "P" on it which tells the IRS and you that this money was taxable in 1998 even though it is reported on a 1999 Form 1099-R. The earnings may be subject to a 10% early distribution penalty if you don't meet one of the exceptions - 59 1/2, death, disability, qualified education expensess, first-time home, etc... You should take a look at IRS Publication 590 either by going to www.irs.ustreas.gov on the net or by calling 1-800-TAX-FORM and ordering one from the IRS.

No thanks to the rest of us, I think you've got it. The required beginning date does not apply to Roth IRAs. There are no required minimum distributions until the Roth IRA holder dies. At that time, the beneficiary can begin to withdraw money over his/her own life expectancy - go to the tables in Publication 590 from the IRS (call 1-800-TAX-FORM to order a copy), find the beneficiary's age on their birthday in the year after the year of death. Divide the prior year's ending balance (the year of the IRA holder's death) by the life expectancy factor. That is the amount that must be withdrawn that year. The next year, use last year's Life Expectancy factor minus 1 and do the same thing - divide the prior year's ending balance by the new LE factor. The other important data you will need is the account history. How many dollars were contributed to the Roth by the original Roth IRA holder? Those are used up first. Then, how many dollars were converted to the Roth by the original Roth IRA holder? Those are eaten up second. Neither of these two catagories will be taxable to the beneficiary. Chances are that you won't hit the earnings until after the five year period from the January 1 of the first year for which a Roth contribution or conversion was done if you use the Life expectancy method so you'll never owe taxes. Hope this helps!!!

Lyric, It is important to note that if you hire a trustee/custodian to handle your self-directed IRA, then you can often direct them to invest your IRA assets in almost anything. However, if you open an IRA at a particular mutual fund family, chances are they will act as custodian over only their investment options. Having one trustee of a self-directed IRA consolidates all your accounts and minimizes paperwork but can sometimes cost more in fees than opening an IRA at a specific financial organization with their investments only and then opening a different IRA with another one next year... Sometimes the choice boils down to $$$$$ or extra paper. Also, it is no longer necessary or helpful to keep your Roth contributions separate from your Roth conversions. The ordering rules state that all of your Roth IRAs are treated as one, the first money withdrawn is your own contributions, the next from conversions and then finally from earnings. Your own contributions always come out tax free (no so with a traditional IRA). The conversion dollars come out tax free but subject to a penalty if withdrawn within 5 years of their conversion and you don't meet any of the exceptions to the penalties (59 1/2, disability, first-time home, education, etc...). Finally, earnings withdrawn before both 5 years and 59 1/2 are subject to tax and possibly penalties. If I contribute $2,000 to Roth IRA 1 and convert $5,000 to Roth IRA 2. Then I take a distribution of $1,000 from Roth IRA 2, it is treated as a return of my own contribution, even though it came from a conversion account. No need to keep them separate any more.

Is it possible that we're talking about a 457 plan? That would not be eligible for rollover into an IRA but I also don't think (but am not sure) that you would be considered an active participant in an employer sponsored retirement plan if it is a 457 plan and you have chosen not to benefit from it.

I don't think $140 is a very high price to pay for tax-free income down the road but I guess we need a little more information - your age, the amount you converted, when do you want to retire, will you need this money for retirement or would you like to be able to let it grow tax-free for your heirs, etc...

Susan, You can either roll your qualified plan money into your regular "contributory" traditional IRA or into a "Conduit or Rollover" IRA. The reason why some people want to roll their qualified plan money into a Conduit IRA and not commingle it with contributory IRA money is because, if they do that, they can roll it back into another qualified plan in the future. Some people see this as and advantage because you can borrow from a qualified plan but not from an IRA and some qualified plans have investment options with lower expense ratios (institutional investment options) than are available to the average investor. If you roll your qualified plan money into your regular IRA to which you also make contributions, you no longer have the option of rolling that money back into a qualified plan in the future. Many people do recommend maintaining two separate traditional IRAs for this reason but it is not required and sometimes not worth the additional fees and paperwork. Kathy

I may be way off base too but I think the issue is the margin account contsitues lending of money between the IRA and an interested party and/or an assignement of the IRA assets, both of which are PTs which, althoug only subject a QRP to an excise tax, completely blows an IRA out of the water.

This is a big problem for IRA Custodians - we're usually bound by the written documents we have on file. So, if Spouse 1 is the designated beneficiary but there is a spouse 2 at the death of the IRA holder and spouse 2 puts in a claim, we're stuck with letting the court decide who gets it at the expense of the spouses 1 & 2. Once the legal fees are all paid there may not be anything left for anyone. That's why it is so important to update your paperwork any time there is a change like that.

Well, you seem to be a good candidate for a Roth to me. You’ve got a good long time to let the money grow with all those earnings coming out tax-free when you reach 59 ½! Do the calculators ask you whether you think you’ll be in a lower tax bracket when you retire than you are now and if so, how do you answer? One of the built in assumptions is that, if you’ll be in a lower tax bracket then than you are now, you should get your deductions now and pay the lower tax rate when you’re older. But, since my crystal ball has been on the fritz for some time now, I’m not sure what my tax bracket will be when I retire 25 years from now. I hope that my investments will do so well that, if they are taxable when withdrawn, I’ll be in the highest tax bracket!! As I’ve said on this board before, I advocate maxing out your 401(k) and then maxing out any other tax-deferred savings/investment vehicles available – why not let your money grow on a tax deferred basis until you do need it?

We would like some more information please in order to play around with some of the reasons why the calculators might be wrong. What is your age? Your tax bracket (current highest marginal tax rate)? Are you thinking of converting? How much? Can you pay the taxes on the conversion from assets outside of the traditional IRA? I think there are probably a million more questions we would need to ask - about your health, your other income, your other investments, your goals, etc... But, at least give us something to start with. I think we might all have fun with it.

I believe the problem falls under the Prohibited Transaction rules of section 4975 of the code.

LE 190 - What do you mean by: "the IRA could continue on until distributable to the daughters once they reach age 50. thus, maintaining the tax free status until then."?? The IRA must continue to make distributions "at least as rapidly" to the beneficiary (trust). My take is that, if the oldest beneficiary is 40 the year the IRA holder is 74, she must have been around 36 when his RMDs started, meaning that the distributions must be made to the trust by going back to her Life Expectancy factor in his 70 1/2 year (somewhere around 46??) and then subtracting 1 for each year that has passed to determine the life expectancy factor to be used for the distributions. The trust must take its first distribution (about 1/40th?) by December 31 of the year after the year of the IRA holder’s death. That life expectancy factor is reduced by one for each subsequent year.

One more thing - if you did your 1998 Roth contributions already, you can still do 1999 contributions now and start sheltering the earnings ASAP. If you turn out not to be eligible for 1999 when it is all said and done, you can always recharacterize by your tax return due date in 2000, (or maybe 1900 if you're not Y2K compliant yet).

I know that there are those out there who will disagree with me on this but I say max out your Roth, max out your 401(k) and max out any other tax deferred savings/investment vehicles available to you!!! The more money you can keep for your self and out of Uncle Sam's pockets, the better off you are. We have already discussed in these message boards that I am using the Roth as another place to invest for my childrens' college educations. (hey, I've got to save money somewhere - why not the tax-deferred Roth????) Two things to consider - 1. if you've already contributed some money to an IRA, you are limited to $2,000 per person to IRA contributions (or your earned income if less) and 2. Since you plan on spending the money in a relatively short period of time, you can't be too aggressive in your investment strategy. You will want to look at money market funds or similar investments in order to preserve your capital.

I'm confused by your question. Since you have earned income and your MAGI appears to be less than the maximum $95,000 for single filers and $150,000 for married filing joint return, I can only assume you mean you're not eligible because you are married filing separately? If this is the case, you are not eligible to contribute to a Roth with MAGI over $10,000 and you are not eligible to convert to a Roth at all. To correct the matter you can recharacterize your Roth to a traditional IRA. Even if you are an active participant in a plan at work, you may have a traditional IRA (as long as you're under 70 1/2 that is). The question then becomes whether you can deduct your traditional IRA contribution on your Form 1040 (doesn't sound like it) or you have to report it on a Form 8606 as nondeductible. Either way, you get the benefit of tax-deferred growth in the IRA until you withdraw it.

Dusty, I’m not sure I understand all the facts. Is this your only IRA or do you have other accounts other places? Did you make the required written irrevocable election to treat the March 1998 contribution as a 1997 contribution? Did you file a Form 8606 with your 1997 tax return? Here is my rough (very rough) take on it: 1997 (March 1998) – irrevocable written election to treat contribution as contribution for prior year (1997), not deducted so should have been reported on 1997 form 8606, now have basis in IRA. (Should have been reported as a contribution on form 5498 by trustee meaning IRS expects to see on either 1040 as deduction or form 8606 as non-deductible) 1998 – Convert IRA to Roth IRA – If this is the only IRA you have, basis is converted tax-free, earnings are taxable. If you have other IRAs, a smaller part of the distribution will be tax-free and the rest taxable (but no penalty for amounts converted to Roth). The taxability of the distribution/conversion is determined using form 8606. Now, if you recharacterize, you will not have a taxable distribution for 1998 at all. But, I don’t see how you can take a deduction 1998 for an IRA contribution for which a written irrevocable election was made to treat it as a 1997 contribution?? I think we need more facts.

That is correct. If the modified adjusted gross income on your joint form 1040 (or single form 1040 if you are not married) is greater than $100,000 for a particular year, you are not eligible to convert any of your traditional IRA to a Roth IRA. I know for a fact that this is clearly stated in Fidelity's literature as well as that of most other fund companies. Since it is really a tax issue and not an investment issue, it doesn't surprise me that they might not ask you if you have determined that you are eligible to open the account you are opening. However, fortunately for you, there is an out. You simply call Fidelity and ask for a Recharacterization form or find it on their web site at: http://personal341.fidelity.com/retirement...pdf/crechar.pdf This must be done by your tax-return due date plus extensions.

Your message raises some interesting questions. First of all, if the MAGI on your 1998 tax return is over $100,000 then you were not eligible to convert to a Roth IRA in 1998. If you are married but file a separate tax return, you were not eligible to convert to a Roth IRA. If either of these is the case, you can "recharacterize" your conversion back to a traditional IRA as long as you do it by your tax-return due date (plus extensions). This means that it as if the conversion never happened and life goes on happily with a traditional IRA growing on a tax-deferred basis. Just talk to the current Trustee/Custodian of your Roth about how to do this. If I have misunderstood your numbers and you were eligible to convert, you should not owe a 10% premature distribution penalty on any traditional IRA money that was converted to a Roth, only that which didn't make it into the Roth. (like, if you kept some of it in cash to pay the taxes) If you qualified for the Roth conversion in 1998 and you took the traditional IRA distribution in 1998 and that money was converted to a Roth within 60 days of the distribution, you should be able to split the taxable amount into 4 equal parts and include one fourth in your taxable income for 1998 and one fourth in each of the 3 subsequent years. If you are concerned about being underwithheld for 1998, make sure you look back to your prior year's tax bill and see if what you had withheld for 1998 would have covered what you owed for 1997. If that's the case, then you shouldn't owe a penalty for being underwithheld in 1998 (although it will be a problem for you going forward for the next 3 years.) I guess we need some clarification of your question.

It is my experience that many school systems limit the number of providers in order to reduce their administrative burden, which seems to be ok unless they are unduly restrictive. The problem with putting your money with one carrier and then transferring (we usually use 90-24 for transfers within 403(B)s) is that so many of the older programs use only annuities and not custodial accounts with mutual funds. The issue then becomes the enormous cost to get out of the particular insurance product - they usually have steep deferred sales charges for a while. So many programs I have seen only offer horrible fixed products so the return is low but the cost to change is too high.

Boy, won't we all be hating life if the market drops that much!!! The guy in your example will hate life even more if the market drop occurs the day after his extended due date!!!! Sometimes you just have to do what you think is right when you think it's right and don't look back.

No, MAGI does not include the amounts that are taxable to you because of the conversion to the Roth from the traditional.

Please clarify what you are saying. I'm not sure I understand how a market decline in the year after a conversion would impact the tax consequences. If I converted in 1998 and then determine that I want to recharacterize after the end of the year but before my tax return due date (plus extensions) any subsequent conversion becomes a 1999 conversion. Are you suggesting that I may rather have a lower tax burden in 1999 than have the higher tax burden of the original conversion, even though I could spread that one over 4 years and eliminate that possibility if I recharacterize and reconvert in 1999?

No. Anyone who has earned income and whose adjusted gross income falls below the maximum level ($150,000 for married filing joint return, $95,000 for single filers) can make a Roth IRA contribution of up to the lesser of $2,000 or their earned income, regardless of active participation in a retirement plan at work. The $2,000 maximum for the Roth is reduced by any traditional IRA contributions you might make (the limit on combined IRA contributions is the lesser of earned income or $2,000 for each individual) but is unaffected by contributions your employer makes on your behalf and unaffected by salary deferrals you make through a SAR SEP.

A 401(k) plan and a Roth IRA are 2 separate animals. If you are still employed by the employer who sponsors the 401(k), those assets must remain in the 401(k) plan. And remember, the 401(k) is a great place to defer money because of the current tax savings. If your employer matches or makes a contribution it is absolutely wonderful!!! But, you can open a Roth too (assuming your income level falls within the restrictions - MAGI of less than $160,000 for married filing jointly or less than $110,000 for single individual) and, although you won't see the immediate tax savings that you will on the 401(k), the distributions can be tax-free if you follow the rules! Now, about moving the 401(k) to the Roth. If you have terminated service with the employer and are entitled to a distribution from your 401(k), you can roll that into a traditional IRA account (not a Roth). This rollover will be tax-free. Then, once in the traditional IRA, assuming your MAGI is less than $100,000, you can convert some or all of that money from the traditional IRA into a Roth. Remember, you will have to pay taxes on the converted amounts (but not penalties). As long as your income falls with in the restrictions, you can convert as little or as much of the traditional IRA as you can afford to pay taxes on.