Requirement for a new Roth IRA Account every year?

[Guest Liferescue]

Tonight I went to my bank to make my contribution for 2002/2003 to my Roth IRA which I established in 1999. The bank manger said I couldn't. The bank's policy is I have to create a new Roth IRA account with a new number every year. I responded that she had processed a contribution to the account last year, and showed her two statements which the bank sent me reflecting the same. She said it was an error and shouldn't have happened. I went to another branch, and I got the same info. I didn't make the contribution tonight because I think the bank is wrong.

Anybody aware of info. on such a policy?

Thanks,

Bob

[BPickerCPA]

The bank has the right to make that their policy. There is nothing in the tax law that mandates they do that. If it's their policy, either accept it or move your accounts to another bank.

[Guest Liferescue]

Mr. Picker

Thanks for your reply. Can I transfer a Roth IRA or its funds to another account should I find one that allows annual contributions to one account? I am pretty sure the interest rate will be different. The ROTH IRA I have now is at 5.83%.

I am annoyed with my bank over this issue. The manager that helped me set up the Roth IRA account specifically stated that I would be allowed to make annual contributions. The bank branch is under new management. Apparently, the bank corporation changed its policy. So now I have to make some changes with regard to the Roth IRA.

Bob

[papogi]

Once you find a new institution in which to place your money (and, as an aside, I would be taking my money elsewhere in this case, as well), you can do that through a direct custodian to custodian rollover. The new institution should have all the paperwork necessary, and they usually handle it for you from beginning to end, but procedures do vary. Before you jump, double-check to see if there are any surrender charges that your existing bank might levy you when closing out your Roth with them.

[mbozek]

If you have a fixed rate investment such as a cd I dont think you will get a comparable rate of return at another financial institution. A better option would be to open an IRA for this year at another financial institution and transfer the funds from your existing roth to the new account when the investment matures.

[John G]

You have raised a couple of issues:

1. Your bank may be saying that you can not add to the CD that it looks like you opened given the interest rate you report. Read the document that you signed when the account was opened, because it may state that you can add to it. The document rules unless it was modified by letter later.

2. I agree with Barry, the Bank is imposing their rules, not IRS requirements. They are probably saying they don't want to give you the higher yielding rate that was available a couple years back.

3. You did not indicate your age or make any comment about your retirement objective. If you are young, or have a long holding period before you expect to use the IRA assets, CDs are a ultra conservative investment option. For example, the difference between 5.83 and a 10% annual return over a 30 year period leads to more than a 3X difference in assets! The 10% return is a rate most financial planners use to represent a broad based stock portfolio... an S&P 500 index fund type of rate.

4. If you are dealing with a clerk at the bank, try going up the chain of command or speaking to someone in the IRA department. The back office IRA dept which may not even be in the building you visited is more likely to be more knowledgable.

5. Sounds like you might be shifting your account. I recommend a direct custodian to custodian transfer. The new "home" can arrange the details. As mentioned above, you need to read the rules you agreed to with the CD about the date the note comes due and possible fees to rollover the IRA to a new custodian.

6. I sure hope this bank is not trying to get multiple IRA accounts so that each account can be charged a fee. Many custodians do not charge any annual fees, especially if your IRA assets are above 5k or 10k, or if you have other business relationships with the firm.

7. This is a "first" for me. I have never heard of any custodian setting up an IRA and requiring you to open a whole new one every year. Not exactly paperwork reduction. Mutual Funds and brokerages do not normally do this.

[papogi]

I agree with mbozek and John G. Even current 5 year CD's have rates below 5.83%. If you like something very safe, does not have a rule against adding to the account if it is designated a Roth IRA, invests in non-equities, and will respond more quickly when interest rates inevitably begin to rise, look into Vanguard's Short-Term Corporate Bond Fund. While it is not FDIC insured, it is a safe, well run fund. I know there'll be lots of differing investment opinions out there, but if you are looking for non-equities that are close and usually beat CD rates, this is a fund to look at. My own personal opinion is more along the lines of John G, especially if we're talking about a long time horizon.

[John G]

A follow up on Papogi. "Long term hold" from my view starts with 10 years. Under 10 years a bond/stock mix may make more sense. Bear in mind that if you are 55 right now, your hold period is not the difference between 55 and the day you retire. You may still have IRA money 10 or 20 years beyond the date of your retirement. If this is a Roth account, the sequencing of what assets you will use may lead to Roth assets coming out later or perhaps becoming part of your estate, so the funds could be invested for multiple decades.

Investments that involve blocks of 2k or 3k can readily be invested in NO LOAD mutual funds, that is funds that do not charge up front or back end commissions. You generally will not find these options at banks. Vanguard is a major name in mutual funds and has a "family" of funds to choose from.

Your financial objectives and your tolerance for risk are a very personal issue. Yes, the stock market has risk, but the risks are reduced as the holding period lengthens. Putting money in fixed income investments also carries risk, even if the CDs are government insured. Here the risk would be that inflation is eroding much of your annual increase and you might not meet your retirement needs.

Your problem and the response should help a lot of folks. Thanks for posting a good question.

PS: in original post you refered to 2002/2003 contributions. You can not yet contribute for the 2003 year. The max contribution this year has moved up to 3,000 or 3,500 if you are older than 50.

[Guest Liferescue]

Thanks for the responses! As a follow-up, I did contact the bank's customer-service, and they are referring the problem to the peole who take care of the problem. I did read the agreement--IRS Form 5303-R/Roth IRA Disclosure Statement--and it does indicate I can make contributions to my acccount--even shows an example of the projection of the long term investment of contributions based on a $1000 annual contribution at 2%. It also says the trustee reserves the right to amend the agreement to comply with tax laws and "for any other reason". It appears to be standard language taken right out of the January 1998 IRS Code Section 408a, Article IX, paragraph 1. Amendments.

I am in my mid-40's and I do have quite a while to go before retirement. The Roth IRA is locked in for 60 months at 5.83% as a CD. It is my conservative investment since I have a 401k with Fidelity with 100% in their Aggressive Growth fund. I invested in this mannerand started buying savings bonds since I had a feeling the boom in the market was going down shortly. It did, and I now know about risky investments since I along with many others who were in it for the long haul took a beating. Incidently, our plan at work has a limited choice of funds, otherwise I would have changed to a more productive aggressive growth fund. Also, If it wasn't for the employer's generous matching, I probably would have been out of it a while ago.

With regard to the Roth IRA contribution, I made the first contribution in Nov. 2000, the second in Apr. 2001, and I was making the third for this year. So for a conservative investment, I thought it was relatively productive investment with the convenience of going to a small local bank where I do all my business. Unfortunately, the bank's management has changed, the local bank has become a chain. As a result, last year I was dealing with a bank clerk who recently became an assistant bank officer this year. When I questioned the policy, she call a regional manager--who is also relatively new to his position--who confirmed the policy. I went to another branch a few blocks away, and spoke to a more experienced manager who confirmed the policy, and agreed the bank chain's policy is not sensible from either the paper chain point of view or customer relations.

For now, I wait for an answer from the bank chain. Meanwhile, I will check into Vanguard and also see what else is around.

Thanks again

Bob