Roth IRA and I Bonds

[Guest JWright]

I have a Roth IRA (opened in 1998 - approx. $18,700.00). Taxes were paid over 4 year period. I put a Company 401 Distribution of approx. $2500.00 into a regular IRA in 2002. I am not happy with the investment company I am dealing with.

Can I cancel both IRA's with this company and put most of the Roth portion into I-Bonds, keeping the remainder free, then take the Traditional IRA and add some of the money left over from the roth to it and start another Roth?

Would there be any penalities or taxes due on any of this?

Thank you

JWright

[John G]

I may not completely understand the facts that you presented. I am assuming that the larger amount was a Roth conversion, as you referred to paying taxes over 4 years. You don't pay taxes on regular Roth contributions, and the 4 year period only applied to conversions in the first year.

Sure, you can change custodians. You need to use the term "rollover". Roth to Roth. Regular to Regular. Shifting funds from a regular IRA to a Roth is "converting". You can not move money the other way, except to reverse a conversion, and there is a limited amount of time when you can do that.

The simplist way to change custodians is to first search for a custodian with the investments you like and with reasonable fees. Then, fill out the forms they will provide for a rollover. Note, closing some existing accounts may trigger fees. The nastiest of these are any back end mutual loads. You need to ask about fees before you act.

Within a custodian, you are normally given a lot of latitude to choose investments. Some custodians have literally thousands (too many!) choices. Others have a more restricted list. Call your custodian and see if there are any other investment options available. You may be able to get what you want without moving your money. Ask.

I-bonds ? When you opt for "guarentees" and "security", you get very low returns. I would not recommend these types of investments for anyone but the most timid of people or those who expect to draw on the assets in a few years. IRA accounts are generally expected to be long term investments often with a couple of decades of wealth building. Choosing bonds seems awfully conservative. The stock market has had a rough few years. It is inconcievable that this trend would continue much longer. Neither I nor anyone else can tell you when we will start to get good returns again, but if I had a lot of cash I would be shifting it more into a broad array of stocks right now.

Post again if you want to clarify your situation (type of current investments, age, etc.) or have additional Qs.

[Guest godmom]

John

If JW is timid and purchases I Bonds with the Roth assets, does he loses the tax exempt status he had with the Roth?

Godmom

[John G]

I think of Ibonds as something of a gimic investment and I have no interest in them personally. It would not make financial sense to use a Roth or IRA to buy a lower yielding bond of any kind that has some kind of imbedded tax break. The Roths and IRAs are already a tax shelter.

Godmom, I have no information on any regulatory impact Ibonds would have on IRAs - they just are just a terrible match for any tax sheltered retirement account, you are giving up too much in yield.

Here is a web site ref on ibonds that may be helpful, but no promises from me, I have not vetted the site:

http://center4debtmanagement.com/Bookshelf/Articles/IBonds.shtml#college

If you were to take money out of a Roth, this Q&A might apply:

I was thinking about using I Bonds as part of my children's college fund. Is there a tax break the same for I Bonds as for Series EE Bonds?

Yes. If you qualify, you can exclude all or part of the interest on I Bonds from income as long as the proceeds are used to pay for tuition and fees at eligible post-secondary educational institutions. Details are available in IRS Publication 550, "Investment Income and Expenses." Contact your nearest Internal Revenue Service District Office to get this publication.

You may also find this Street.com article useful, it is frank and very clear about the + and - of Ibonds.

http://www.thestreet.com/markets/ericgillin/10004114.html

Brokerages, mutual funds and banks are all harping about investment risk right now. Does anyone get tired of this three year too late emphasis? Why is this happening? Because so many investors do not really understand the flucuations in the stock market and feel they were "burned". Now the financial gurus (like Suze) and the industry is feeding on folk's anxiety over their IRAs and their fear of how little they really know about investing. Look at the ads in all the financial magazines and the TV ads by Merrill, Schwab, Fidelity. The industry can't sell success right now so they are hucksters for fear.

A prediction: Many folks will sit on the sidelines with "guarentees" and "insured" CDs or perhaps utility stocks. They are overreacting to 2+ negative years. Perhaps two years from now they will panic again when they realize they missed out on equity appreciation. It is amazing how many folks get the buy-low, sell-high confused. The short term penache of Ibonds is just another manifestation of this cycle.

An Uncle Lou style investor does not fret over these cycles. They come and go. You can't accurately predict them. I can't, Lou can't, you can't. The stock market cycles, the economy cycles, political styles come and go. When it comes to investing, ignoring some of these and sticking to fundamentals has some merit. Think long term and stay with a solid plan.

[dh003i]

Brokerages, mutual funds and banks are all harping about investment risk right now. Does anyone get tired of this three year too late emphasis? Why is this happening? Because so many investors do not really understand the flucuations in the stock market and feel they were "burned". Now the financial gurus (like Suze) and the industry is feeding on folk's anxiety over their IRAs and their fear of how little they really know about investing. Look at the ads in all the financial magazines and the TV ads by Merrill, Schwab, Fidelity. The industry can't sell success right now so they are hucksters for fear.

A prediction: Many folks will sit on the sidelines with "guarentees" and "insured" CDs or perhaps utility stocks. They are overreacting to 2+ negative years. Perhaps two years from now they will panic again when they realize they missed out on equity appreciation. It is amazing how many folks get the buy-low, sell-high confused. The short term penache of Ibonds is just another manifestation of this cycle.

An Uncle Lou style investor does not fret over these cycles. They come and go. You can't accurately predict them. I can't, Lou can't, you can't. The stock market cycles, the economy cycles, political styles come and go. When it comes to investing, ignoring some of these and sticking to fundamentals has some merit. Think long term and stay with a solid plan.

I agree with much of what you're saying here. However, I'd like to add a few points.

Suze Orman (I believe you're referring to her) is not feeding off of ppls anxiety. She is offering the same advice she always has. Max-out employer-sponsored 401k/403b contributions. Make debt-elimination a priority. If you have more credit card debt than you can pay off right now at this moment, you're in serious credit card debt trouble. Invest using dollar-cost averaging, and don't try to time the market. If you invest in individual stocks, look at the fundamentals. I'm a big fan of value investing, as well as investing in value-stocks where the companies have the potential and proven record of growth (a good example is Pre-Paid Legal....stock has stagnated since inception, but companies has grown for many quarters in a row now, is greatly undervalued, and has room for much more growth).

I believe that too much emphasis has been placed on "safe investments", particularly given the current situation. The time to diversify away from the stock-market was when it was outrageously high -- particularly the Nasdaq tech-stocks. That isn't really market timing -- that's just saying, these stocks are selling with outrageous P/E's, and their PEG's can't match them, so it's absurd. I never understood the dot-com boom. The idea of making money by giving stuff away for free...something about it, just doesn't click with me. Maybe I'm too stupid to understand it.

Right now is a time to start investing more heavily in stocks -- at least 50%. Fundamental's should definately be what's telling you what stocks, and mutual funds, to buy. Technical analysis (which is dangerously close to market-timing) should tell you when to buy (e.g., maybe a good time is after a bogus lawsuit is announced, or a strike, and the stock sinks). The problem is most people are afraid to buy stocks during such events, when they are in fact the best buys. Then the other problem is some people want to time it out perfectly -- buy when the stock is at rock-bottom. Not possible.

I-Bonds are not necessarily bad. In fact, they are agood thing. I see them as a good alternative to keeping money in the bank or a money-market/CD, if you want to have a continuous amount of money in cash, and can contribute to them regularly, and start taking out of them after 5-years (or at least long enough after 1 year to compensate for inflation).

[John G]

DH, the investment advice business is not all that different from the biz/gov consulting business where I used to work. You find "I'm smart and you are not", lots of jargon to maintain a false intellectual superiority, a dash of sensasionalism (avoid boring) and find a credible boogyman (inflation, deflation, job riffs, college costs, taxes, etc.).

Suze's package has absolutely changed in the past five years, moving from a major emphasis on equities to pitching to middle age uncertainty about having enough, when can you retire and what do you actual know about investing. Her folksie advice about family finances may have some good points, but you sure would not want to listen to her about investing. I have watched her PBS shows and its awfully simplistic.

But, hey. Look at what Merrill, Fidelity and Schwab are now pitching. Schwab used to emphasize they never give advice, now they say they give unbiased advice (compared to the big bad brokerages where analysts are less than truthful). Merrill, which used to be the biggest of the bull brokerages with bulls running down Broadway, now lays the bull down in the customer's living room like a family pet. Great marketing angles in this market. These pitches will all change again after we have had an upbeat 12 months.

For the novice investor... building wealth has little to do with "luck" or "timing" or worse "a system". You build wealth in the USA when you back our economic structure - capitalism, personal ownership, growth, freedom, and invention. You don't need to pick long shots. You don't need inside information. Good investors think very long term and have a disciplined approach to balancing risk and reward.

You mention 50% in stocks. I find no one solution fits all. Some folks should be virtually 100% in stocks. Some less than 1/3. The choice has a lot to do with their investment goals, age and risk tolerance.

No one should "recommend" a specific stock or narrowly defined mutual fund at this site. I suggest you edit out the specific stock references in your posts. In previous posts I have suggested broadly index funds like Vanguard's S&P 500 or Schwabs 1000 - this is as far as I will go, and each suggestion was related to someone just getting started.

[dh003i]

Suze's package has absolutely changed in the past five years, moving from a major emphasis on equities to pitching to middle age uncertainty about having enough, when can you retire and what do you actual know about investing.

Well, I don't watch the show that often, though I do understand what you're talking about. Suze has a rather annoying air about her -- like a cross between Judge Judy, Hillary Clinton, and Susan Estridge (the female counterpart of James Carvil, Clinton's hound-dog, who's also an obnoxious ass). Anyways, Suze is rather confrontational on her show, almost bossy. It makes the show difficult to watch, though I think for the most part her advice is good. I don't see her as a fear-monger, though.

But, hey. Look at what Merrill, Fidelity and Schwab are now pitching.

I'm a Fidelity customer, so I don't know much about what Schwab and Merrill are pitching; though I did read that they were recently convicted of defrauding investors, or something to that effect. Anyways, with regards to Fidelity, I don't see fear-mongering either (though I haven't seen any Fidelity commercials). In fact, when I was looking for a conservative investment, one of their online reps directed me away from the more safe Fidelity Mortage Securities fund, to the Fidelity Asset Manager Income fund, which is more volatile, but offers greater returns.

My personal opinion on investment risk is pretty simple. You should know your investment horizon for money you diversify...if you need 1000 dollars in 1 year, then I think it's wise to invest it in the best-performing fund that has never been outpaced by inflation over a 1-year period. If you need 1000 dollars in 10 years, then in the best-performing fund that has never been oupaced by inflation over a 10-year period.

building wealth has little to do with "luck" or "timing" or worse "a system"...Good investors think very long term and have a disciplined approach to balancing risk and reward.

I believe that thinking in the long-term, having a disciplined approach, and balancing risk and reward is precisely the definition of "a system". Some timing is useful, so long as based on fundamentals. Whenever you look at a stock's P/E and use that to help you decide if it's a good stock to buy into at the moment, then that is to some effect "timing", though not the kind that day-traders engage in.

You mention 50% in stocks. I find no one solution fits all. Some folks should be virtually 100% in stocks. Some less than 1/3. The choice has a lot to do with their investment goals, age and risk tolerance.

Agreed completely.