Should she open Roth or save in a taxable account?

[Guest plmills66]

I wanted to get an idea of what you'd advise. My sister has $2000 to invest. She will also add $2000 a year. She thought she'd put it in a taxable account, but I suggested a Roth. This would be opened in her husband's name and he is 52 1/2 years old. They meet the income requirements.

Money would go toward purchase of a B & B in the future. She likes the idea that in a taxable account, it's immediately available, where in a Roth, she couldn't access earnings for 7 years. However, she probably wouldn't need the money for at least 7 years.

I told her that she could withdraw the CONTRIBUTIONS at any time without penalty. She just couldn't get the earnings without penalty until 7 years have passed. Since she probably won't need the money for at least that long, why not have the benefit of no taxes on the earnings. If she needed to withdraw the contributions, she could always do that at any time.

We're not talking a huge sum of money here, but I figure why pay ANY taxes that you don't have to. At least she's in Florida where they don't have state income tax to also pay.

It is my understanding that at age 59 1/2, her husband could withdraw ALL the earnings at once, if he wanted, and there would be no tax or penalty. Is this correct?

Also, he has a traditional IRA with a large sum of money. I think you can withdraw money from a traditional IRA at 59 1/2 and pay taxes but no penalties. Is this correct?

Thanks, Patti

[John G]

I am a little puzzled by your example. Do these folks have other assets to draw upon for the B&B idea? If they don't, then they have a bigger problem. A B&B business that is undercapitalized could be a big problem. The B&B field seems to attract lots of good folks who do not understand the time demands and financial risks. But that is another story.

Here is a suggestion that may be useful. They could put the $2000 per year into a either an index fund or a tax managed mutual fund. These have either no or very small cap gains or dividends each year. The assets would hopefully grow and they would owe taxes based upon lowere long term capital gains when they sold the fund in the future. This option buys you some flexibility of timing. If there are other assets such as home equity, inheritance, other family assets, etc. then going the Roth route would eliminate the tax liability but put more constraints on timing.

If the husband is currently funding his IRA, he can not also fund a Roth. However, as long as his income is atleast $4000, they can fund (due to recent tax law changes) both his IRA and one for her.

[Guest plmills66]

I'm sorry I wasn't very clear in my explanation. Yes, they have about $350,000 in traditional IRAs which they can access in 7 years. That would be used for B & B. Husband is not currently adding to his IRA; most of it came from a rollover from a pension plan. They do fund a SEP each year, but I believe that has no bearing on contributing to a Roth.

I know a lot of CPAs read these threads and I wondered if someone could give me a ballpark figure on something. When opening a B & B, you obviously have to set up the books. I assume there is software available for this. Approximately what would you pay someone to set this up for you, show you how to use it, and then file the taxes for you each year (assuming you did most of the day to day bookkeeping yourself)?

Thanks so much for any info. Patti