UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next
Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Re: Distribution Penalty? Date: 12/12/2000 10:09 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Author: Crosenfield Date: 12/11/00 10:29 AM Number: 26532
I agree with Mark.
If you do a custodian-to-custodian transfer there isn't any 10% penalty or taxes on capital gains. First you set up the IRA with Vanguard. They will send you paperwork to do the transfer. Your existing custodian may charge you an exit fee of $50 or so. Then you liquidate whatever of the existing investments you wish (or do this before the transfer, depending on whose commissions are lower). Then buy the Vanguard Index fund with the proceeds.
An IRA is a box. As long as you leave money in it there are no taxes on dividends, capital gains or anything else. At 70 1/2 you must start taking money out, and pay taxes on it.
Once at Vanguard, you can convert the same account to a Roth if you wish. If you are converting all at once, it would be just a change in account number and you pay the taxes on amount of gains converted. Or you can convert just part and leave the rest in a traditional IRA.
Best wishes, Chris


Chris,

Thanks for your comments, but I guess I was not clear on what I'm trying to do.

I am trying to find a way to get this money OUT of my current nondeductable traditional IRA, because I have done calculations that show that VTGIX may actually do better than a nondeductable IRA (which is all that I am eligible for).

By owning VTGIX outside an IRA, distributions are no longer sheltered, but when liquidating, I can take advantage of long term capital gains rates, which I cannot do if the fund is held in an IRA.

I have looked closely at VTGIX, which is essentially a tax managed S&P500 Index Fund, and found its expense ratio is 0.19%, and its historical distribution have been about 0.9% per year. This results in a total cost of ownership, when held outside a tax shelter, of about 0.28%, which is unbelievably low. If the fund were held in an IRA, the expense ratio cost would be the same, but there would be no current tax due on the 0.9% distributions. I believe the tax cost on the distributions can be easily beaten by the reduced tax benefit afforded by long term capital gains in retirement.

Therefore, I have concluded that it is better to own VTGIX outside an IRA than to hold any S&P500 Index Fund inside an IRA. Now, I'm trying to understand all the penalties and tax issues if I withdraw my money from my current nondeductable traditional IRA. During this past year I have incurred substantial losses, and may have a low enough overall capital gain, now, that my taxes and penalties won't be too bad. That's what I'm studying currently.

The only negative issue with VTGIX that I can find is that you have to hold it for five years before a back-end load of 1% goes away, but that will not be a problem for me.

Please let me know if there is something wrong with this analysis.

Russ
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (10) | Ignore Thread Prev | Next

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

The Story Behind the Story
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement