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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75871  
Subject: Changing IRA Date: 8/20/1998 9:41 AM
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My son works for a new company with approx. 10 - 15 employees. This spring, a full service broker gave a presentation for each to open IRA's through his brokerage. None of the employees were/are knowledgeable in investments or IRAs so they just followed his suggestions. Our son is starting to get a little concerned with this "wise" choice. He has asked for my help (I also am learning) and I'm turning to the "foolish" for direction. Here are my questions:

Our son has $500/month deducted from his check and put into this account making the total already past the $2000/yearly IRA contribution. Is this "foolish" and is there a penalty for over contributing per year?

The money is invested in mutal funds with 4.00% deferred sales charges and 1.41% operating expenses. With a captial gains distribution, his funds have increased $60, but $40 was deducted for custodial fees leaving a balance of $20 for the investment time.

This is called a Simple IRA. Is that the same as a regular IRA?

Is it possible to switch from this brokerage and these mutal funds to a discount brokerage and use a portfolio such as the Foolish Four? What are the ramifications, if any? In the process, could he switch to a Roth IRA and how complicated would that be?

One last question. What does the U/P/O in front of the employers name mean and does it effect the IRA?

Our son qualifies for either IRA, but the ROTH looks best to us. He is single and wants to "sock it away".

Thanks everyone!!!


LnJM002
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5090 of 75871
Subject: Re: Changing IRA Date: 8/20/1998 12:31 PM
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Greetings, LnJM002, and welcome. You asked:

Our son has $500/month deducted from his check and put into this account making the total already past the $2000/yearly IRA contribution. Is this "foolish" and is there a penalty for over contributing per year?

The money is invested in mutal funds with 4.00% deferred sales charges and 1.41% operating expenses. With a captial gains distribution, his funds have increased $60, but $40 was deducted for custodial fees leaving a balance of $20 for the investment time.

This is called a Simple IRA. Is that the same as a regular IRA?


A SIMPLE is actually a small business retirement plan. While an IRA in this case, the allowable contribution each year by employees is $6,000. Therefore, your son is not over-contributing to this IRA and will suffer no penalty for making that contribution. Additionally, the employer must match that contribution with up to 3% of your son's compensation each year. For a more complete description of the SIMPLE, see my Foolish Retirement Plan Primer, which you will find at http://www.fool.com/Retirement/Retirement.htm . While I think the deferred sales charge in this case is way too high, the annual expense ratio is par for the course in SIMPLE/401k plans. IMHO, your son should participate at least to receive the employer match. That's free money and worth the effort. Beyond that level he may want to consider other options such as a self-directed Roth IRA where he can probably get a better long term return.

Is it possible to switch from this brokerage and these mutal funds to a discount brokerage and use a portfolio such as the Foolish Four? What are the ramifications, if any? In the process, could he switch to a Roth IRA and how complicated would that be?

Amounts held in a SIMPLE IRA may be withdrawn at any time. An employer may not require an employee to retain any portion of the contributions in the employee's SIMPLE IRA or otherwise impose any withdrawal restrictions. However, if he transfers the money prior to the completion of two years' participation in the SIMPLE, then he will be taxed on the transfer (i.e., it will be considered an invalid rollover) and he will be penalized 25% -- not 10% -- on the sum transferred. Accordingly, your son should transfer nothing until he's been in the plan for over two years.

One last question. What does the U/P/O in front of the employers name mean and does it effect the IRA?

Sorry, I have no idea what those initials signify.

Regards……Pixy


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Author: DaBob One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5096 of 75871
Subject: Re: Changing IRA Date: 8/20/1998 7:22 PM
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LnJM002,

I set up a SIMPLE IRA for my company this year using Charles Schwab.

The SIMPLE has the advantages that our good friend Pixy noted. Doing it at Schwab means that each of us employees can within our IRA own stocks, and any of a couple of thousand mutual funds.

Having to pay a load is just that, a load of &%$. The employer needs to do just a bit more homework. Our local Schwab office did all of the work for us.

Each (Schwab) SIMPLE IRA acct does have to pay a small fee, I think it might be $29/annually, until the account bal is > 10,000 (although all an individual's accounts are totaled for purposes of this fee).

daBob.

ps: for the record, I don't have any reason to promote Schwab other than the fact that they have done a good job for me and my company.

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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5130 of 75871
Subject: Re: Changing IRA Date: 8/24/1998 1:18 PM
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You replied: "...the allowable contribution each year by employees is $6,000." What are the pros/cons for having more than $6000/yr in this account?

"Beyond that level he may want to consider other options such as a self-directed Roth IRA where he can probably get a better long term return." I believe you are saying that after he reaches the yearly Simple IRA $6000 allowable to direct additional $500 deposits to a Self-Directed IRA with another brokeage of choice using Foolish wisdom. Correct?



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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5131 of 75871
Subject: Re: Changing IRA Date: 8/24/1998 1:34 PM
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You replied: "The SIMPLE has the advantages that our good friend Pixy noted. Doing it at Schwab means that each of us employees can within our IRA own stocks, and any of a couple of thousand mutual funds." Did you mean that the employees can chose their own stocks and mutual funds for their IRAs?

"Our local Schwab office did all of the work for us."
The Schwab office set up the individual Simple IRA accounts and took care of the paperwork?

I understand about the yearly fee until all the individual accounts of one person totaled are over $10000. Do you still pay Schwabs $29 to $35 charge per stock trade?

Thank you for your information. It really helps.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5138 of 75871
Subject: Re: Changing IRA Date: 8/24/1998 4:52 PM
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LnJM002, you asked in a follow-up:

You replied: "...the allowable contribution each year by employees is $6,000." What are the pros/cons for having more than $6000/yr in this account?

As compared to what? Obviously, if your son puts in $6K he gets the immediate tax deduction and tax-deferred growth. Whether or not that's better than a taxable alternative or a Roth IRA depends on many factors such as tax rates, investment choices and length of time before the money is needed.

"Beyond that level he may want to consider other options such as a self-directed Roth IRA where he can probably get a better long term return." I believe you are saying that after he reaches the yearly Simple IRA $6000 allowable to direct additional $500 deposits to a Self-Directed IRA with another brokeage of choice using Foolish wisdom. Correct?

No, I'm saying that after he invests enough to get any employer matching funds, the Roth probably will be better for up to the next $2K based on the ultimate tax-free withdrawals of everything in the account. Again, that depends on how the money is invested.

Regards…..Pixy





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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5156 of 75871
Subject: Re: Changing IRA Date: 8/25/1998 10:10 AM
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Let me rephrase my question. Is there a penalty for having over $6000/yr in a Simple IRA?

Thank you so much for your help!


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5164 of 75871
Subject: Re: Changing IRA Date: 8/25/1998 11:27 AM
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LnJM002, you asked:

Let me rephrase my question. Is there a penalty for having over $6000/yr in a Simple IRA?

Your son may have an unlimited amount of money in a SIMPLE IRA. He may not, though contribute more than $6K in one year. Otherwise, there will be a 6% penalty assessed against the excess conctribution for every year it remains in the account.

Regards.....Pixy

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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5192 of 75871
Subject: Re: Changing IRA Date: 8/26/1998 11:47 AM
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Let me restate to see if I understand correctly:

1) An individual can have a $6000 in a Simple IRA and $2000 in a Self-Directed IRA at the same time?

2) The $6000 in a Simple IRA cannot be switched from the current brokerage to another brokerage (still keeping it under the Simple IRA) before 2 years past without incurring 25% penalty?

3) Can the choices of investment (mutal funds, stocks, ect.) be changed by the employee within the Simple IRA without the penalty?



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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5193 of 75871
Subject: Re: Changing IRA Date: 8/26/1998 2:31 PM
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LnJM002, you asked:

Let me restate to see if I understand correctly:

1) An individual can have a $6000 in a Simple IRA and $2000 in a Self-Directed IRA at the same time?


Yes ….. BUT ... The $2K may or may not be deductible depending on filing status and AGI. See IRS Pub 590 for details. If it's not deductible, then dollar-for-dollar a Roth IRA will be a better place for the $2K IRA contribution because ultimately everything can come out tax-free.

2) The $6000 in a Simple IRA cannot be switched from the current brokerage to another brokerage (still keeping it under the Simple IRA) before 2 years past without incurring 25% penalty?

If your son changes employers within the two years and if the new employer has a SIMPLE, then the money in the existing SIMPLE may be rolled to the new employer's plan without penalty. After two years' participation in the SIMPLE, your son may roll the money to a non-SIMPLE, traditional IRA without penalty. The 25% penalty only applies if your son moves the money from a SIMPLE to something else before two years passes. He can't establish a SIMPLE with a broker on his own because it's a plan only offered by an employer. Thus, if he moves the money it can only be to another (new) employer's SIMPLE or to an IRA. He can't move to an IRA until the two years runs.

3) Can the choices of investment (mutal funds, stocks, ect.) be changed by the employee within the Simple IRA without the penalty?

While the money is in the SIMPLE, your son is restricted to the choices offered within the plan.

Regards…..Pixy


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Author: LnJM002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5216 of 75871
Subject: Re: Changing IRA Date: 8/28/1998 12:52 PM
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Thanks for your patience and information. It is digesting. Another question: A Self-Directed and a Roth IRA are can be two separate IRA's or one Self-Directed Roth IRA?

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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5218 of 75871
Subject: Re: Changing IRA Date: 8/28/1998 2:59 PM
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YES... a total of $2000/year can be added to any and all types of IRA's each year. PP

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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5219 of 75871
Subject: Re: Changing IRA Date: 8/28/1998 3:00 PM
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LnJM002 - I mean a total of $2000/year. PP

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5237 of 75871
Subject: Re: Changing IRA Date: 8/30/1998 10:24 AM
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LnJM002, you asked:

Thanks for your patience and information. It is digesting. Another question: A Self-Directed and a Roth IRA are can be two separate IRA's or one Self-Directed Roth IRA?

a "self-directed" IRA is simply one that has been established with a broker and within which you do your own trading in individual securities. It may be either a traditional IRA or a Roth IRA.

Regards….Pixy


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