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Author: makumar11 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75824  
Subject: Diff between 401K,regular IRA, brokerage account Date: 3/31/2008 4:16 PM
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Hello,
I am currently maxing out on my 401K. I was looking at my portfolio options being offered by my company, which are:

BGNMX - American Century Ginnie Mae
BOGRX - American Century Income and Growth
PEOPX - Dreyfus S&P 500 index
NPRTX - Neuberger Berman Partners
OAKMX - Oakmark 1
JAWWX - Janus Worldwide

I chose to put 70% of my monthly deductions into NPRTX, and 30% into PEOPX, as I did not like the other options.

So currently my portfolio is 100% Large Blend. I have atleast 30 years for retirement. I want to create a supplement for my retirement investments, so I was looking into opening a regular IRA account. I already have a roll-over IRA account.

My CPA informed me that adding to a rollover IRA creates confusion when its time to start making withdrawals during retirement. For withdrawals from 401K, you pay federal tax, but for withdrawals from a regular IRA, you pay federal and state taxes.

For a rollover IRA, because the money came from a 401K, you pay only federal taxes on withdrawals during retirement. If you add money to a rollover account, then, unless you keep track of the sources throughout the life of that account, what happens is that you will be taxed state and federal taxes when you start taking withdrawals. So, for that purpose, its better to separate a rollover IRA with any other IRA accounts.

Does this sound right ?

My other question is regarding opening a regular IRA account, compared to a regular investment account. If I want this to be a long-term investment plan, opening an IRA will force me to use it just for retirement (I don't like to borrow money from my investment accounts), but having a regular brokerage account will give me the flexibility to use the money if I need to, while still treating it as a long term investment vehicle.

Are there other differences between a regular IRA and a brokerage account as investment vehicles for long term ? Of course, I understand that the money in IRA will grow tax-free, that is, the dividends and capitals gains do not get taxed. So if you reinvest the dividends, you will be increasing the value of your investments, but not pay taxes when its growing in an IRA.

Thanks,
Mallika.
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62076 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 3/31/2008 4:33 PM
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My CPA informed me that adding to a rollover IRA creates confusion when its time to start making withdrawals during retirement. For withdrawals from 401K, you pay federal tax, but for withdrawals from a regular IRA, you pay federal and state taxes.

Does this sound right ?


What state are you in?

--Peter

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Author: makumar11 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62078 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 3/31/2008 4:37 PM
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Hi,
I'm in Massachusetts.

-Mallika.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62079 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 3/31/2008 5:38 PM
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My CPA informed me that adding to a rollover IRA creates confusion when its time to start making withdrawals during retirement. For withdrawals from 401K, you pay federal tax, but for withdrawals from a regular IRA, you pay federal and state taxes.

This depends on the state you're living in when you take withdrawals. Some give no break, some tax no retirement income, and some, evidently including Mass, are in between.

Phil

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Author: dond261 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62081 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 12:17 AM
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You are confusing some terms; a brokerage account simply means you have the ability to trade investments within that account; said account may be taxable, a traditional IRA, a ROTH IRA, a Rollover IRA or or an after tax IRA.

Taxable: All gains are taxable for the year they are recieved. Capital gains or losses are figured on all sales; dividends may be taxed several different ways depending on their source. This I believe is what you were refering to as a brokerage account.

Traditional IRA: Money goes in pre tax. Subject to max contribution limits and max income limits. Major penalties for access before 59 1/2;
required min distributions after 70 1/2.

Roth IRA: Money goes in after tax. subject to max contributions and max income limits. Your contributions can be withdrawn without penalty at any time. Increases must stay in at least 5 years and until 59 1/2 to avoid penalties.

Rollover IRA: Can be from a 401K or another traditional IRA. As long as
they are both from pretax sources, they are treated the same as traditional IRA.

After Tax IRA: Keep this as a completely separate account. Mixing with a pre tax IRA or Rollover from pre tax source will create an accounting nightmare.

IRS PUB 590 is the primary source on IRA's.

http://www.irs.gov/publications/p590/index.html

Don

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62082 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 12:21 AM
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After Tax IRA: Keep this as a completely separate account. Mixing with a pre tax IRA or Rollover from pre tax source will create an accounting nightmare.

You were doing fine until here. This bit is just wrong.

If you make any after-tax contributions to any traditional IRA, you will have to track that forever. From a tax standpoint, you have to add all of your traditional IRAs together and consider them as one when making withdrawals after you have made any non-deductible IRA contributions.

--Peter

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Author: makumar11 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62083 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 7:57 AM
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Thanks Don. You're right, I used the term brokerage account to refer to a taxable brokerage account that does not contain any kind of IRA, rollover IRA etc.

If I open a new IRA, the contributions will not be pre-tax, as I won't qualify for pre-tax dollars going into IRA.

At that point, it seems like having a regular brokerage account where I can buy and hold mutual funds for the long term (non IRA, non-retirement account) seems better to me, unless I'm missing something.

Thanks,
Mallika.

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Author: dond261 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62084 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 9:38 AM
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RE: after tax IRA

My point was to keep all after tax IRA contributions in a separate account so tracking after tax contributions is simple rather than trying to track them if mixed in with a pre tax IRA. That is an accounting nightmare.

Don

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62085 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 9:59 AM
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My point was to keep all after tax IRA contributions in a separate account so tracking after tax contributions is simple rather than trying to track them if mixed in with a pre tax IRA. That is an accounting nightmare.

Assuming that you properly follow the IRS procedures and file a form 8606, tracking after-tax contributions is no different whether they are in a separate IRA account or not. The amount of work is the same in either case.

AJ

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Author: dond261 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62086 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 10:05 AM
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A couple of additional points on Roth IRA's & Traditional IRA's:

After the 5 year and 59 1/2 limits are reached, withdrawals are tax free from Roth's. Traditional IRA withdrawals(after 59 1/2) are taxed as ordinary income at the then current tax rate.

Traditional IRA has minimum required distributions after 70 1/2. Roth's have no required minimum distributions.

Any part or all of a Traditional IRA can be converted to Roth status without penalty at any age. Any converted amounted is taxed as ordinary income at the time of conversion.

I have set up my retirement accounts so I can withdraw part from traditional and part from Roth to keep in a lower tax bracket during retirement. Having both Roth and Traditional IRA's keeps the minimum required distribution down also.

Again refer to IRS Pub 590

http://www.irs.gov/publications/p590/index.html

Don

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62087 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 11:56 AM
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My point was to keep all after tax IRA contributions in a separate account so tracking after tax contributions is simple rather than trying to track them if mixed in with a pre tax IRA. That is an accounting nightmare.

And my point was that you are wrong in that thinking.

When you make a non-deductible IRA contribution, you must file Form 8606 with your tax return. Keep that form permanently (or until all of your traditional IRAs are drained), and you've done all the tracking you need.

A separate IRA account does nothing to help track your non-deductible IRA contributions.

--Peter

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Author: dond261 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62088 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 12:13 PM
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I know at least two other non accountant types that find my way easier so we will keep using it. What ever works for you, use it.

Don

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62089 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 12:57 PM
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A separate IRA account does nothing to help track your non-deductible IRA contributions.

I know at least two other non accountant types that find my way easier so we will keep using it.


Before this game of "Mine Are Bigger Than Yours" gets out of hand, a valedictory note of clarity for lurkers.

Peter's point is that for tax purposes it matters not where you keep your after-tax contributions. All traditional IRA accounts, including pre-tax, after-tax, SEP, SIMPLE and rollovers from employer plans are lumped together when calculating the taxable portion of distributions from any of them. Further, when you make after-tax contributions you must report them on Form 8606, and it's a good idea to make sure you can put your hands on the last one you filed. At one time you were required to file one every year even if there was no activity, and some people still do that so they have it readily available.

Don's point is that he finds it easier to keep all his after-tax contributions in one account regardless of the treatment of distributions.

The points are not mutually exclusive.

We return you to your regularly scheduled programming.

Phil

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62090 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 2:32 PM
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The points are not mutually exclusive.

I guess I just don't see what there is to be gained here. Perhaps some performance tracking of the portfolio. But that has nothing to do with keeping track of the non-deductible contributions.

What am I missing??

--Peter

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62091 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 2:48 PM
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I guess I just don't see what there is to be gained here. Perhaps some performance tracking of the portfolio. But that has nothing to do with keeping track of the non-deductible contributions.

What am I missing??


The fact that it doesn't matter whether you or I see what is to be gained. No harm, no foul, as long as everyone knows the rules.

Phil

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62092 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 3:07 PM
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No harm, no foul, as long as everyone knows the rules.

I guess that's where my problem is.

I have found a common misunderstanding that keeping non-deductible IRA contributions in a separate IRA account allows you to only consider that account when making withdrawals. And, as you know, that's simply not true. You have to look at all of your IRAs once you've made any non-deductible contribution to any IRA.

--Peter

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62093 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/1/2008 3:56 PM
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Traditional IRA: Money goes in pre tax. Subject to max contribution limits and max income limits. Major penalties for access before 59 1/2;
required min distributions after 70 1/2.

Rollover IRA: Can be from a 401K or another traditional IRA. As long as
they are both from pretax sources, they are treated the same as traditional IRA.

After Tax IRA: Keep this as a completely separate account. Mixing with a pre tax IRA or Rollover from pre tax source will create an accounting nightmare.


Don, since your goal is to enlighten and inform, on reflection I'll suggest you reconsider the way you present this in the future. For tax purposes there is zero, zilch, nada, bupkes difference between these three accounts. They are all simply traditional IRAs, as are SEPs and properly-aged SIMPLEs. By presenting them as different creatures you leave the reader open to the inference that the differences matter. They don't.

Just a slight quibble about your last sentence of explanation regarding rollovers. In a fairly recent change to the law, Congress enabled rollovers of after-tax 401(k) money to traditional IRAs. With or without after-tax contributions, the rollover is just a traditional IRA treated like all others.

There was a time when your "rollover" IRA, also called a "conduit" IRA, could be "tainted" by contributions, thus eliminating the possibility of rolling it into a future employer's plan. That restriction was removed several years ago, yet some people still think it's in existence. Heck, the law on taxation of gain on sale of personal residence changed in 1997, and people still rattle on about what they did with the proceeds.

Later in the thread you told us that you and several acquaintances find it easier to keep all your after-tax contributions in one account. Perhaps if you explained why you find it easier it would help people make their own choices.

As always, thanks for your contributions.

Phil

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Author: dond261 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 62102 of 75824
Subject: Re: Diff between 401K,regular IRA, brokerage acc Date: 4/2/2008 1:11 AM
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I'll bow to the accountant types; after tax contributions require special reporting. If you can figure out work sheet 1-5 you are ok.

I find it easier get the numbers right if all my after tax contributions are located in one spot(a separate account).

It is a simple matter of personal preference in keeping track of the numbers. It has little or no effect on taxes but keeps my stress level down.

Don

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