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Author: maddiemcwa 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 75890  
Subject: IRA, Etc. Questions Date: 3/23/2004 8:47 PM
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Hi,

I've decided to start an IRA for my husband. This has been on my mind for a while, but I found out that it can make the difference between paying Uncle Sam and getting money back, so this seems like a good time to do it.

Most likely it will start with a couple of Vanguard index funds and it will be some time before individual stocks might be added to it. It looks like I could go directly to Vanguard, but it also appears that the fees might be lower if I purchase through Scottrade.

My husband hasn't been paying into a retirement fund since July. He's changed jobs twice since then, and may again before he qualifies at 6 months at his current job. We were thinking that it would be smart to just start putting a percentage of his earnings into a retirement account any time he isn't paying into one through work. He started saving for retirement really late and we don't have time to waste. Now that I'm seeing that there are limits on paying into an IRA, maybe that wouldn't work, at least when we hit the limit for the year.

Another thing I've run into is it is not obvious as to how money trickling in from paychecks through the year gets into the IRA. Does the IRA have a cash part to it for that? Do we have to hold the money somewhere and purchase shares at the minimum amount? Also, what if we want the contributions to automatically be allocated by percentage into different funds?

These probably sound like stupid questions, but I haven't found anything that spells it out.

Any input would be appreciated.

Madeline
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Author: EllenB116 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39988 of 75890
Subject: Re: IRA, Etc. Questions Date: 3/23/2004 9:13 PM
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"Now that I'm seeing that there are limits on paying into an IRA, maybe that wouldn't work, at least when we hit the limit for the year."

Sorry I didn't quite understand what you mean here - are you talking about the limit on contributions, the time limit on contributing by 4/15, or the limit on contributing to a deductible or non-deductible IRA based on income limits and whether you're covered by a retirement plan at work...............

"Another thing I've run into is it is not obvious as to how money trickling in from paychecks through the year gets into the IRA. Does the IRA have a cash part to it for that? Do we have to hold the money somewhere and purchase shares at the minimum amount? Also, what if we want the contributions to automatically be allocated by percentage into different funds?"

Sounds like you're used to a 401K plan. You don't allocate by percentage in an IRA the way you do for a 401K. An IRA is a totally self-directed account, like a regular investment account at a brokerage, or mutual fund company. Most have a money market account tied to the trading account. So, once you open it, you send them the contribution, and they will happily keep it in whatever money market type account they offer - and pay you a paltry .0075 or 1% annual interest - unless you direct them to buy a mutual fund or a stock with your money. You can make contributions throughout the year up to the maximum dollar amount allowed by the law - for example if you were making a contribution for the 2004 tax year, you can do that anytime from 1/1/04 through until 4/15/05.

I can't answer your question about fees for Vanguard vs Scottrade, but from what I've read and heard, Vanguard Funds are an excellent place to start. You should read the boards on this - there are a number of folks who have recommended them.

And there are NO stupid questions................

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Author: maddiemcwa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39991 of 75890
Subject: Re: IRA, Etc. Questions Date: 3/23/2004 9:50 PM
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"Now that I'm seeing that there are limits on paying into an IRA, maybe that wouldn't work, at least when we hit the limit for the year."

Sorry I didn't quite understand what you mean here - are you talking about the limit on contributions, the time limit on contributing by 4/15, or the limit on contributing to a deductible or non-deductible IRA based on income limits and whether you're covered by a retirement plan at work...............


I was refering to the limit on contribution amounts for the year. Isn't there a cap of $3,000 this year and $4,000 next year? Or is that just the amount that can qualify as tax-deductible? If that is the cap, and we wanted to put more away for retirement, then we need to start a regular investment account, right? I guess I was hoping for a one account scenario, but it looks like that won't work.

You don't allocate by percentage in an IRA the way you do for a 401K. An IRA is a totally self-directed account, like a regular investment account at a brokerage, or mutual fund company. Most have a money market account tied to the trading account. So, once you open it, you send them the contribution, and they will happily keep it in whatever money market type account they offer - and pay you a paltry .0075 or 1% annual interest - unless you direct them to buy a mutual fund or a stock with your money.

Thank you for clarifying this.

Madeline

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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40003 of 75890
Subject: Re: IRA, Etc. Questions Date: 3/24/2004 1:44 PM
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I was refering to the limit on contribution amounts for the year. Isn't there a cap of $3,000 this year and $4,000 next year?

If he's over 50, the caps are a wee bit higher--$3500 for 2004 and $4500 for 2005. Also, it's not too late to contribute for tax year 2003! A 2003 contribution might not be deductible if he was covered by a plan at work, in which case you might consider contributing to a Roth IRA instead (if he meets the Roth income requirements).

Or is that just the amount that can qualify as tax-deductible?

I believe it's only deductible if he wasn't covered by a plan at work. And the maximums are the maximums, regardless of whether it's a tax-deductible contribution or not.

If that is the cap, and we wanted to put more away for retirement, then we need to start a regular investment account, right? I guess I was hoping for a one account scenario, but it looks like that won't work.

If he has to make-up time via larger savings/contributions, then you'll probably have to have a taxable account also. If you do, use the taxable account for a low turnover, long-term hold index fund, like Vanguard's Total Stock Market Index. Use the IRA for a REIT, or other investment that throws off non-qualifying distributions.

2old



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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40414 of 75890
Subject: Re: IRA, Etc. Questions Date: 4/9/2004 11:03 PM
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If you haven't done so already, I would recommend reading "All About IRAs" <http://www.fool.com/money/allaboutiras/allaboutiras.htm?REF=PRMPIN>

That series of articles don't cover the latest contribution limits:

-------401(k)------- --------IRA---------
Tax Year Under 50 50 & Above Under 50 50 & Above
-------- -------- ---------- -------- ----------
2003 12,000 14,000 3,000 3,500
2004 13,000 16,000 3,000 3,500
2005 14,000 18,000 4,000 4,500
2006 15,000 20,000 4,000 5,000

Just as a point of order: if one participates in an employer's 401(k), 403(b), or selected other plans any day in 2004, the income limits for being able to deduct contributions to a Traditional IRA in 2004 go down tremendously, even if one contributed to a 401(k) for just one day.

For this reason, if one might be contributing to a 401(k) or 403(b) in 2004, I would recommend contributing to a Roth IRA for 2004 (if one is eligible) instead of contributing to a Traditional IRA.

Another reference to IRAs is IRS Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf

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