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Author: cvisick Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75777  
Subject: IRA Qs Date: 6/23/1999 12:30 PM
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I participate in a defined contribution retirement plan and a 401(k) at work. Because of certain moving expenses my employer has paid on my behalf, my 1999 AGI will likely be too high to allow me to open a Roth IRA or deduct any contribution to a conventional IRA.

Given the above, I have a few questions:

1. If I were to open a Roth IRA and then learn at tax time that my AGI was too high, what would be the effect on my taxes and my IRA?

My assumption is, but I can't find the answer, that I would have to (be able to) recharcterize the IRA as a conventional IRA.

2. If my AGI is too high, does it still make sense to open a conventional IRA?

I guess the benefit is that I wouldn't be taxed on gains when I traded through the IRA and the value of the benefit depends on how often I traded and how large the gains or losses were when I traded.

3. Changing to Education IRAs, if my AGI is too high, can I make a gift of $500 to each child and have them each establish an Education IRA?

4. Finally, what don't I know that I should know about tax-effcient investing in my situation? (A small question, I know.)

To all who respond, thanks for your help, knowledge and insight.
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Author: rhecker One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11478 of 75777
Subject: Re: IRA Qs Date: 6/23/1999 12:56 PM
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2. If my AGI is too high, does it still make sense to open a conventional IRA?

I guess the benefit is that I wouldn't be taxed on gains when I traded through the IRA and the value of the benefit depends on how often I traded and how large the gains or losses were when I traded.


To answer one of your questions (above), the benefit of a non-detuctible IRA is that your gains are tax-deferred (which allows you to accumulate compound interest faster), and when you eventually withdrawl from the account, you are taxed at your income bracket (instead of the money being taxed as capital gains - which might actually NOT be a benefit depending on your tax bracket in retirement). In other words, it converts capital gains taxes into income taxes.

The amount of trading you do in an IRA as well as the individual gains or losses are largely unimportant (unless you spend your entire account on making trades or lose it all in some bad stocks). You are simply taxed at your income tax rate when you withdrawl the money (assuming it's a qualified withdrawl, etc...). Hopefully the overall gains in your IRA will be large!

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Author: moseykitty One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11479 of 75777
Subject: Re: IRA Qs Date: 6/23/1999 1:28 PM
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2. If my AGI is too high, does it still make sense to open a conventional IRA?

----

Your situation seems unique in that your AGI is temporarily inflated. In this situation, you could make a non-deductable IRA contribution this year and then convert it to a Roth next year. The basis calculation for the conversion includes the balances of all IRAs, so depending on your holdings you may not be able to capture the entire $2K. If you're married, it'll be tougher because the $100K AGI cap for Roth conversions is the same for single or married.

I am over the limits for a Roth and still make the $2K non-deductable contribution. It's a tough call every year. Buying and holding equity index funds seems like a good alternative strategy.


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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: 11481 of 75777
Subject: Re: IRA Qs Date: 6/23/1999 2:41 PM
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Greetings, Cvisick, and welcome. You asked:

<<1. If I were to open a Roth IRA and then learn at tax time that my AGI was too high, what would be the effect on my taxes and my IRA?

My assumption is, but I can't find the answer, that I would have to (be able to) recharcterize the IRA as a conventional IRA.>>


You are correct. As long as the recharacterization to a traditional IRA takes place by April 15 of the year following the year of contribution or conversion to a Roth, there will be no adverse tax consequences to you.

<<2. If my AGI is too high, does it still make sense to open a conventional IRA?

I guess the benefit is that I wouldn't be taxed on gains when I traded through the IRA and the value of the benefit depends on how often I traded and how large the gains or losses were when I traded.>>


Precisely. It depends largely on how and in what you invest. Remember that any growth in a nondeductible traditional IRA will be taxed at ordinary income tax rates. OTOH if you invest in a taxable investment wherein you can achieve long-term capital gains, the tax rate on that growth would be less.



<<3. Changing to Education IRAs, if my AGI is too high, can I make a gift of $500 to each child and have them each establish an Education IRA?>>

No. The gift is not earned compensation for the purposes of making a contribution to an EIRA. However, you may contribute $500 to an EIRA for each child.

<<4. Finally, what don't I know that I should know about tax-effcient investing in my situation? (A small question, I know.)>>

Regardless of your situation you should know as much as you can about the tax impacts of any investment choice you make. That's the only way you can avoid making a cost-inefficient choice through lack of knowledge. As to what you don't know that you should, you first have to disclose fully what you do know. Otherwise, we can't answer the question. :-) However, one way to learn is to poke around the various areas of Fooldom. Seeing as you're interested in IRAs, try the IRA area at http://www.fool.com/Money/AllAboutIRAs/AllAboutIRAs.htm first, and then take a peek at our Retirement area at http://www.fool.com/retirement. Both the primer and the 13 Steps in the latter will help increase your knowledge somewhat.

Regards..Pixy

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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11482 of 75777
Subject: Re: IRA Qs Date: 6/23/1999 2:50 PM
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You want to look at IRS Publication 521. As I read it, moving expenses your employer pays are in general not exactly income to you. Certain expenses don't count. I didn't bother to read what these are, but I could imagine that boarding Fluffy the cat can't be deducted.

Anyhow, read that publication, you may come in under the wire.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 11504 of 75777
Subject: Re: IRA Qs Date: 6/24/1999 11:43 AM
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You asked--

4. Finally, what don't I know that I should know about tax-effcient investing in my situation? (A
small question, I know.)

In reply--

Assuming you have paid off your debts (like credit cards), maxed out your 401K and IRA contributions, on this board for tax efficiency you will usually be advised to check out taxmanaged mutual funds and/or consider long term buy and hold strategies for stocks.

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