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Author: jax4pres Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75376  
Subject: Ira Questions Date: 6/29/2001 4:39 PM
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Hello all,
I was just curious about how a ROTH IRA functioned. Here is my situation:

I would like to open an account with Vanguard, and purchase one of their funds. Don't worry, the expense ratios are low, the turnover is low, etc.

Unfortunately, the minimum initial investment for the fund is 25K. That goes for an IRA fund too. Being that there is a 2K limit on your contribution, how does this work? Does the remaining 23K get diverted into some other non-IRA account?

My other question is: I have no earned income on my name this entire year, and this may continue up through tax day (next April 15).

What will happen to the account if I try to set it up? Will I be rejected?

Can someone please explain, I'd really appreciate it.

PS - please prompt for email in your reply...

Thanks again,

Jax4Pres
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Author: tstrahan One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30502 of 75376
Subject: Re: Ira Questions Date: 6/29/2001 5:01 PM
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To make IRA contributions you need to earn the same as your contribution at least (e.g. $2K this year) or be married. When married I BELIEVE (99% sure) you can contribute for a spouse, check www.irs.gov to be sure though.

You can attain $25K in it by transferring other IRAs into this fund I know. It sounds like they require 25K in an IRA account, not just in this fund, from what you are describing. Their customer service has always been very helpful when I call, and I bet the website details this was well. www.vanguard.com



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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: 30505 of 75376
Subject: Re: Ira Questions Date: 6/29/2001 5:33 PM
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I don't guarantee any accuracy, but since I am taking the week off and I have time to respond ...

Unfortunately, the minimum initial investment for the fund is 25K. That goes for an IRA fund too. Being that there is a 2K limit on your contribution, how does this work? Does the remaining 23K get diverted into some other non-IRA account?

Actually, it means you will not be able to hold that fund inside your Roth IRA account at Vanguard. You would need to choose a fund that has a minimum of $2,000 or less (assuming you can fund your Roth IRA with $2,000, which I don't think you can--see later), such as the Vanguard 500 Fund (VFINX, $1,000 minimum within a Roth IRA) or the Vanguard Total Stock Market Fund (VTSMX, $1,000 minimum inside the Roth IRA).

I am not 100% positive, but I am fairly certain that, when considering minimums to open an account, the Roth IRA investments have to stand on their own, separate from whatever is invested in other types of accounts (such as regular (taxable) accounts), so, no, you cannot invest $23K in a regular account and $2K in the Roth IRA to make the $25K minimum for that fund. You can verify this on the "Index Funds" board or by calling Vanguard directly.

The money inside a Roth IRA account could come from several sources, such as multiple years of contributions (no, you don't have to keep each year's Roth IRA contribution in a separate account) and conversions from a Traditional IRA (including conversions from "rollover IRAs" where 401(k) or 403(b) money from a previous employer was rolled into an IRA and then converted to Roth), so it is possible for some people to have $25K in their Roth IRA account.

I have no earned income on my name this entire year

To be able to make your Year 2001 Roth IRA contribution, you must qualify based on your calendar year 2001 earned income. If you have no earned income in calendar year 2001, you cannot make a Roth IRA contribution unless you are married, filing jointly, and your spouse has enough earned income in year 2001 without hitting the AGI limit.

I am assuming you are a calendar year tax person--if your taxes are based on a fiscal year that is different from the calendar year, I don't know if you have to qualify based on the calendar year or based on your fiscal year. Almost all individual filers are calendar year filers.

By the way, even though the Tax Year 2001 Roth IRA can be funded any time from January 1, 2001 through April 15, 2002, a calendar year filer must qualify based on earned income and AGI limits for January 1, 2001 through December 31, 2001--those extra 3.5 months to contribute to a Roth IRA do not give you more time to qualify for for making contributions.

What will happen to the account if I try to set it up? Will I be rejected?

Vanguard might not know that you don't qualify (their web site covers the qualifications, but they don't have access to your tax filings), but the IRS would probably become ... let's say ... concerned--the IRS gets both your tax filings (such as W-2 statements and self-employment filings showing earned income) and a statement from your Roth IRA custodian showing what tax year your contributions are for and the amount of the contributions. The IRS will charge you 6%/yr for having unqualified money in a Roth IRA until that money is removed. Overall, you would be better to invest in a tax efficient mutual fund in a regular (taxable) account than trying to fool the IRS.


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Author: bigcaat Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30506 of 75376
Subject: Re: Ira Questions Date: 6/29/2001 5:57 PM
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Unfortunately, the minimum initial investment for the fund is 25K. That goes for an IRA fund too. Being that there is a 2K limit on your contribution, how does this work? Does the remaining 23K get diverted into some other non-IRA account?

******************

This is my 250th post, so I'd better make it good. :)

You don't mention the Vanguard fund that you're looking into, but there are plenty of excellent Vanguard funds that require only $1000 minimum intial investment for a Roth. Two of the better core funds are: VTSMX (Total Stock Market Index) and VFINX (500 Index.)

If any of that 25k is in another retirement account, you may be able to roll it over into your Roth...assuming you are eligible. If not, you will be charged some fees for a low-balance until you hit $5000. ($10,000 if your in an index fund.) See my post on fees at:

http://boards.fool.com/Message.asp?mid=14988801

But since you have that extra money, you wouldn't have to pay those fees for long. You could put your 2k in this year (assuming you're eligible, since you don't have that income...I don't know about that) and then next year, the limit raises to 3k. So you've erased your custodial fee right there.

Now, what about that 25 grand? First and formost, do you have an emergency fund? That should be your top priority. You should have at least 3-6 months of living expenses socked away in a money market fund. (Vanguard's Prime MMkt comes to mind.) So you may want to, maybe, split that money up between your emergency fund MMkt, and then maybe a tax-efficient taxable account at Vanguard. If you have all of your accounts at Vanguard, you can transfer funds between them.

************************

If I may make some suggestions:

First, you can get a lot of Roth info at:
www.rothira.com

Secondly, I would recommend that you buy the book "Mutual Funds for Dummies" by Eric Tyson. It has some great information.

Third, there is an "Index Fund" board here that is really excellent, and very active.
http://boards.fool.com/Messages.asp?bid=100111&mid=14988801

Fourth, read and learn as much as you can, and then develop an asset allocation plan. The book I recommended will help. There's also the "Fool's School," which gives some great information about the basics of investing.
http://www.fool.com/school.htm?ref=G02A06

Fifth, in the future, give us as much info as you can about your situation, such as asset allocation plan, risk tolerance, investing timeline, funds currently owned, etc. This makes it a lot easier for us to point you in the right direction.

Welcome to the Fool.
Glad to have you here.
Hope this helps.
Caat

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