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Author: Respectable Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: More IRA questions Date: 2/3/1998 9:42 AM
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My understanding
of the taxes on converting the traditional IRA into a Roth IRA is that
one pays taxes on the increase in value of the investment, not what the
person contributed, so it seems to me it would make a difference whether one opens and deductible traditional IRA and then converts it to a Roth or opens a Roth to begin with. Say I
contribute $2K to a tradional IRA this year and take the tax break next
April for this (putting about $560 in my pocket, while still having $2K
in my IRA, saying it neither increases nor decreases in value). Then,
say in May, I convert it to a Roth IRA...my understanding is that if
there has been no dividends paid or capital gains made in the
investment, you owe the IRS nothing for doing this, and if there is an
increase in value, you owe taxes only on this increase, not the original
$2K invested. Perhaps I am understanding something incorrectly?
Has anyone ever heard that a minor can make an IRA (not education IRA, but
a Roth IRA or traditional IRA) contribution of up to $2K of their earned
income (income earned outside of the home)? I read this is a Dec. 1997
magazine and again yesterday in a Neuberger IRA packet, but when I asked a broker at a seminar a couple weeks ago, he pointed
out that the kid would need a W2 to prove his income (which one doesn't
get by running a lemonade stand and doing chores for neighbors) and that
in MD, it is illegal for a child to sign a legal document, so they
legally can't open an IRA, and both points seemed to make sense to me.
Plus, I had never heard of anyone under 18 being able to contribute to
an IRA prior to this Dec. magazine, so I wondered if it might have been
a new change made at the same time as the Roth and Education IRA were
passed.
All for now. Thanks again so much for your help!
Cordially,
Respectable
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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: 1610 of 75340
Subject: Re: More IRA questions Date: 2/3/1998 2:30 PM
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Respectable,

<<My understanding of the taxes on converting the traditional IRA into a Roth IRA is that one pays taxes on the increase in value of the investment, not what the person contributed, so it seems to me it would make a difference whether one opens and deductible traditional IRA and then converts it to a Roth or opens a Roth to begin with. Say I contribute $2K to a tradional IRA this year and take the tax break next April for this (putting about $560 in my pocket, while still having $2K in my IRA, saying it neither increases nor decreases in value). Then, say in May, I convert it to a Roth IRA...my understanding is that if there has been no dividends paid or capital gains made in the investment, you owe the IRS nothing for doing this, and if there is an increase in value, you owe taxes only on this increase, not the original $2K invested. Perhaps I am understanding something incorrectly?>>

You are indeed misunderstanding something. If you excluded that $2K from your income, then on conversion of the traditional IRA to a Roth IRA you must claim it as income for tax purposes. Do that in 1998, and you spread that $2K income equally over four years. Do it in 1999 or later, and it all gets claimed as income in the year of conversion.

<<Has anyone ever heard that a minor can make an IRA (not education IRA, but a Roth IRA or traditional IRA) contribution of up to $2K of their earned income (income earned outside of the home)? I read this is a Dec. 1997 magazine and again yesterday in a Neuberger IRA packet, but when I asked a broker at a seminar a couple weeks ago, he pointed out that the kid would need a W2 to prove his income (which one doesn't get by running a lemonade stand and doing chores for neighbors) and that in MD, it is illegal for a child to sign a legal document, so they legally can't open an IRA, and both points seemed to make sense to me. Plus, I had never heard of anyone under 18 being able to contribute to an IRA prior to this Dec. magazine, so I wondered if it might have been a new change made at the same time as the Roth and Education IRA were passed.>>

Anyone under the age of 70 ½ with earned compensation may contribute to an IRA, and that includes children. You have to prove the income was in the form of wages, tips, bonuses, commissions, etc., and the best proof is a W-2. Even when the child can prove it, brokers may not accept the account because the child cannot legally execute a contract. For that reason, the vast majority of brokers and funds will not accept a child's IRA. A few places do, though, and it's my understanding Vanguard is one that does.

Regards…..Pixy


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