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Author: jmelnik Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75337  
Subject: Newbie Advice & IRA Dividends/Gains Question Date: 3/29/2002 3:38 PM
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Hey guys, I've been a lurker but this is my first post.

I'm just getting started with Retirment Investing/IRAs so please forgive my naivete. Sorry to say I'm going to be 40 this year and it took this long for me to get the wake up call. Better late then never though, at least that's what I tell myself as i kick myself in the behind when I think how much I could have invested by now.

I came into some money this year and I plan to open a Roth IRA for 2001 and 2002 with max contributions in each ($5000 total). I've done a great deal of research and settled on 2 mutual funds (dodgx and mpgfx for those who care) for the IRAs which I will obtain directly from the fund provider rather then through a discount broker.

I've also started putting in the max contribution ($11,000, some of which is matched) in my company's 401k which is currently split between company stock (IBM) and the Vanguard Small Cap Value Index fund (the 2 best performers offered in my plan).

I'm also planning to open a discount brokerage account (either Ameritrade or ScottTrade) and do some careful stock investments. I also plan to put next years IRA in some high quality individual stocks (3m, walmart, J&J, etc).

And, I'm also looking to get into some DRIPS (possibly 4 at $25/month each for a total of $100/month).

Whew, ok... how does this strategy sound? Any comments or suggestions would be greatly appreciated.

Also, regarding the IRA mutuals:

1. are the dividends/gains generally reinvested? While the MPGFX site indicates that they are, the DODGX site didn't even mention it. Unless I'm missing something, why would you ever want to receive the dividends/gains rather then reinvest them... particularly with a Roth.

2. Since they are in a Roth, I assume all reinvested dividends/gains are tax free. Is this true?

3. Do the dividends/gains reduce the max contribution I can make to a Roth? Thats is, say i earn $100 in 2003 from the 2001/2002 IRA accounts. Does that mean i can only contribute $2900 for 2003?

4. Can I split any years IRA contribution between any number of custodians, or does it need to be one custodial account?

Sorry this is so long... thanks for reading this far if you did.

joann

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Author: jmelnik Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34067 of 75337
Subject: Re: Newbie Advice & IRA Dividends/Gains Question Date: 3/29/2002 3:49 PM
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Ooop... i forgot to mention (if you can believe that after my long post) that I am going to put my short term savings into a Money Market Account which is currently paying 3.1% (the best I could find).

I'm also considering putting some funds into a 5 year cd with ING direct (5%). I don't see much talk about CDs are they a worthwhile investment or should I put that money somewhere else?

thanks again,

joann

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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: 34068 of 75337
Subject: Re: Newbie Advice & IRA Dividends/Gains Question Date: 3/29/2002 4:34 PM
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regarding the IRA mutuals:

1. are the dividends/gains generally reinvested? While the MPGFX site indicates that they are, the DODGX site didn't even mention it. Unless I'm missing something, why would you ever want to receive the dividends/gains rather then reinvest them... particularly with a Roth.


Many (most?) open-ended mutual funds will default to reinvesting all distributions (both dividends and realized capital gains)--the fund manager, after all, generally wants to maximize the amount of money under the manager's management (usually their compensation is tied to the money under management), so it is in their best interest to make it as easy as possible to have all distributions reinvested.

The Prospectus for the Dodge & Cox Stock fund (DODGX) is on the web(http://www.dodgeandcox.com/pdf/prospectus/dc_prospectus_10-01.pdf) and it looks like they do reinvest distributions unless your elect to do otherwise.

(It is always recommended to read the Prospectus before investing in that fund or in that stock.)

2. Since they are in a Roth, I assume all reinvested dividends/gains are tax free. Is this true?

Well ... hmm... as long as the distributions remain inside the Roth IRA, there are no tax consequences. Likewise, if one follows the rules for tax-free withdrawals, there would be zero tax consequences. (There are cases where you can make withdrawals without penalty but still have to pay income tax on the gains, such as having the withdraw for qualified home acquisition costs.) But, yes, if you are planning on keeping the gains inside the Roth IRA (including the distributions) until you are 59.5 and had a Roth for at least 5 years, then, yes, it is tax free.

3. Do the dividends/gains reduce the max contribution I can make to a Roth? Thats is, say i earn $100 in 2003 from the 2001/2002 IRA accounts. Does that mean i can only contribute $2900 for 2003?

No, distributions are not part of the contributions. So if there is a distribution of $100 in 2003 and that remains completely inside the Roth, it is just part of the money still inside the Roth; you can still contribute the full $3,000 ($3,500 if you are 50 or older by December 31, 2003) for tax year 2003. And that is true whether the distribution from DODGX or MPGFX or other mutual fund is used for reinvesting in the fund generating the distribution or used for feeding another fund, money money account, or used to purchase stocks, just as long as the money remains in the Roth IRA.

4. Can I split any years IRA contribution between any number of custodians, or does it need to be one custodial account?

You can have any number of Roth IRA accounts. There may be custodial fees charted by the custodians, so it would be advantageous to keep the number of custodians few to keep the number of custodial fees few. But if your investment plan involves some funds and some stocks, it could make great sense to have part of your Roth IRA custodian sent to a custodian that does best with the funds (and often the fund family ends up being the best choice of custodian for funds owned by that fund family) and send the rest to a custodian that is a discount broker with a "self-directed Roth IRA" so you can invest in stocks through that custodian. The limit is a total of $2,000 for your Tax Year 2001 IRA contributions (Traditional IRA + Roth IRA), but you can send that all to one custodian, or split it up among different custodians, just as long as the total doesn't exceed $2,000. And, likewise, the total limit for Tax Year 2002 is $3,000 ($3,500 if you will be 50 by December 31, 2002) and can also be split up among different custodians, just as long as the total doesn't exceed the limit.

Note: time is getting tight for your Tax Year 2001 Roth IRA contribution, so you should get that taken care of as soon as you can, and be sure to indicate clearly how much money is to be your Year 2001 Roth IRA contribution and how much is to be your Year 2002 contribution.


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Author: jmelnik Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34069 of 75337
Subject: Re: Newbie Advice & IRA Dividends/Gains Question Date: 3/29/2002 4:46 PM
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Thanks for the answers. I do have propectuses from all the investments I am planning to make and am currently working my way through them. The D&C one was one of the longest and I must not have come to the part about reinvestment yet.

I know that I need to get the 2001 IRA done asap... I've got the applications here now ready go i was just seeking some advice before finally taking the plunge and putting them in the mail Monday morning. 8-)


Thanks again for the info!

joann

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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: 34070 of 75337
Subject: Re: Newbie Advice & IRA Dividends/Gains Question Date: 3/29/2002 5:10 PM
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I am going to put my short term savings into a Money Market Account which is currently paying 3.1% (the best I could find).

Right now that is a good rate for a Money Market Account. My credit union is paying only 1.61%APY on money market accounts with at least $10,000 in that account. (My credit union pays different interest rates for different amounts in the account, and $10K gives the top rate.)

I use my money market account for short-term savings for saving up for the annual property tax bill, my annual Roth IRA contribution, and the more liquid half of my emergency fund. I also have my credit union automatically divert part of each payroll direct deposit into this account so, if I do withdraw from the account (e.g., to pay the property tax bill, or handle a major car repair), the account will automatically be rebuilt.

I'm also considering putting some funds into a 5 year cd with ING direct (5%). I don't see much talk about CDs are they a worthwhile investment or should I put that money somewhere else?

Can you redeem the 5-year CD before maturity? (Some issuers will allow it with penalty, some won't allow it.)

I generally have mixed feelings about CDs--one one hand they do usually give better yields than a money market account or a money market fund. On the other end, CDs generally tend to be inflexable. I used to keep some long-term money and the less liquid half of my emergency fund in CDs, but I have since moved the less liquid half of my emergency fund to I-Bonds (http://www.publicdebt.treas.gov/sav/sbiinvst.htm) and I have moved longer-term money into stock funds and (ahem) bond funds. I still use CDs where I want the money available on a specific date (e.g., I have a couple CDs that mature near January 1 that I can use for a Roth IRA contribution if need be, and in the recent past I have used CDs to boost yields of money I have set aside for property taxes but made sure they would mature just before I expect the property tax statement to arrive).

Right now the FOMC has the overnight rate pretty low and many people expect those rates to rise sometime in the next few months to a year, and when they do, it is expected that money market rates and CD rates would rise. Unfortunately, most 5-year CDs don't give you the benefit of the increased rates, pretty much locking you into the lower rate.

You can get more opinions about CDs, I-Bonds, and other fixed-rate instruments over in The "Bonds & Fixed Income Investments" board (http://boards.fool.com/Messages.asp?bid=100135).


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