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Okay, I already know the answer to the subject line but it's a tad tricker than that. When I was 16 my mom set up a traditional IRA mainly as a tax advantage to reduce what I'd owe at the end of the year. I was working part time during high school and the investments (which I didn't know much about at the time) that were going to send me to college were doing quite well. Now, 12 years later, the traditional IRA is still sitting there. Most years, I've made the max contribution I could. This year, I couldn't due to a higher salary and my 401k participation. I've got about 32k sitting in the traditional IRA. I plan to open a Roth by the end of this year, just to have one regardless of the following question:

Should I 86 the traditional IRA, eat the tax now (really over 2 or 3 years - I can't eat it all at once) and plop everything into a Roth?

I suppose the alternative would be letting the traditional IRA sit there untill retirement and continue to contribute to my 401k/Roth. I'm already leaning towards the conversion (on the grounds of relatively poor returns [3-5%] in the traditional). But, I'm still undecided.

Also, I hope to not open up too big of a can of worms here. I know this is probably one of the bigger "Catch 22" type of questions out there.

-Jon
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Many people would recommend keeping the traditional IRA, and funding your Roth with the new money. We know what the tax situation is right now ... but we don't know what it will be years from now when you are tapping into those accounts. So, people often recommend "diversification" among your retirement accounts. (Have retirement accounts and income sources of various types.) One scary possibility that has been mentioned is that there could be a national sales tax or "Valued-Added Tax" instead of income tax. So, when you turned around to spend your money in retirement, the TIRA money would be good to have. (Plus, a greater sum of money would have been at work for you between now and retirement.) Such people caution against paying the taxes that you would have to pay now to make the conversion from TIRA to Roth. Why be in a hurry to pay taxes? --Especially if we know things could change.

As for being too "bond-heavy" (as another poster suggested)--I'd want to know whether you had some teacher's pension that you could look forward to. That could could be bond-like, and would supply the income that bonds are supposed to. --Do you?

And do you have an emergency fund?

As for real estate, I have only a little experience with it. But I'd suggest here that you want the RE to flow cash positive from month to month. Don't rely on capital gains. If the property increases in value, that's good! But anyway that's in the future and you'd be counting your chickens before they hatched if you counted that now.

If the TIRA has returned only 3 to 5% recently, what would be the problem with changing your investments within the TIRA? Converting the funds to a Roth won't have much impact on what they are invested in, will it?

--SirTas
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I'm already leaning towards the conversion (on the grounds of relatively poor returns [3-5%] in the traditional).

That is not a good reason at all to convert the traditional IRA to a Roth or to cash in the IRA. If you don't like the returns in your IRA, change the investments. If the IRA is in a mutual fund, switch it to another fund. Or to stocks. Or bonds. Or CDs. Or whatever floats your boat. But don't take it out of the IRA just because the returns haven't been what you expected.

Technically, what I'm suggesting is a rollover. You roll the funds over from one custodian to another. Or you might not even need to do that. If your IRA is with a broker, you can just sell what you currently have and buy something else.

But please don't just take the money out and pay the taxes.

--Peter
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At the moment I don't have a specific pension/bonds to look forward to. Diversifying my retirement with some bonds is something that would be easy to do, but I don't feel I need to do that now. Being single, no kids and at 28 I'm willing to take on some risk for greater returns.

I don't have an explicit "emergency" _fund_ but I do have liquid assets in case an emergency happens.

I bought a house a little over a year ago and while I'm not likely to still be living there in a year and a half it won't be hard to rent it out to allow the equity to grow (with or without cap gains).

It probably wouldn't be hard to change the allocation within the TIRA (I haven't investigated yet). The TIRA is is an annuity product from a life insurance company (Farmers Insurance).
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Should I 86 the traditional IRA, eat the tax now (really over 2 or 3 years - I can't eat it all at once) and plop everything into a Roth?

I wouldn't. What if the government changes the rules and starts taxing Roths? Better to be "diversified" in your tax-advantages. Especially since you are up there in the tax brackets these days.

I'm already leaning towards the conversion (on the grounds of relatively poor returns [3-5%] in the traditional). But, I'm still undecided.


What sorts of investments are offered by the company holding you IRA for you? Maybe you can switch into something you like better. After you check that out, you may want to move your IRA to another company. Just contact the company that offers the investments you want and fill out the forms. Be sure to have the money transferred directly to the new company to avoid tax problems.

Vickifool
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HikerJon: "It probably wouldn't be hard to change the allocation within the TIRA (I haven't investigated yet). The TIRA is is an annuity product from a life insurance company (Farmers Insurance)."

Ugh.

Did your mother also make you wear suspenders with your belt?

Unless an annuity was the only investment choice open to you (which I doubt), paying to put a tax deferred product (the annuity) inside another tax deferred wrapper (the traditional IRA) is usually a pointless waste of money.

At the very least, you shoul be able to exchange to a better annuity. IIRC, anguard and TIAA are low-cost annuity providers.

Voting with the others that there is no reason to 86 the traditional IRA, only to 86 your current holdign therein.

Regards, JAFO

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One of the only things I can think of that's a worse idea than an annuity inside a TIRA is holding muni bonds in one.

Annuities tend to have subpar long-term returns in part because they usually already include tax-deferred compounding. So why pay that "stealth tax" of lower returns and fees inside an IRA, when any investment would also compound tax-deferred (or even tax-free in the case of a Roth)?

#29
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The TIRA is is an annuity product from a life insurance company ...

The only good news I can see in this is that you've held the annuity for quite a while now. Perhaps the surrender charges won't be too onerous and you can redeploy the capital in a mutual fund or some individual stocks.

It is very possible to surrender the annuity and put the proceeds into a rollover IRA with a discount broker or mutual fund company. The amount of the surrender charges will have an impact on your decision to surrender or to just live with it. It would not be taxable withdrawal from an IRA as long as you keep the money inside of IRA accounts with both the insurance company and a new IRA custodian.

It might also be possible to do a partial surrender or a partial withdrawal and move the money to another IRA. To the extent you can do that with little or no surrender charges, it would make a lot of sense. Perhaps a multi-year plan of slowly getting out of the annuity could be developed.

--Peter
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It probably wouldn't be hard to change the allocation within the TIRA (I haven't investigated yet). The TIRA is is an annuity product from a life insurance company (Farmers Insurance).

Well, now we get to the root of the problem.

Sounds to me like you're in a fixed annuity, which is basically a savings account or CD in disguise, only with higher expenses. At least this is certainly the case if the 3%-4% return is consistent year after year.

Check and find out if you're out of the 'surrender charge' period for the annuity. Chances are you are. If so, get the heck out of there. Change it to another investment within the IRA, or move your IRA to another provider (Vanguard, Fidelity, and T Rowe Price are excellent options).

Oh, and don't let them move you to a variable annuity either - or any kind of annuity period. Those are different but are still much more expensive and have no tax advantages since they're already inside an IRA.
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Thanks everyone. I'm in the process of hunting down a rep/agent to change into another investment within the IRA. Otherwise, I'll transfer it to another TIRA provider; all without using the words "cash out".

Speaking of not cashing it out, some of my coworkers are under the impression that if I don't touch the money in any way I can move all of the traditional IRA money into a Roth without any tax implications. This is something that I'll pass by my tax guy but ... it doesn't sound all that kosher to me. Does anyone have any experience with this or know if that would be the case?
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Speaking of not cashing it out, some of my coworkers are under the impression that if I don't touch the money in any way I can move all of the traditional IRA money into a Roth without any tax implications. This is something that I'll pass by my tax guy but ... it doesn't sound all that kosher to me. Does anyone have any experience with this or know if that would be the case?

There are no penalties, but there are definitely tax implications. You pay regular income tax on every penny of the conversion.

http://www.irs.gov/publications/p590/ch01.html#d0e4612
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Otherwise, I'll transfer it to another TIRA provider; all without using the words "cash out".

You don't have to deal with the bank at all in order to transfer the IRA to another provider.

All you do is find another IRA provider and fill out their "New account via rollover" forms. You tell them the current provider and the account number, and they do all the work.

So to avoid tax implications you need to do a Direct Rollover or a Custodian-to-Custodian Transfer.

I can move all of the traditional IRA money into a Roth

This is called a Roth Conversion, and you don't have to do it now, you can do it anytime. But it is a taxable event.
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I'd like to resurect this discussion for a bit, albeit on a slightly different topic.

I've found an agent that can properly look up my account information as well as transfer it into a host of different funds (most of which will likely do better than the annuity it's in now). I'm basically giving this new agent a shot to see what he has to offer. Although, this is really just lip service because I'm thinking of moving it all to Vanguard. (I'd keep everything, for the moment, under the ubmrella of a traditional IRA and I'll likely start converting it all to a Roth starting next year.) Anyway, Mr. Agent says he can move my money into any of around 10,000 funds of the 15,000 (estimated) available funds on the market. He likes the funds from American Funds but can put it into just about anything including Fidelity, T. Rowe, Janus, et cetera.

So now I'm confused by how he's getting paid. Since he can't skim off the top of my bottom line is his paycheck coming as a commission from the funds I invest in? So he says, "the better I (investor) does the better he (agent) does." I'm sure... But if my expense ratios are the same from any of these companies if I were to invest with them directly it would appear that it wouldn't hurt me to keep the agent. I know that logic can't be true - he's getting paid from somewhere but I don't see it. Any thoughts?
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I'd give it a 95%+ chance that he will put you mostly or entirely in load funds (American Funds are load funds). These are funds that will take 5% of your money off the top (give it take), some of which will be returned to him. Or at least funds with largish 12b-1 fees, which are the fees that are used for advertising and 'incentives' for brokers.

Sure, maybe he *can* put you in no-load funds, but its probably distinctly to his interests not to do so.


if I were to invest with them directly it would appear that it wouldn't hurt me to keep the agent.

A big, big if, if you ask me :)
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I know that logic can't be true - he's getting paid from somewhere but I don't see it. Any thoughts?

If he won't tell you how he's being paid, in my book that's another reason to ditch him.

Most likely he is paid via 12b-1 fees from the mutual funds.

If you buy the mutual funds through a broker/advisor, the 12b-1 fee gets paid to the broker/advisor.

If you buy the mutual funds direct from the company, the 12b-1 fee gets used for marketing purposes by the company (e.g. buying ads in the Wall Street Journal or in your local newspaper).

So if you *want* to buy a fund with a 12b-1 fee, you may get more for your money by buying it at a broker or through an advisor. But most likely there is an equivalent fund without a 12b-1 fee that would earn you better returns.
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