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Author: Calyxia Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75890  
Subject: Newbie ROTH tax question Date: 3/31/2005 1:29 PM
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very newbie-esque question:

I have a brand spanking new Ameritrade ROTH-IRA, consisting of a couple of American Funds products just transferred over from another broker. I want to sell those, and invest in a couple of index funds.

I just want to make sure that there are no tax consequences incurred by selling off the one, temporarily having the ROTH full of cash, and then buying the new funds.

It's my understanding that my investment, in whatever form, is protected from taxes as long as it stays within the ROTH, but I want to make sure before I do anything foolish...er, "dumb".

thoughts?
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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45372 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 1:42 PM
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Correct. As long as you don't use the Roth to make a "prohibited transaction" (e.g. investing in art, collectibles, or something controlled by you or one of your direct relatives like your home) anything you do inside the Roth is tax free. [There are a few concerns having to do with foreign taxes but you shouldn't run into them.]

btw

foolish = dumb
Foolish (with a capital F) = the philosophy we aspire to

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45374 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 2:35 PM
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I have a brand spanking new Ameritrade ROTH-IRA, consisting of a couple of American Funds products just transferred over from another broker. I want to sell those, and invest in a couple of index funds.

May I ask why you want to do this? Which funds are they? Some of the American funds are excellent. You have already paid the commission, and the management costs are low. If they meet your goals and needs, why sell them? They defy Modern Portfolio Theory, but they have done well over the years.

cliff
... Owns New Perspective, Income Fund of America, New Economy, Small Cap World (Wish I had sold five years ago! hindsight.), Capital Income Builder, and Capital World Growth and Income.

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Author: Calyxia Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45377 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 2:40 PM
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May I ask why you want to do this? Which funds are they? Some of the American funds are excellent. You have already paid the commission, and the management costs are low. If they meet your goals and needs, why sell them? They defy Modern Portfolio Theory, but they have done well over the years.


In other words, you'd leave those funds alone and just buy into index funds (properly asset-allocated) along with them?

What's the financial harm in selling out from the American Funds and putting all of my investments into a long-term oriented index strategy?

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45378 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 3:27 PM
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In other words, you'd leave those funds alone and just buy into index funds (properly asset-allocated) along with them?

No, I would leave them alone if they fit your overall investment plan. Use them as a part of your portfolio, as long as you stay comfortable and well-diversified.

What's the financial harm in selling out from the American Funds and putting all of my investments into a long-term oriented index strategy?

No harm at all, if you get a better portfolio mix.

Again, which funds are you considering selling? Buying? How old are you (how far from retirement)? How large is your portfolio? Without knowing this sort of thing, any advice from this forum (or any other) will be useless.

cliff

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Author: Calyxia Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45384 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 4:30 PM
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I'm 38 years old.

Currently own in ROTH:
ABALX: $3000
AMCPX: $8000

Intend to buy:
VFINX: $7500
VBIIX: $3500

I have also have a SEP-IRA, in which there is a similar mix of American funds, but with a value of approx $50K, which I intend to sell and revise to something along Coffeehouse lines, reflecting multiple market sectors in low-cost index funds. (I guess my very first question, about tax consequences within the ROTH also applies to the SEP)

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45389 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 5:34 PM
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OK. No tax consequences. Everything is staying in its original account. The key is that you are not taking any distributions from the accounts.

In fact, if you take only qualified distributions from the Roth, there will never be any tax consequences at all with respect to those funds.

With the SEP-IRA, distributions will be taxed at ordinary income rates.

--SirTas


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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45390 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 5:38 PM
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Calyxia, I think you are doing the right thing. I would question having the bond fund AT ALL for someone 38 years old. Your time horizon is long, you should be prepared to ride out the ups and downs to gain the higher return from stocks.

I personally like VEXMX as a primary investment more than VFINX, but some people like brown shoes, some like black.

Good luck. I wish I had done what you are doing when I was 38.

cliff

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Author: Calyxia Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45391 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 5:42 PM
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Thanks for the encouragement!

With all of the information that's out there - and the helpful people on these boards - I'd be a fool *not* to do this now.

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Author: FoolishBull One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45397 of 75890
Subject: Re: Newbie ROTH tax question Date: 3/31/2005 10:36 PM
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I'm 38 years old.

Currently own in ROTH:
ABALX: $3000
AMCPX: $8000

Intend to buy:
VFINX: $7500
VBIIX: $3500

I have also have a SEP-IRA, in which there is a similar mix of American funds, but with a value of approx $50K, which I intend to sell and revise to something along Coffeehouse lines, reflecting multiple market sectors in low-cost index funds. (I guess my very first question, about tax consequences within the ROTH also applies to the SEP)


I think you should be a little more aggressive if you plan to stay in the work force for another 15-20 years. I would stay out of bond or balanced funds and would have a long-term investment strategy of 100% growth stocks.

For example, you might consider investing 50% in an index fund and 50% in a growth fund. VFINX is an excellent choice for an index fund that follows the S&P 500 and is extremely popular due to its low expense ratio. As typical when compared over a long period of time, the VFINX fund has performed much better in the long term when compared to your American Funds

http://finance.yahoo.com/q/bc?t=my&s=ABALX&l=on&z=m&q=l&c=vfinx

http://finance.yahoo.com/q/bc?t=my&s=AMCPX&l=on&z=m&q=l&c=vfinx

Vanguard also has interesting choices for the growth portion of your portfolio. For example, consider the funds found at the following page of the Vanguard web site

http://flagship3.vanguard.com/VGApp/hnw/FundsByObjectiveDetail?category=DomStockAggr

If I were investing in funds, VASVX and VTMSX both look like great growth funds that have consistently beat the index fund historically. See the following (the green curve represents the S&P 500)...

http://finance.yahoo.com/q/bc?s=VTMSX&t=my&l=on&z=m&q=l&c=vasvx,%5EGSPC

Finally, since you have over $5,000, you might consider having Vanguard handle the ROTH fund. See following for information:

https://flagship3.vanguard.com/VGApp/hnw/content/AccountServ/Retirement/ATSRothIRAOverviewContent.jsp

There will be no fee involved in transfering your funds to Vanguard. Moreover, since you have over $5,000, there will be no management fee and there is no trading fee for buying the funds. With no transaction fees, you can dollar cost average into the fund each month throughout the year. For example, if you want to contribute $3,000 for a given year, you can have Vanguard automatically withdraw $250 per month ($250X12=$3000) from your checking account and buy the funds of your choice throughout the year rather than contributing one lump sum.

Just some thoughts. Good luck.

FB




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Author: Calyxia Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45439 of 75890
Subject: Re: Newbie ROTH tax question Date: 4/4/2005 2:57 PM
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thanks for the thoughtful input, FB... youve certainly given me food for thought here. (also, I'd never seen the yahoo finance website before... some useful tools there!)

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