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Author: adjulian Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Rookie investor needs your help Date: 5/15/2001 12:48 PM
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I recently left my job to pursue another opportunity. I am 26 years old and my wife is 23. I have approximately $7500 in my 401k and my wife has 2 mutuals at around $20K. I am in the process of initiating a rollover into a traditional IRA with Vanguard.

QUES 1; is this a good idea or should I leave it in the 401k?

In my new job I will have an opportunity to participate in a SIMPLE IRA program which I will start contributing in 6 months. My wife has a couple of mutual funds with American Century but no company sponsored retirement plan.

QUES 2; I will potentially have a traditional rollover IRA + SIMPLE IRA; does my wife need to open an IRA as well or are we okay with what we have set up?

QUES 3; are there limits to my contributions to my SIMPLE IRA + traditional rollover IRA (and potentially another IRA if we open one up for my wife)and what are they?

QUES 4; any other general tips for being sure we are set up for retirement?

Thanks for the education,
AJ
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Author: avjo Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29713 of 75335
Subject: Re: Rookie investor needs your help Date: 5/15/2001 2:02 PM
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1) IMHO, that sounds like a good idea, but I would look at the funds you own in your 401k first, and then see if they are available through Vanguard, if they are not then you have a choice to make, sell them and buy new and or similar one(s) there at vanguard. Basically just do a check up on what you own, and what the costs (and perhaps tax consequences are) will be thats all.
(Also, you guys are young, why not looking into the advatages of a Roth IRA...)

2)IMHO, yes your wife needs here own account(s) in her own name. If she does not work she can get a spousal ira, if she does she can open up her own roth ira (since she is young this might be the best choice) but if she makes more than the agi limits than she can open herself a traditional ira. She needs to have some things in her own name.
(A Spousal IRA is either a traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than $2,000 in annual compensation. The couple must file a joint tax return for the year of contribution. The working spouse may contribute up to $2,000 per year to the Spousal IRA and up to $2,000 per year to his or her own IRA. A couple, then, may contribute up to $4,000 per year provided neither IRA receives more than $2,000. )


3)Yes, there are something to be aware of:
"Individual Retirement Arrangement (IRA). An IRA, or Individual Retirement Arrangement, is a personal retirement savings plan available to most persons who receive taxable compensation during the year. Compensation includes wages, salaries, fees, tips, bonuses, commissions, taxable alimony, and separate maintenance payments. Husbands and wives may each have an IRA even if one person in that marriage is not working. Except for an Education IRA, annual individual contributions are limited to the lesser of total taxable compensation or $2,000. There is no minimum or required IRA contribution, and all earnings on the amounts in an IRA are untaxed until withdrawn. Contributions may or may not be deductible in the tax year made depending on the type of IRA used and the owner's income tax filing status, Adjusted Gross Income (AGI), and eligibility to participate in a tax qualified retirement plan through employment.

Money may be withdrawn from an IRA at any time, but any withdrawal may be taxed at ordinary income tax rates. Except as noted below, withdrawals from an IRA other than a Roth or Education IRA prior to age 59 1/2 will result in a 10% excise tax in addition to ordinary income tax. Non-deductible contributions, if any, will be excluded from taxation as a portion of a withdrawal based on the percentage those contributions represent when divided by the sum of that withdrawal plus the total IRA balance as of December 31 of the year of withdrawal.

There are seven exceptions to the 10% penalty for withdrawals prior to age 59 1/2. The penalty does not apply to early distributions that:

Occur because of the IRA owner's disability.
Occur because of the IRA owner's death.
Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of AGI.
Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
Except as noted in the discussion for Roth and Education IRAs, ordinary income taxes still must be paid on withdrawals for these purposes.

http://www.fool.com/Retirement/RetirementPlanPrimer.htm

Savings Incentive Match Plan for Employees (SIMPLE). Established by the Small Business Protection Act of 1996, a SIMPLE may be set up by employers who have no other retirement plan and who have 100 or fewer employees with at least $5,000 in compensation for the previous year. SIMPLE plans are the replacement for the SARSEP plans discussed above. They may be structured as an IRA or as a 401(k) plan. Employees may defer any percentage of compensation up to $6,500 per year to the SIMPLE, and the employer is required to make a matching contribution of up to 3% of the employee's pay based on that election. The employer may reduce the maximum matching percentage in any two years out of five. Alternatively, the employer may establish a uniform 2% of salary contribution per year for all eligible employees regardless of whether they contribute to the SIMPLE or not. Together, the employee and the employer may contribute a maximum of $13,000 annually to the SIMPLE.

Contributions are immediately vested with the employee, and deposits and earnings in the account will accumulate tax free until withdrawn. In general, distributions from a SIMPLE are taxed like those from an IRA. Withdrawals prior to age 59 1/2 are subject to the 10% early withdrawal excise tax in addition to ordinary income tax. Unlike an IRA or SEP, however, employees who withdraw money from a SIMPLE IRA within two years of their first participation in the plan will be assessed a 25% penalty tax on such withdrawals instead of 10%. This extra penalty does not apply to early withdrawals from a SIMPLE 401(k). Distributions from both types of SIMPLE may be transferred to another SIMPLE or to an IRA, but they are ineligible for transfer to a qualified retirement plan."

and

"A Rollover (Conduit) IRA is a traditional IRA set up by an individual to receive a distribution from a qualified retirement plan. Distributions transferred to a rollover IRA are not subject to any contribution limits. Additionally, the distribution may be eligible for subsequent transfer into a qualified retirement plan available through a new employer. To retain this eligibility, the IRA must be composed solely of the original distribution and earnings (i.e., no other contributions or rollovers may be added to or mingled with the IRA), and the new employer's plan must permit the acceptance of rollover contributions. "

and

"A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a traditional IRA set up by a small employer for a firm's employees. Employees may contribute up to $6,000 per year to these IRAs and will receive some level of a matching percentage of pay from their employer. Between the employer and the employee, up to $12,000 may be contributed annually to the participant's account. (See SIMPLE). "


(Defined Contribution Plan. A defined contribution plan is a qualified retirement plan in which the contribution is defined, but the ultimate benefit to be paid is not. In such plans, each participant has an individual account. The benefit at retirement depends on the amounts contributed and on the investment performance of that account through the years. In such plans, the investment risk may rest solely with the employee because of the opportunity to choose from a number of investment options. These plans take many forms and are known by various names such as money purchase, profit sharing, 401(k), or 403(b) plans.

Annual contributions by the employee and/or employer are limited to a maximum of $35,000 or 25% of compensation. At retirement, benefits are typically paid in installments or as a lump sum; however, they may also be paid as an annuity. Income tax ramifications and rollover options are the same as those described above for defined benefit plans. Installment payments for a period of less than 10 years are eligible for transfer to an IRA, while those lasting for a period of 10 years or more are not. )

http://www.fool.com/Retirement/Retirement.htm

http://www.fool.com/calcs/calculators.htm?ref=RetAg#saving



Some info on Traditional versus Roth:

A Traditional IRA is the term for a regular IRA available to those under age 70 1/2 who have earned income (i.e., job compensation). Earnings within the traditional IRA grow tax-deferred until withdrawal. Withdrawals must begin, and will be taxed, when the owner reaches age 70 1/2. If required distributions are not taken at that age, a 50% penalty will be assessed on the amount not taken. When made, contributions may or may not be tax deductible. If a traditional IRA owner participates in an employer's qualified retirement plan on any day in the tax year, the deductibility of contributions declines to zero between certain AGI ranges. In 2001, the AGI range is $33K to $43K for a single filer and $53K to $63K for joint filers. These AGI ranges will increase gradually through 2007, at which time they will be $50K to $60K for single filers and $80K to $100K for joint filers. As of January 1, 1998, a working spouse not covered by a retirement plan through employment may make a tax-deductible contribution of up to $2,000 annually to an IRA despite the other spouse's coverage under an employer-provided retirement plan. When the couple's AGI reaches $150K, deductibility for such contributions begins to decline, and it reaches zero at a joint AGI of $160K.

A Roth IRA is an IRA authorized on or after January 1, 1998, in which:
Contributions to the account are not deductible.
"Qualified" distributions (i.e., withdrawals) from the account are not taxable; and
Earnings on the account are taxable only when a withdrawal is not a "qualified" distribution.
A "qualified" distribution from a Roth IRA is a withdrawal that meets one or more of the following:

Made after the taxpayer attains age 59 1/2.
Made to a beneficiary after the taxpayer's death.
Made because the taxpayer is disabled.
Made by a first-time homebuyer to acquire a principal residence.
No withdrawal except those attributable to previously taxed contributions will be a qualified distribution unless it is made after the five-taxable-year period beginning with the taxable year in which the taxpayer first contributed to a Roth IRA.

Annual contributions to a Roth IRA are limited to $2,000 minus the taxpayer's deductible IRA contributions. Contributions to a Roth IRA may be made even after the owner reaches age 70 1/2. The $2,000 limit is phased out as AGI increases from $150,000 to $160,000 (married filing jointly) or $95,000 to $110,000 (single filer).

Amounts in traditional IRAs may be transferred to Roth IRAs provided the taxpayer's AGI (married or single) for the transfer year is $100,000 or less. Transferred amounts must be included in that year's income, but the money transferred will be exempt from the 10% excise tax for a withdrawal prior to age 59 1/2. No withdrawal allocable to earnings on the transferred amounts can be a qualified distribution unless made more than five tax-years after the transfer.

Further details on IRA provisions may be found in IRS Publication 590, Individual Retirement Arrangements. This publication may be obtained at no cost by calling 1-800-TAX-FORM, or it may be downloaded online. http://www.irs.ustreas.gov/prod/forms_pubs/index.html


some info on conversions:
http://www.fool.com/money/allaboutiras/allaboutiras05.htm


and just some incentive advice:
401(k)s or 403(b)s. Your employer may match the contributions that you make to this plan, up to a certain amount -- and that means that you're getting free money. "Free money." Hmm... we like the sound of that. Couple the free money with tax-deferred compounding, and you've got a great tool for amassing a sizable stash by the time you retire.


IRAs. If you're eligible, there's really no good reason why you shouldn't have one -- whether you choose a Roth IRA or a traditional IRA. Each of these provide great tax advantages, and the flexibility to be invested in the stock market all the while. The Roth IRA is appealing because, if you follow the rules, you can withdraw money you've contributed to it, as well as any earnings on the money, completely tax-free. You can contribute up to $2,000 per year to a regular or a Roth IRA.

http://www.fool.com/school/basics/investingbasics001.htm

http://www.fool.com/money/401k/401k001.htm

http://www.fool.com/money/401k/401k002.htm

(So, I'd say a combination approach should work well: 1)Get all matches on simple or 401ks,
2)make full contributions to roth ira
3) taxable account

Think that is a good start. Hope that helps! Sorry so long!!


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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: 29715 of 75335
Subject: Re: Rookie investor needs your help Date: 5/15/2001 3:44 PM
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1. Depends on what funds are in the 401(k). There are a few magic 401(k)s in the country where you have access to "institutional" funds with extremely low fees. If the fees are low enough, it might be worthwhile to leave it in the 401(k).

2. I use a different terminology than avjo. Both you and your wife can have your own IRAs, provided your total combined income is over $4000. I think it is a good idea to sheild as much assets from taxes as possible. Note that this means "don't put assets in an IRA that you're going to need before retirement".

3. Since you'll be covered by a retirement plan at work, you won't be able to deduct contributions to a Traditional IRA. Perhaps a Roth IRA would be better for you; you can put in $2000 per year. Your contributions to an IRA do not affect your company's contribution to your SIMPLE.

4. Have you gone through the Fool's School?
http://www.fool.com/retirement.htm?REF=PRMPIN


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