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Author: scrowden Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121256  
Subject: Roth Cash In? Date: 11/30/1998 2:36 PM
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Hi All,

A few months back (before I found this site) I opened a Roth IRA with $2,000. It's a high growth international type of fund with 2.5% fees. The fees are obviously high based upon what I have read @fool.com.

I had heard on CNBC (take it easy, this was before I found fool.com) and someone there mentioned that you could take out the original amount penalty free. But the company that the fund is with says I have to pay a 10% penalty if I take it out before 5 years.

I have a student loan with 8.5% rate. I was thinking about cashing in the Roth to pay down on the loan.

Is this a bad idea or a good one?

By the way the fund has lost money ever since opening the account, but it's close to what it was when I purchased it.

TIA,

Steve Rowden
scrowden@aol.com
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6672 of 121256
Subject: Re: Roth Cash In? Date: 12/2/1998 11:36 AM
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[[Hi All,]]

Hello...

[[ A few months back (before I found this site) I opened a Roth IRA with $2,000. It's a high growth
international type of fund with 2.5% fees. The fees are obviously high based upon what I have read
@fool.com.]]

Sadly...true...

[[ I had heard on CNBC (take it easy, this was before I found fool.com) and someone there
mentioned that you could take out the original amount penalty free. But the company that the fund
is with says I have to pay a 10% penalty if I take it out before 5 years.]]

There is a difference between a contribution and a conversion to a Roth IRA. If you are talking about a contribution, then you are free to take back your original contributions (but NOT earnings) tax and penalty free at any time.

But if you are talking about a conversion, then the rules are a bit different.

[[ I have a student loan with 8.5% rate. I was thinking about cashing in the Roth to pay down on the
loan.

Is this a bad idea or a good one?]]

Again, if your Roth IRA was opened with a contribution (and NOT a conversion), you would be able to remove the initial $2k without penalty or tax. But any earnings would be subject to taxes and penalties.

But is this a good idea? Hard to tell with such limited information. The words "good", "better", and "best" are difficult to define in a specific situation. You really have to review your personal situation and see what would be best for you. And, when you are making your decision, don't forget that some of the interest that you pay on your student loan may be a deductible expense. Read more about this in the Taxes FAQ area (archives section).

[[ By the way the fund has lost money ever since opening the account, but it's close to what it was
when I purchased it.]]

Then, if we are talking about an original contribution (and NOT a conversion), it is very likely that your tax issues would be small.

TMF Taxes
Roy

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Author: RandomThoughts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6870 of 121256
Subject: Re: Roth Cash In? Date: 12/8/1998 2:24 AM
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scrowden said:
But the company that the fund is with says I have to pay a 10% penalty if I take it out before 5 years.

If you cash the Roth in, you pay the 10% penalty. BUT, what they are not telling you is that you can have it transferred directly to ANOTHER mutual fund, even at a different mutual fund family, and not have to pay the 10% penalty. That will get you out of the bad investment.


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6885 of 121256
Subject: Re: Roth Cash In? Date: 12/8/1998 10:00 AM
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[[scrowden said:
But the company that the fund is with says I have to pay a 10% penalty if I take it out before
5 years.

If you cash the Roth in, you pay the 10% penalty. BUT, what they are not telling you is that you
can have it transferred directly to ANOTHER mutual fund, even at a different mutual fund family,
and not have to pay the 10% penalty. That will get you out of the bad investment.]]

As pointed out, you can certain make a "transfer" of your Roth IRA from your current mutual fund to another family of funds without penalty. Or you could even make the transfer to a broker and invest in securities...all without penalties if done correctly.

Remember that you still have the same "rollover" rules for your Roth IRA that are available for a regular IRA. If you are not happy with your broker or investment, you can move the funds (under the rollover provisions) to another investment or broker without the 10% penalty. This is usually best done via a "trustee to trustee" transfer...which avoide the "once a year" rollover rules completely.

The only time the 10% penalty comes into play is when you take a distribution...and keep the funds.

TMF Taxes
Roy

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