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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 756720  
Subject: ROTH Conversions, how many? Date: 1/20/2000 9:35 PM
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In 1998 I converted a chunk of my IRA to a ROTH and opted for the 4 year tax spread. Can I make additional
qualified conversions as long as I meet the AGI requirement? Is their a limit to the number of conversions that can be made and is their a limit to
how many can be made in a given year? Would a conversion made this year violate any of the stringent
rules governing my SEPP withdrawls?

Any guidance would be appreciated.


ttjasi
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2387 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 9:47 PM
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ttjasi asks,

In 1998 I converted a chunk of my IRA to a ROTH and opted for the 4 year tax spread. Can I make additional
qualified conversions as long as I meet the AGI requirement? Is their a limit to the number of conversions that can be made and is their a limit to
how many can be made in a given year? Would a conversion made this year violate any of the stringent
rules governing my SEPP withdrawls?


You can make as many Roth conversions a you want under the conditions you describe. The only restriction is you can't do a Roth conversion on an IRA that you are currently taking SEPP withdrawals from. (I'm hoping you have at least 2 IRAs, one Roth, one traditional, if you are currently taking SEPP distributions.)

intercst



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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2388 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 10:04 PM
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I have one traditional IRA and one Roth which I opened
by converting a chunk of my IRA in 1998. I am just
starting SEPP withdrawls this month from my traditional IRA. I have been
toying with the idea of converting additional amounts
over the next few years, but my gut (a reliable indicator for me) told me that I should make sure it was permissible if I am also doing SEPP. Something told me that it might not be allowed. But can I make a partial conversion of my traditional IRA if I am doing SEPP? Thanks again.

ttjasi

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2389 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 10:14 PM
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ttjasi asks,

I have one traditional IRA and one Roth which I opened
by converting a chunk of my IRA in 1998. I am just
starting SEPP withdrawls this month from my traditional IRA. I have been
toying with the idea of converting additional amounts
over the next few years, but my gut (a reliable indicator for me) told me that I should make sure it was permissible if I am also doing SEPP. Something told me that it might not be allowed. But can I make a partial conversion of my traditional IRA if I am doing SEPP?


No, you're out of luck.

Withdrawing money from the IRA that you are currently taking SEPP from to rollover to a Roth will trigger the 10% penalty.

If you had a second traditional IRA that was still intact, you could rollover money from the second traditional IRA into a Roth, while continuing SEPP withdrawals from the first traditional IRA.

It's a confusing subject. I hope this explaination makes it clear.

intercst



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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2390 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 10:40 PM
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Thanks for a clear response to a very confusing subject. I can live without the conversion and when
my SEPP requirement is up will think about additional ROTH conversions then.

I already have what I really want: freedom and independence with a higher all around quality of life
for myself and my 2 children.....thanks again.

ttjasi

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2391 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 10:47 PM
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ttjasi wrote,

I already have what I really want: freedom and independence with a higher all around quality of life for myself and my 2 children.

If you already have that, who needs a Roth? <grin>

intercst

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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2392 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/20/2000 11:07 PM
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Daydreamers like me need a Roth so they can STAY
retired early......my kids each have one from their part time jobs and their only 14 and 15! Imagine the
possibilities for them. Einstein said it and I believe it: Compounding interest is one of the miracles of
the universe!

ttjasi





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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2394 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 12:26 AM
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ttjasi wrote,

Daydreamers like me need a Roth so they can STAY
retired early
......my kids each have one from their part time jobs and their only 14 and 15! Imagine the
possibilities for them. Einstein said it and I believe it: Compounding interest is one of the miracles of
the universe!


I'm not convinced that a Roth is necessary to STAY retired.

Funding a Roth IRA is a bet that you will be in a higher tax bracket when you retire, most people aren't. (Though I suspect that a few Fools who decide not to retire early and just let their tax deferred accounts continue to compound WILL be in a higher tax bracket when they retire.)



Consider this excerpt from post #126 on the Retire Early Home Page board.

Tomcat98 wrote: <<<<Your next question might be "Why not convert the traditional IRA to a Roth IRA?"

We made the decision to do the conversion last year so we spread the tax. We also fund the Roths each year. We are in the 28% bracket.

Seems to me if I used the Roth in retirement years where I was pushing the 28% tax bracket or higher edge, I could control my tax bracket a little? Is this correct?>>>>>

intercst responds: That's correct. If you edged into the 31% bracket in retirement, you could decide to fund part of your expenses with a Roth IRA withdrawal rather than a source that would put you in a higher tax bracket.

My reluctance to do a Roth rollover stems from what happens if I'm in a lower tax bracket in retirement. Hopefully it's a remote possibility, but it could happen. If you fund a Roth in the 28% bracket and a market downturn puts you in the 15% bracket in retirement, you'll have less retirement income than a person who didn't fund a Roth and took a traditional IRA instead. The way I look at it, having additional income if I'm the 15% tax bracket would mean more to me in retirement than additional income if I'm in the 39.6% bracket. If I'm lucky enough to reach the 39.6% bracket, I can pay the taxes and still have more money than I need. If I'm in the 15% bracket, every dollar will likely count, so my choice was to protect the downside case at the expense of paying more taxes if I end up very wealthy.


intercst


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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2397 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 7:02 AM
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If I'm in the 15% bracket, every dollar will likely count, so my choice was to protect the downside case at the expense of paying more taxes if I end up very wealthy.

This is one of the reasons I didn't convert to a ROTH IRA in 1998 when I was able to. Another reason is that we haven't had a market downturn in quite a while, and while it may never come, it will probably come sooner or later. It would be a pity to pay taxes on an IRA for conversion and then have the value of the new ROTH IRA decline by 30 or 40% a year or two after the conversion.



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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2407 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 11:37 AM
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Your point is well taken and well illustrated.

When converting part of my IRA to a Roth I made sure that I had sufficient assets remaining to take early and comfortable retirement and initiate SEPPs out of the traditional IRA calculating a potential return considerably below what it has returned in the last few years.

The funds in the Roth are in rather aggressive mutual
funds (Janus) which if they returned only historical stock market returns of about 12 percent (adjust that upwards when considering ANY tax bracket), would return far more over the course of my life and my children's lives then the taxes paid would have returned had the money used for the taxes been invested and taxed.

Part of my reason for converting included my children's option as my beneficiaries, to withdraw the assets
at a rate using their life expectancy over the course of their lives. Their 14 and 15 years old.

I do have a modest income outside of SEPP and expect to remain in a higher tax bracket for some time.

In the short time I have had the Roth, it has returned
SIGNIFICANTLY more then the taxes that will be paid on it over four years with no tax liability on the gain. Allowing for a downturn I believe the long term prospects for the US and global economy
will return at least the historical stock market average of about 12 percent, if not the spectacular returns of the last few years. Combine the 12% with tax savings at even the lowest bracket for a very respectable tax free return for the ROTH.

In short I have a "Fools" faith in the long term viability of the US/global economy which I couple with a buy and hold approach for about 85% of my portfolio.

My ultimate goal for my traditional IRA is to convert additional amounts over the years to the Roth for my children's benefit while still maintaining enough to
insure a comfortable life for me. Of course market conditions will ultimately influence just how much of this goal I accomplish. And thanks to this board I learned that I cannot convert while making SEPP withdrawls without incurring the 10% penalty! So I wait untill I have completed those.

That's my daydream for my Roth.







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Author: 1Vagabond One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2414 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 1:21 PM
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markr33 says....
This is one of the reasons I didn't convert to a ROTH IRA in 1998 when I was able to. Another reason is that we haven't had a market downturn in quite a while, and while it may never come, it will probably come sooner or later. It would be a pity to pay taxes on an IRA for conversion and then have the value of the new ROTH IRA decline by 30 or 40% a year or two after the conversion.


After 2-years (1998), look where your portfolio is NOW. If you were invested in good equities or maybe even good mutual funds, your return for the last 2-years should have been at least 100% minimum. Now you owe twice as much tax as you did in 1998 and your still waiting for a market decline. How many more years are you going to wait before you do the converting? If you can look into the stars and know when the downturn is coming, please tell us so we can all pull our money. Until that time I will stay fully invested.

If you are truly want to convert to a Roth, do it now or maybe you could convert a percentage over time.

Time to get FOOLISH and stop listening to the WISE!!

Fool On
Vagabond



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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2420 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 2:54 PM
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<ME>
This is one of the reasons I didn't convert to a ROTH IRA in 1998 when I was able to. Another reason is that we haven't had a market downturn in quite a while, and while it may never come, it will probably come sooner or later. It would be a pity to pay taxes on an IRA for conversion and then have the value of the new ROTH IRA decline by 30 or 40% a year or two after the conversion.
<VAGABOND>
After 2-years (1998), look where your portfolio is NOW. If you were invested in good equities or maybe even good mutual funds, your return for the last 2-years should have been at least 100% minimum. Now you owe twice as much tax as you did in 1998 and your still waiting for a market decline. How many more years are you going to wait before you do the converting? If you can look into the stars and know when the downturn is coming, please tell us so we can all pull our money. Until that time I will stay fully invested.

If you are truly want to convert to a Roth, do it now or maybe you could convert a percentage over time.

Time to get FOOLISH and stop listening to the WISE!!


I was tempted to list more reasons in my first post, but I only listed one of my reasons not to convert to a ROTH IRA.

Reasons not to convert :
1. Market may underperform (significantly) after the conversion leading to overpayment of taxes. (if the markets average 11% return per year, we will either have to underperform for a very long period, or have a significant one-time decline)
2. My income tax bracket now may (and probably will) be higher, or perhaps much higher, than in retirement.
3. I don't trust our government to not apply means-testing on ROTH IRA distributions. (same as is done with earned income today regarding SS payments, and similar to what is done to reduce deductions based on AGI.)
4. An efficient conversion should have the tax bill paid from outside the IRA. (need cash)
5. And my main reason not to convert anytime soon is that I am not eligible anymore.

Reasons to convert:
1. I can place my riskiest, and therefore most profitable, investments to my ROTH IRA and reap those gains completely free of tax. (While using tax-deferred accounts for less risky shorter term investments, and taxable accounts for mostly long term capital gain investments)
2. No accounting or record-keeping necessary. (Is this absolutely true ?)

I am sure that people will want to expand on this list.


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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2421 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 3:08 PM
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Vagabond1 wrote,

<<<<<<markr33 says....
This is one of the reasons I didn't convert to a ROTH IRA in 1998 when I was able to. Another reason is that we haven't had a market downturn in quite a while, and while it may never come, it will probably come sooner or later. It would be a pity to pay taxes on an IRA for conversion and then have the value of the new ROTH IRA decline by 30 or 40% a year or two after the conversion.>>>>>>

After 2-years (1998), look where your portfolio is NOW. If you were invested in good equities or maybe even good mutual funds, your return for the last 2-years should have been at least 100% minimum. Now you owe twice as much tax as you did in 1998 and your still waiting for a market decline. How many more years are you going to wait before you do the converting? If you can look into the stars and know when the downturn is coming, please tell us so we can all pull our money. Until that time I will stay fully invested.

If you are truly want to convert to a Roth, do it now or maybe you could convert a percentage over time.

Time to get FOOLISH and stop listening to the WISE!!



Vagabond1 may have missed the fact that it's not the percentage gain on your portfolio that makes a Roth attractive, it's being in a higher tax bracket when you withdraw the money.

If you are in the SAME tax bracket when you withdraw the money, there was no advantage to having the Roth.

If you're unlucky enough to be in a LOWER tax bracket when you withdraw money from your Roth, you've paid more in taxes than if you kept the traditional IRA.

intercst

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Author: duggg Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2425 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 4:05 PM
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If you're unlucky enough to be in a LOWER tax bracket when you withdraw money from your Roth, you've paid more in taxes than if you kept the traditional IRA.

That's not exactly true. Suppose you only invest $6000 in a Roth and then let it grow for 22 years. You really only paid $1680 (28% of $6000) in taxes. The earnings are tax-free.

Now, if you had done the same thing with a conventional IRA, all the earnings would be taxed (at whatever bracket) and the actual tax bill would be a lot more than $1680.

What is true is that the net earnings of a Roth often are less than that a conventional IRA, provided you can take the full IRA deduction, you invest the entire deduction, and you're in a lower bracket when you cash out the IRA.

Case in point:

Put $6000 in a Roth and let it grow for 22 years at 11% to $59,600. Total tax paid: $1680. Basis: $53,600. Net earnings: $53600 - $1680 = $51,920.

Now, put $6000 in a conventional IRA. Suppose you could take the full $6000 ($2000 over 3 years) IRA deduction for a total of $1680. That's $7680, which after 22 years at 11% produces $76,289. Your basis will be $68,609.

If you pay 15% taxes on $68,609 ($10,291), your net earnings will be: $68609 - $10291 = $58,318.

If you pay 28% taxes on $68,609 ($19,211), your net earnings will be: $68609 - $19211 = $49,398.

Note though that not everyone can take the full $2000 conventional IRA deduction, especially if you participate in a 401(k) and make decent money. Without the upfront deduction, the conventional IRA is not Foolish.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2426 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 4:11 PM
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duggg wrote,

<<<<<intercst wrote: If you're unlucky enough to be in a LOWER tax bracket when you withdraw money from your Roth, you've paid more in taxes than if you kept the traditional IRA.>>>>>>

That's not exactly true. Suppose you only invest $6000 in a Roth and then let it grow for 22 years. You really only paid $1680 (28% of $6000) in taxes. The earnings are tax-free.

Now, if you had done the same thing with a conventional IRA, all the earnings would be taxed (at whatever bracket) and the actual tax bill would be a lot more than $1680.

What is true is that the net earnings of a Roth often are less than that a conventional IRA, provided you can take the full IRA deduction, you invest the entire deduction, and you're in a lower bracket when you cash out the IRA.


Duggg,

Thanks for catching that error.

I should have said the "after-tax value of the IRA will be higher" rather than "taxes will be lower."

intercst



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Author: duggg Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2427 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/21/2000 4:15 PM
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I'm sorry, there was an error in my last post, number 2425.

Put $6000 in a Roth and let it grow for 22 years at 11% to $59,600. Total tax paid: $1680. Basis: $53,600. Net earnings: $53600 - $1680 = $51,920.

Should say:

Put $6000 in a Roth and let it grow for 22 years at 11% to $59,600. Total tax paid: $2333. Basis: $53,600. Net earnings: $53600 - $2333 = $51,267.

I underestimated the tax by thinking $6000 was gross, not net. $8333 less 28% ($2333) is $6000.





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Author: Linne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2438 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/22/2000 2:21 AM
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Daydreamers like me need a Roth so they can STAY retired early......my kids each have one from their part time jobs and they're only 14 and 15!

Would you mind sharing where you opened a Roth for them? And what is the minimum? Fidelity's literature says you have to be 18 to open a Roth there ($500 minimum) but I can't see why...

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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2439 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/22/2000 8:05 AM
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ANYONE with earned income, usually a job that produces
a W4 at the end of the year, like a job at Burger King,
can open an IRA up to the amount they earned or $2000, whichever is greater. A teenager who worked part time
and earned lets say $1256 could open and contribute up to that amount for that year. If they earned $2300
they could contribute up to $2000.

In all probability Fidelity doesn't want to bother
with little accounts, thereby missing the chance to sign on lifetime customers. Their refusal is a matter
of policy. Try Vanguard, www.vanguard.com they
will accomodate you as will any number of other mutual
fund companies. Some have minimums even lower then $500 to open an account with low additional contribution requirements. www.invesco.com I believe
has very low minimums.

A good core mutual fund for a child that returned an average of 15% would double SEVEN times between the ages of 15 and 50....TAX FREE. Even a less average annual yield would result in staggering growth over 35 years.

ttjasi

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Author: duggg Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2449 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/22/2000 12:01 PM
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ANYONE with earned income, usually a job that produces a W4 at the end of the year, like a job at Burger King, can open an IRA up to the amount they earned or $2000, whichever is greater. A teenager who worked part time and earned lets say $1256 could open and contribute up to that amount for that year. If they earned $2300 they could contribute up to $2000.

I don't think even a W4 is required; however it would probably be wise to thoroughly document income earned from jobs such as babysitting or mowing lawns, in the event of an audit.

It's also important to note that if the child earns money, he or she does not have to actually contribute that specific money to the Roth IRA; a benevolent parent, grandparent, or anyone for that matter, can make a gift of the amount earned, up to $2000 per year.





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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2455 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/22/2000 4:29 PM
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I agree that baby sitting and mowing lawns certainly constitute a source of earned income. And like you I am not sure about the W4 requirement. My hesitation for sources like that however would be based on having the necessary documentation to prove it as earned income, as you stated, in an audit. Also, possible problems with social security etc, especially in the light of the storm in recent years over SS withholding for domestic workers. Not paying SS taxes on those earnings might not qualify them as "earned income" to make a qualified contribution to an IRA. (My gut feeling).

Since the source of a minor's support is his parents
I have my children bank their earnings and then I give
them their "discretionary income" allowances, spending money, etc. (Believe me they make out even better that way).

Thanks for responding,

ttjasi

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Author: bettypeterson One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2460 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/22/2000 6:24 PM
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Would you mind sharing where you opened a Roth for them? And what is the minimum? Fidelity's literature says you have to be 18 to open a Roth there ($500 minimum) but I can't see why...


I opened one for my son when he was 14 at Morgan Stanley Dean Witter. I can buy stock in the account.

When a child is under 18 you can pay them for work they do around the house without paying SS taxes or federal withholding. You have to keep track of the work they do and pay a reasonable amount that will pass an audit.



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Author: ajh1120 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2491 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/23/2000 1:43 PM
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ANYONE with earned income, usually a job that produces a W4 at the end of the year, like a job at Burger King, can open an IRA up to the amount they earned or $2000, whichever is greater. A teenager who worked part time and earned lets say $1256 could open and contribute up to that amount for that year. If they earned $2300 they could contribute up to $2000.

I'm already planning to help my children out this way.

When my kids get jobs with W-2's, I'll help them open ROTH IRA's and fund them (for a year or two), after that they're on their own. I trust them not to raid the account, especially after I show them what compounding can do for them.

Think about what a ROTH IRA could have done for you if you started at 16.


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Author: kathytx One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2525 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/24/2000 11:09 AM
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The February 15 issue of Family Circle has an article on How to Make Your Child a Millionaire. The author, an attorney, states that you can pay your child for chores, which is then earned income, so they can have an IRA. There is nothing listed about wage statements being a requirement, just good documentation of what they were paid for, how much, and when.

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Author: ttjasi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2527 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/24/2000 11:21 AM
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Other messages on this board have also stated that no
annual W4 is required nor is SS withholding for minors under I believe 18???

I wasn't aware that what you and others have indicated
was possible. Thanks

ttjasi

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Author: bettypeterson One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2532 of 756720
Subject: Re: ROTH Conversions, how many? Date: 1/24/2000 12:09 PM
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Other messages on this board have also stated that no
annual W4 is required nor is SS withholding for minors under I believe 18???

I wasn't aware that what you and others have indicated
was possible. Thanks

ttjasi


I think it can also be found in the Motley Fool basic education information.

-betty

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