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I will be starting a Roth IRA through Datek for tax year 2000. I'd like to know if I can make tax year 2000 contributions in 1999, as well as make trades applicable to tax year 2000 in 1999. I'd like to know so I can make my first trades in December, the favorite FF month.
-Mark
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Why don't you just start it now for 1999? Then you can add more money in 2000, rather than having to wait until 2001.

jbw
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Unless you've already done a 1999 contribution somewhere else!
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Exactly. I became a Fool too late in 1999.
-mark
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I will be starting a Roth IRA through Datek for tax year 2000. I'd like to know if I can make tax year 2000 contributions in 1999, as well as make trades applicable to tax year 2000 in 1999. I'd like to know so I can make my first trades in December, the favorite FF month.
-Mark



Hi Mark,

I went to the IRS site, www.irs.gov and found the relevant information: http://www.irs.gov/prod/forms_pubs/pubs/p5900202.htm

When Can I Make Contributions?
You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).


Looks like your out of luck. But since you do not have to pay taxes on your gains for the Foolish Four, the one year holding period is not as important. Simply rebalance in 11 months: December of 2000. Then you will be on schedule to take advantage of December rebalancing for the rest of your investing days.

Best of Luck,
Brandon

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Thanks for your help. I also noticed that only a 6% penalty is assessed on additional Roth IRA contributions past $2000.

"What If I Contribute Too Much?
If you make an excess contribution to a Roth IRA, a 6% penalty tax applies to the excess.
Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:
1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or converted from a traditional IRA, as described later) that are more than your contribution limit for the year, plus
2. Any excess contributions for the preceding year, reduced by the total of:
a. Any distributions out of your Roth IRAs for the year, plus
b. Your contribution limit for the year minus your contributions to all your IRAs (other than education IRAs) for the year."

This appears to be a great loophole. Six percent is even less than leveraging a portfolio on margin at 7.75%, and it's not even close to the 20% long term capital gains. Does TMF have any pros/cons regarding additional IRA contributions? Thanks,
-Mark
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Mark aka Asterisk writes:

<<I also noticed that only a 6% penalty is assessed on additional Roth IRA contributions past $2000.

"What If I Contribute Too Much?
If you make an excess contribution to a Roth IRA, a 6% penalty tax applies to the excess.
Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:
1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or converted from a traditional IRA, as described later) that are more than your contribution limit for the year, plus
2. Any excess contributions for the preceding year, reduced by the total of:
a. Any distributions out of your Roth IRAs for the year, plus
b. Your contribution limit for the year minus your contributions to all your IRAs (other than education IRAs) for the year."

This appears to be a great loophole. Six percent is even less than leveraging a portfolio on margin at 7.75%, and it's not even close to the 20% long term capital gains. Does TMF have any pros/cons regarding additional IRA contributions?>>


T
You apparently missed the fact that the 6% penalty is applied yearly. Even in a Roth where ultimately you can take earnings tax-free, that reduces your return on that money to about an untaxed municipal bond rate. Run the numbers yourself, and you should quickly discover that investing the excess money in a taxable stock account using a LTB&H strategy will give you a far better result than investing in the same thing within a Roth while incurring an annual 6% penalty.

Regards..Pixy
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This appears to be a great loophole. Six percent is even less than leveraging a portfolio on margin at 7.75%, and it's not even close to the 20% long term capital gains. Does TMF have any pros/cons regarding additional IRA contributions? Asterisk>>


<bi>"You apparently missed the fact that the 6% penalty is applied yearly. Even in a Roth where ultimately you can take earnings tax-free, that reduces your return on that money to about an untaxed municipal bond rate. Run the numbers yourself, and you should quickly discover that investing the excess money in a taxable stock account using a LTB&H strategy will give you a far better result than investing in the same thing within a Roth while incurring an annual 6% penalty.Pixy"</bi>

Here is the answer to the 6% tax penalty problem. I'm not sure what to do if you don't know for sure in advance that this overcontribution could happen, due to a good investment year or increased employment income....just wait till end of the tax year to contribute to Roth? Or can you remove the earnings with the 2K when you find out you overcontributed? I will ask Vanguard this too and let you know if no one knows. thanks, Meowiz
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Meowiz writes (in part):

Here is the answer to the 6% tax penalty problem. I'm not sure what to do if you don't know for sure in advance that this overcontribution could happen, due to a good investment year or increased employment income....just wait till end of the tax year to contribute to Roth? Or can you remove the earnings with the 2K when you find out you overcontributed? I will ask Vanguard this too and let you know if no one knows.

I reply:

Just go ahead and make your contributions as you normally would. If you find yourself in the phase-out range, you may simply recharacterize any portion of the Roth contributions into a traditional IRA. This recharacterization may occur at any time until the due date for your tax return (I believe that's with extensions). Vanguard will insist on doing the earnings calculation to determine how much of the earnings will follow the recharacterized contributions into the traditional IRA. There will be no effect on your income and no excise tax to worry about. --Bob
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Just go ahead and make your contributions as you normally would. If you find yourself in the phase-out range, you may simply recharacterize any portion of the Roth contributions into a traditional IRA. Bob

Thanks Bob! :-)

meowiz
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