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Question from a newbie. I have just figured out at 31 years that I need to invest if I am going to have any life in retirement. So happy I found TMF. I am now completely Foolish. My cash is quite tight right now. I have $1000 to invest. I would like to place it in Vanguards IRA (the S&P 500 index) but am woried that when my cash is up to say $5000 that I won't be able to roll over to a self directed IRA without getting hit with the penalties. Any experience from the Fools. Also it will cost me $13.10 to have this account is there anything I have missed.

Fooled again
Darren
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On Wed, 30 Apr 97 11:55:03 -0600, nasche wrote:
<<

Question from a newbie. I have just figured out at 31 years that I need to invest if I am going to have any life in retirement. So happy I found TMF. I am now completely Foolish. My cash is quite tight right now. I have $1000 to invest. I would like to place it in Vanguards IRA (the S&P 500 index) but am woried that when my cash is up to say $5000 that I won't be able to roll over to a self directed IRA without getting hit with the penalties. Any experience from the Fools. Also it will cost me $13.1

0 to have this account is there anything I have missed.



Fooled again

Darren

>>
Darren,
I am just a reader passing by, but I think I can answer
your question. I had IRAs in multiple accounts in 1996 that
I transferred into a SEP IRA. There are no tax penalties
for doing this. One thing that can be confusing is to
differentiate between a transfer and a rollover. They are
not the same. A transfer is from one IRA account to
another. As far as I know there are no restrictions
involved as long as the money goes directly from one
account to the next. I _think_ a rollover is when you go
from an employer retirement plan account such as a 401k
and move that money to a regular IRA. Hopefully someone
who knows for sure will read this and confirm or deny that.
Anyway, my understanding of a rollover is that there is no
penalty as long as the money does not go to you during the
changing of accounts. It should go directly from the old
account to the new account, or you should receive a check
from the old account that is payable to the new trustees
(NOT payable to you). You then forward that check to the
new account. When done this way there is no tax penalty.

I hope this helps.
Tom
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Tom... regarding transfers and rollovers... they are virtually one in the same... that is the "safest" way to switch your tax deferred savings from one account to another... if you have the money sent to you with the ability to cash it yourself... it is a BIG temptation... but keep in mind the 20% penalty on any cash you take from it PLUS the fact that it is also added to your yearly income and depending on your tax bracket... there is another 15 to 28% or more on top of that..... i recently had a transfer (rollover) done for me to my money market account account at my bank and the check was made out to my bank as a custodian for my account... I am not one that can resist temptation <G>
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Yo, golfingfool.

<<Tom... regarding transfers and rollovers... they are virtually one in the same... that is the 'safest' way to switch your tax deferred savings from one account to another... if you have the money sent to you with the ability to cash it yourself... it is a BIG temptation... but keep in mind the 20% penalty on any cash you take from it PLUS the fact that it is also added to your yearly income and depending on your tax bracket... there is another 15 to 28% or more on top of that..... i recently had a transfer (rollover) done for me to my money market account account at my bank and the check was made out to my bank as a custodian for my account... I am not one that can resist temptation <G> >>

I believe you're under a misconception here, so I'll sound another word of caution. A direct transfer and a rollover, while similar in their ultimate outcome, are definitely NOT the same kind of transaction. A rollover from one IRA (or qualified retirement plan) to another occurs when YOU get the funds from the old vehicle in a check made out in your name. On receipt of that check, you have 60 days to roll that money to another IRA to avoid taxation. You may roll that money only once every twelve calendar months. A direct transfer occurs when you never have actual or constructive receipt of that money. Instead, it goes directly from the old IRA or plan custodian to the new custodian. A direct transfer may occur as often as you want, and no adverse tax impacts will ensue.

As to your statement regarding the "...20% penalty on any cash you take from it ...," I think you're mixing two concepts here. The first deals with ordinary income tax withholding, and the other with the excise tax on early withdrawals from retirement plans and IRA. Neither will occur in a direct transfer, and both could occur in rollover. Let's see how.

You retire from work or take money from an IRA and receive the cash from your plan or IRA in a check made out in your name. By law, the custodian must withhold 20% of the proceeds against your potential tax bill for the year. (Note: IRA custodians may and will waive this requirement if notified in advance that the withdrawal is for the purpose of rollover; plan custodians may not and will not waive the withholding requirement.) You now get the check and have 60 days to roll it to an IRA to avoid taxation. The check, though, is only for 80% of the withdrawal. If you just roll that amount to the IRA, you have an incomplete rollover. To avoid that, you must come up with the missing 20% from other resources and add that amount to your rollover deposit within the 60 days. If you fail to do that, at the end of the year the IRS will say you received the missing 20% as a distribution. It will be counted as part of your income for the year, and you will be taxed on that amount. Worse, if you are under age 59 1/2 (55 for retirement plan distributions), you will also be assessed a 10% excise tax as a penalty for taking a premature distribution from the IRA or plan.

With a direct transfer, you don't have to worry about any of this. There is no withholding. There is no restriction on how often the transfers may occur. There is no potential for an unintended distribution. There is no 60-day time limit to be concerned about.

Moral: Generally, usually, normally ... A direct transfer is the best way to go.

Regards.....Pixy
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HAHAHAHHA I just figured out the cut and paste procedure <sily foolish grin inserted here>

I believe you're under a misconception here, so I'll sound another word of caution. A direct transfer and a rollover, while similar in their ultimate outcome, are definitely NOT the same kind of transaction. A rollover from one IRA (or qualified retirement plan) to another occurs when YOU get the funds from the old vehicle in a check made out in your name. On receipt of that check, you have 60 days to roll that money to another IRA to avoid taxation. You may roll that money only once every twelve calend
ar months.

Yes... I was under a misconception... that stems from the people telling me the procedures not knowing the correct terminology....

A direct transfer occurs when you never have actual or constructive receipt of that money. Instead, it goes directly from the old IRA or plan custodian to the new custodian. A direct transfer may occur as often as you want, and no adverse tax impacts will ensue.

The check i received was made out to my bank as a custodian of my IRA account...

As to your statement regarding the '...20% penalty on any cash you take from it ...,' I think you're mixing two concepts here. The first deals with ordinary income tax withholding, and the other with the excise tax on early withdrawals from retirement plans and IRA. Neither will occur in a direct transfer, and both could occur in rollover.

Again.... misinformation from the misinformed <G>....

Bottom line is..... I managed to make the transfer of funds without incurring penalties...... Thanks for your informative answer (which was mostly deleted in this reply in the interest of saving space)

Regards....


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<<I _think_ a rollover is when you go from an employer retirement plan account such as a 401k and move that money to a regular IRA.>>

Actually the IRS calls it a rollover if you take possession of money from one IRA and put it in another IRA. If you have it transferred directly to another IRA it is not called a rollover.

Yes, transfers can be made at any time without any penalties.

If take possession of the money, you have 60 days do a rollover. However, the IRS requires that 20% be withheld as tax. And if you only rollover 80% of the money, you will be hit for taxes and penalties on the 20% that you didn't rollover. Bottom line is to do a direct transfer and avoid problems.

Regards, Jim
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