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Greetings, HomerCompton, and welcome.

<<I am currently looking at converting my trad IRA to a Roth IRA. Vanguard advises me not to mix (commingling) my assests (conversion money and new contributions). They have advised this because they said thats what the IRS said.

I would like to keep it all together and avoid multiple accounts and extra annual fees.

Does anyone know why the IRS is advising this? Is there or will there be any penalty for commingling?>>

There is a technical correction to the law establishing the Roth that's now pending in Congress. It will be retroactive to 1/1/98, and it specifies the order in which money may be removed from a Roth. Normally, you can take money from contributions anytime. If you convert a traditional IRA, you must wait five years. The correction will specify penalties from taking money from the conversion within five years, plus it will say that's the money that comes out of an account first. The order is as follows from first out to last out:

a. Contributions from IRAs converted in 1998 - If taken within five years, there will be a 10% penalty on the amount taken PLUS another 10% penalty for spreading the income tax on the conversion over four years. Total: 20% penalty.
b. Contributions from IRAs converted in 1999 or later - If taken within five years, there will be a 10% penalty on the amount taken.
c. Contributions from any other source - No penalty when withdrawn.

There is no law that says you can't mix conversion money with normal contribution money. BUT - The IRS has strongly recommended that Roth providers not allow this because of the pending correction, and has issued an approved Roth IRA agreement that specifically precludes it. Most Roth providers are following this recommendation. Separate accounts helps keep track of the money in Roth IRAs, and also helps prevent you from making a mistake you will regret.

When the IRS "recommends" something, most Fools listen.


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