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Greetings, mbanelson, and welcome. You asked:

About three to four years ago I invested in two mutual funds as an IRA. A couple of years ago I opened an additional one for my wife. I have not been impressed whatsoever in their performance to date, however, I realize that the long-term with smooth out these valleys. I would, however, like to take the money I have invested in these mutual funds, seel the funds and invest in my Foolish 4 portfolio. Is this Foolish (good) for me to do? If so, what tax penalties, if any will I incurr?

Also, I was curious, on an annual average, about what percentage of my returns on Investment will be taxed?


If you're unhappy with your current IRA investments, you may certainly roll them over to something else. What that something else should be is entirely up to you based on your confidence in your investment skills and your ability to take the ups and downs of the marketplace. Around Fooldom we believe investing is an individual responsibility. Consequently, those decisions must be based on your own research and made based on your own goals. If, after a thorough analysis you think the Foolish Four is the way to go, then it's good for you. Otherwise it's not. You and you alone must decide. Obviously, most of us think handling our own investments is the right decision for us, but none of us can say it's right for you. Only you can do that.

If you decide that the Foolish approach is appropriate for your situation, then all you have to do is pick a discount broker and arrange to transfer your IRA money to self-directed IRAs for you and your spouse. The broker will guide you through the steps to do so. On transfer, you will incur no taxes and no penalties. Just as now, as long as the money stays within the IRA it grows tax deferred. On withdrawal in retirement, though, all earnings and all previously untaxed contributions will be taxed at the ordinary income tax rates in effect at that time.

I'm concerned that you seem to be thinking in terms of cashing your IRAs in today to put in a taxable investment of some sort. You may not want to do that because in doing so you will have to pay the taxes mentioned above plus you will be assessed an additional 10% on that amount for taking an early withdrawal from your IRAs (assuming both of you are younger than age 59 ½). It's just not very Foolish to do that, so think twice if that's your intention. At worst, all you will want to do at this point is transfer the money to a Roth IRA. You'll still pay taxes, but you'll avoid the penalty that way. And BTW, a conversion to a Roth also requires detailed analysis to see if it makes sense. Surprisingly, in most cases it doesn't unless you can pay taxes due from other sources and leave the money there for a long time.

Regards…..Pixy


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