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Warning to all: First-time poster on this board!

I'm a minor who's interested in establishing a Roth IRA, but have encountered difficulties in doing so because of my inability to enter into contractual obligations. I've basically decided that, since I have only about 3 months until I reach majority, I may as well wait until then to begin funding a Roth.

I contacted Ameritrade, w/ which I currently have a custodial account, and was informed that although they can't set up an IRA for a minor, they will be able to internally transfer the securities from my custodial account to a new IRA account when I reach majority. Finally, this brings me to the question: I assume that this transfer will count against my 2001 Roth contributions, but *what* exactly will count--the market value of the securities at the time of transfer, or my cost basis for the securities?

Any input, whether assistance or direction to more appropriate boards, will be appreciated.

Thanks!

-Joeli
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I contacted Ameritrade, w/ which I currently have a custodial account, and was informed that although they can't set up an IRA for a minor, they will be able to internally transfer the securities from my custodial account to a new IRA account when I reach majority. Finally, this brings me to the question: I assume that this transfer will count against my 2001 Roth contributions, but *what* exactly will count--the market value of the securities at the time of transfer, or my cost basis for the securities?

I wanted to clarify an assumption you made... If you make a contribution to an IRA before the date that taxes are due in April, 2001, you can have those contributions count for year 2000. Between January and April, you can contribute to either your year 2000 IRA OR you year 2001 IRA. Just make sure your broker knows what you want to do.

As far as what counts - I'm not sure if this applies to Ameritrade's "internal transfer" of securites or not, but I know that any new contributions to an IRA have to be made in cash, not stocks. When Ameritrade opens your new IRA account, they may very well be selling your securities, contributing the resulting cash to your new IRA, and then buying back the securities within your IRA. I'm sure Ameritrade will be able to give you a better understanding of how their "internal transfer" is going to work.

In any case, what are you going to be contributing to your new IRA?... The amount of money you originally invested years ago in your custodial account (the cost basis) or the amount of money you now have in your custodial account (the market value)?
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Greetings, Joeli, and welcome. You asked:

<<Finally, this brings me to the question: I assume that this transfer will count against my 2001 Roth contributions, but *what* exactly will count--the market value of the securities at the time of transfer, or my cost basis for the securities?>>

It's a shame you have run into such problems, but unfortunately that's not uncommon with IRA providers when it comes to IRAs for minors.

You do not have an IRA at the present time. Therefore, when you open your IRA in a few months, the contribution to that IRA must by law be made in cash. That means you cannot transfer shares. Instead, sufficient shares must be sold to raise the cash for the contribution. You will be subject to income tax on any gains from that sale as well.

If the agent tells you shares will be transferred, ensure you understand what's involved. Legally, that cannot be done. So in effect what will probably occur is a sale from the custodial account with an immediate repurchase within the IRA. That's the only way shares can get into the IRA under existing tax law.

Regards..Pixy
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Thanks to TMFPixy and rhecker for the help.

rhecker:
If you make a contribution to an IRA before the date that taxes are due in April, 2001, you can have
those contributions count for year 2000.

OK, I think I can live w/ that. :-) Thanks for the clarification.

TMFPixy:
Therefore, when you open your IRA in a few months, the contribution to that IRA must by law be made in cash. That means you cannot transfer shares. Instead, sufficient shares must be sold to raise the cash for the contribution. You will be subject to income tax on any gains from that sale as well.
Now that you mention it, I think I did read somewhere in the TMF IRA FAQ (enough TLAs?) abt the cash requirement. What's strange, though, is that the Ameritrade rep I spoke w/ specifically said that the shares will *not* be sold and repurchased but will be transferred. Oh well...if I'm going to pay income tax (unfortunately, not LT cap gains at this point) in any case, it may be simplest to just cash out and close the UGMA acct, and use the cash to fund a new IRA.

Thanks for the info!

-Joeli
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Joeli:
you wrote:
Oh well...if I'm going to pay income tax (unfortunately, not LT cap gains at this point) in any case, it may be simplest to just cash out and close the UGMA acct, and use the cash to fund a new IRA.

Comment:
I hope that this is your UGMA account and not your childs because that would not be lawful. The UGMA belongs to the child and not you as custodian. Now, if the child has earned income then closing the UGMA and opening an IRA for the child makes perfect sense.

Suggested reading:
www.fairmark.com in the childrens investing area

Jenn
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I hope that this is your UGMA account and not your childs because that would not be lawful
Actually, I *am* the child.

-Joeli
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I've read through the entire thread to date, and I want to re-emphasize one point and make one that hasn't been made, unless I'm having a senior moment.

You cannot transfer shares from a taxable account, e.g. your custodial account, to an IRA. Period. The Ameritrade rep you were talking to was full of beans. The cash contribution requirement is clear, and you'll find it in IRS Publication 590, among other places.

The new point. No one has mentioned that you must have earned income in order to contribute to an IRA. You are limited annually to the amount of your taxable compensation or $2,000, whichever is less. I mention this because it sounded to me like what you wanted to do was just change your custodial account into an IRA.

TMF ExRO
Phil Marti
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You cannot transfer shares from a taxable account, e.g. your custodial account, to an IRA. Period.
Right. That seems clear at this point, although I'm still slightly curious what the rep was thinking. Thanks for the IRS pub reference.

You are limited annually to the amount of your taxable compensation or $2,000, whichever is less.
Also correct. I'm currently employed in a reasonably lucrative job, so the earned income requirement should present no problem.

Thanks for the input!

-Joeli
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Joeli, after further search for my pre-18 year old son, I found that he can open his own Roth IRA as a minor through American Century, Janus, T. Rowe Price, Vangard, and Invesco. There are others as well. check out the site at youngbiz.com/stock_optionz/wanna_be_millionaire.htm. the sidebar gives a number of firms and their phone numbers. Good luck!!
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