I opened a ROTH IRA in 1999 for the purpose of helping me save for a first time home buy. I took
out an early distribution of $10,000 in 2005 (leaving $1380 in the account) and purchased my home.

Questions: What should I do with the account? Can I continue to contribute to the ROTH
and when I turn 59 1/2, withdraw the money?



Thanks in advance!

Thanks for your response, Kempman.

My main concern is how does the IRS imposed $10,000 LIFETIME limit come in
to play here? I do not want to continue to contribute to something when I'm
not allowed to withdraw ANY money. I've read PUB 590 and I've been unable
to find an answer. (Unless I'm missing something obvious)

I agree, it should explain it a bit clearer. This link is helpfull:

http://www.irs.gov/publications/p590/15160x04.html

What makes it all confusing are the terms "may" be subject to tax and penalties. IRS should clarify it!

agentgrey said:For example, say you put $3000 into a mutual fund Roth IRA, purchasing 30 shares at $100 each. At some point in the future, the total value of the account is still $3000, but that reflects reinvested dividends, so you have more than 30 shares each worth less than $100. Could you withdraw the full $3000 and count it all as a "return of contributions?" You don't keep track of cost basis, dividends, etc?

It seems like you just treat the Roth IRA as a black box, and the only numbers you care about are the amount of cash you put in or take out. In this case, "earnings" just means a net increase in account value, after dividends and capital gains/loss, right?Right. What happens inside the account makes no difference, unless it's one of the unusual things that causes the IRA itself to have to pay tax, like investing in real estate with a mortgage; or an illegal investment for IRA's, like life insurance or collectibles. All that matters is the change in value.

quaters said:I have searched with no avail to find the answer to this question.

If you:

-max out your 401k ($15,000)
-max out your Roth IRA ($4,000)

Can you:

-contribute to a Traditional IRA (without taking the tax deduction, but enjoying tax free growth)
-have both a Traditional and Roth open at the same time?

TIA

quaters

From my readings, it's acceptable to have both a Roth and Traditional IRA but the combined contributions to both must be the maximum of 4k. For instance 3k into Roth and 1k into traditional for a total of 4k.

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I'm a novice to retirement investing but I've been reading up on IRAs and Roth IRAs over the last couple of days. I have a special situation and I wanted to get advice on a particular strategy. I am currently a (graduated) student with no income. In November, I will be starting a job with a high yearly income that will put me above all the relevant phaseouts for IRAs and Roths. But because I will be making only two months of that income, which will allow me to contribute the full amount but put me well under relevant limits for 2006, I was thinking of trying this:

Open a traditional IRA, and contribute the $4k maximum. This will make the full $4k tax deductible for 2006. Because I will no longer be able to make deductible contributions (for the foreseeable future) after 2006, I will no longer benefit from an IRA vs. a Roth. Therefore, I was thinking of rolling over the IRA into a Roth IRA right after making the contribution. This would put the Roth at my disposal for future contributions, and make the withdrawal of that $4k tax-free.

First, is it even permissble to rollover an IRA in the same year that you open it? Also, I've read something about a rollover creating taxable income in the amount that you convert. Does this mean that even if I make that $4k deductible contribution to the IRA, it will be cancelled out because the $4k will be added back to my taxable income? My income will not be so low that I won't be paying tax at all in 2006, but I would likely be in the lowest bracket or close to it. Is it even worth trying to shield low income with an IRA contribution, as opposed to using the money to pay down a student loan at 7-8%?

agentgrey said:Rather than trying to deduct the $4k now, it might be to your advantage to open a Roth directly and pay taxes on the $4k this year (when your income puts you in a lower bracket), rather than next year at a higher rate.
I think you're right about rollovers being deductible if you could deduct them upon contribution to the IRA (because you have no basis in that money--it's pretax dollars). And my tax rate is the lowest now than it will probably ever be again (including retirement), so maybe I should just put it in a Roth now.

asteinb said:I think you're right about rollovers being deductible if you could deduct them upon contribution to the IRA (because you have no basis in that money--it's pretax dollars). And my tax rate is the lowest now than it will probably ever be again (including retirement), so maybe I should just put it in a Roth now.

First, you’ve got some issues with the terminology and the tax aspects…for example, the discussion between you and agentgrey is about a conversion, not a rollover. And conversions would never be deductible, they would only be taxable or non-taxable.

Second, the process you are contemplating is essentially that of recharacterization. If you make what you intend to be contributions to a traditional IRA (in your case deductible contributions) and then, subsequently, decide to recharacterize the contributions as Roth contributions, you are allowed to do so. There are some formalities to the process, but you have 6 months after your unextended return due date for the tax year to make the election.

As agentgrey said, based on the info you’ve provided, it probably doesn’t make a whole lot of sense to worry about having deductible traditional contributions for a year with low income and you’d be better off just going with the Roth right off the bat. However, if you remain undecided, at least for a while, the ability to recharacterize the contributions allows you the freedom to make up your mind later.

asteinb said:In the IRS publication, I thought I read something about your ability to contribute to a Roth being phased out above $110k. Does this mean you cannot contribute at all for years in which you make more than that?It's "fully phased out" at $110,000 (for singles) -- if you make more than that (in MAGI, which is a slightly different measure of income than is used for just about anything else), you can't contribute to a Roth IRA at all. If you make between $95,000 and $110,000, you can contribute, but less than the $4000 standard maximum.If so, would I be better off starting an IRA next year (during which I will be making over $110k), which would allow me to contribute and defer taxation on the gains (albeit, I believe, without deductions), or should I just contribute to some "generic" investment vehicle (e.g., mutual fund acct., etc.) that will allow me more flexibility in withdrawing contributions?Do you participate in a retirement plan at work? If not, you can deduct a contribution to a traditional IRA, and you almost certainly should do that. If you do participate, and your income is too high to deduct the contribution, it's a slightly tricky question. There have been threads around here about that issue.

Here's an executive summary:

1. If you will soon be able to do a Roth conversion, do contribute.
1A. Under current law, in 2010, everybody will qualify to convert. Whether that law will be changed before then is a difficult question.

2. If you won't qualify to convert anytime soon, then, basically, a nondeductible IRA is better than investing directly if you'll be holding tax-inefficient assets, but worse than investing directly if your investments are tax-efficient. Bonds, cash, futures, REITs, and high-turnover strategies in stocks or anything else are tax-inefficient; low-turnover stock strategies (including index funds, tax-managed funds, other funds that don't trade much, and individual stocks that you buy and hold, or only sell losing positions) are tax-efficient. So, basically, ask yourself: if I contribute this money to an IRA, what asset category will I add to? If it's bonds, do contribute. If it's a stock index fund, don't.

3. It can also make sense to contribute if you don't want to hold much in tax-inefficient assets today, but want the option for the future.

4. Under special situations, like if you fear being sued and having your directly-held assets taken, you need to think more (and maybe that sways you to contributing).

5. Always contribute if, otherwise, you would hold an investment that effectively includes a charge for its special tax treatment: a deferred annuity, cash-value life insurance policy, or municipal bond (except in the unusual circumstance that you have a non-tax reason for holding one of those).