Post Your Best Insured Roth IRA Options

Arcanlaw said: Good topic OP, green.

I'm in a higher tax bracket currently and am aggressively paying CC debt down, however in the next year I expect to have no CC debt and less income. Tax benefits from continued contribution to a traditional IRA or 401k will be lessened, and I'll be looking to create an emergency fund. Sounds like Roths are the best option.

A couple related questions I've been wondering: I know $4k/person is the limit, or $8K total for a couple. Can you open Roths in children's names for their eventual retirement? What is the deadline for annual contributions, EOY (Dec 31st of each year) or can you contribute retroactively up to tax day, like you can with a traditional IRA? IOW, if I were to get a $20K bonus April 5th, could my wife and I invest $8K for 2006 on April 10th and $8K for 2007 on April 20th?

I contributed my 2005 ROTH IRA contribution in late March and my 2006 ROTH IRA contribution in early May of this year.


Discusses ROTH IRAs for Minors
Apparently, the kid needs to make taxable income in order to contribute it to a ROTH. Setting up a personal business and then paying $4K to the kid to show up one once a year at the place of business isn't going to cut it - you'll need documentation that you paid them a fair rate and actual work was done.
-g

manuel said: penfed is a pretty good one to look at.Agreed. They offer no-fee Roths, and great rates (6% currently on 3-5 year terms, as per here).

Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.

Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.

FWgunn said: Discusses ROTH IRAs for Minors
Apparently, the kid needs to make taxable income in order to contribute it to a ROTH. Setting up a personal business and then paying $4K to the kid to show up one once a year at the place of business isn't going to cut it - you'll need documentation that you paid them a fair rate and actual work was done.
-g

To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.

This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.

Dus10 said:
To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.

This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.

Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video.

ok, maybe not, but the money's hers, and she can do whatever she wants with it-power you may not want to give an 18 year old. especially when she discovers she's got about 100k.

Twould seem like the vast majority of young professionals who can't afford to max out a roth would be in low tax brackets - making this use of a roth rather iffy. If they're in the 25% or higher bracket they should probably try harder and max out their roth.

Perhaps sell their bmw or their prius.

"Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video."

Too late, I already saw his daughter in GGW 2020 edition. Me and doc Brown were there in our Dilorean.

ETFnerd said: Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.

Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.

ETFnerd, you brought up a point that i never thought about....that you cannot put money back into a roth once you take it out. Is that really true? Does any roth IRA experts know how that works? But then again, how many people are going to actualy replace an emergency withdraw regardless of what type of savings account it is in (MM accounts outside of retirement accounts or roth, etc) assuming that it REALLY was an "emergency." And say you do withdaw some money for emergency and want to replace it, just put it back in a high yield money market account (outside your Roth) where everybody else puts their emergency funds who doesn't have a ROTH IRA.

somdave2005 said: ETFnerd said: Let's remember that for most people, the benefits of the roth IRA comes from many years of compounding. The return in a riskier investment over a longer horizon is "expected" to be greater, so you "should" reap a greater benefit than being in a cash account. If you choose carefully, you can easily beat inflation by carefully choosing high yielding MM investments, but it is unlikely that you are maximizing the Roth IRA benefit in this way.

Another pet peeve that I have is with the folks who use the Roth for a home downpayment vehicle or an emergency funds vehicle. Once you take that money out for your short term needs, you cannot replace it and you are giving up a future stream of compounding. Not the best choice in my opinion unless you expect your home appreciation to wildly outpace returns in other asset classes. This is not what has happened historically.

ETFnerd, you brought up a point that i never thought about....that you cannot put money back into a roth once you take it out. Is that really true? Does any roth IRA experts know how that works? But then again, how many people are going to actualy replace an emergency withdraw regardless of what type of savings account it is in (MM accounts outside of retirement accounts or roth, etc) assuming that it REALLY was an "emergency." And say you do withdaw some money for emergency and want to replace it, just put it back in a high yield money market account (outside your Roth) where everybody else puts their emergency funds who doesn't have a ROTH IRA.

I replace my emergency fund. Actually, for me I don't really have an "emergency fund" per se. I have a "loan to myself" account. When I need money, I take a loan against this account and pay myself back with interest. I set up my automatic bank transfers to pay myself back. It's like I'm the banker!

manuel said: Dus10 said: manuel said: Twould seem like the vast majority of young professionals who can't afford to max out a roth would be in low tax brackets - making this use of a roth rather iffy. If they're in the 25% or higher bracket they should probably try harder and max out their roth.

Perhaps sell their bmw or their prius.

The benefits are worthwhile even if you're in the 15% tax bracket. A 5% CD turns into a 5.75% CD. A 6% turns into 6.9%. I think that's worthwhile enough. Especially with the amount of rate chasing that goes on here at FW.

some of the statements being made here are very good, but are probably more appropriate posts for the thread i quoted in my OP that spawned this thread. I hope to focus the discussion on money market accounts and CD's that can be opened in a Roth for those putting their cash reserves there. Penfed has decent rates, but i would say that a 3 year CD with a substantial withdrawl penalty isn't a great cash reserves vehicle (would be good for a portion of the cash reserves though). Is the only good money market the uninsured cash reserves fund at fidelity?

Does anyone know of a discount brokerage that will do IRAs for minors? I just got a response back from Sharebuilder that they do not offer them. They only offer custodial brokerage accounts and Coverdell ESAs, in that sense.

Dus10 said: wilsonshmilson said: Dus10 said:
To add a little to this topic. I am planning to setup my oldest daughter to work for my new company. It is an LLC that is owned wholly by me. Anyhow, in this situation, she pays no FICA, therefore I pay no FICA match, and also pay no unemployment insurance. She essentially becomes a "FREE" employee, because there is no extra overhead in hiring her, other than her pay/benefits (no benefits necessary as she is a minor). So, up to the $5150 standard deducation in 2006, she is tax free (could be more if she has other deductions). I am going to have her fully-fund a Roth IRA, and use the remainder to fund a Coverdell ESA.

This turns into a great education savings plan. Roth IRAs are not considered in financial aid calculations, whereas 529s and Coverdells are. Any funds taken from a Roth IRA, contributions and/or earnings, are tax free for education purposes. So, here is the plan. Fully fund Roth IRA every year. Fund a Coverdell ESA with the remainder. Withdrawal from the Coverdell ESA first, for education, and when it is depleted, withdrawal from the Roth IRA. Any contributions that are left over could be used for a down payment on a home, and the everything else that is not withdrawn stays for retirement. Another advantage is that with Coverdell ESAs, you have to use all the funds by the time you are 30, or gift them to another eligible person, or you have to pay penalties. By depleting the Coverdell ESA first, you leave the bulk in an IRA that can stay around for a long time.

Good idea. But your daughter may be a rebel when she's 18, take the money from her roth, take off with her boyfriend Jamal, and the next time you see her will be on a Girls Gone Wild video.

ok, maybe not, but the money's hers, and she can do whatever she wants with it-power you may not want to give an 18 year old. especially when she discovers she's got about 100k.

I have been thinking about this. My plan is to raise a responsible daughter, but what can I do as a backup? I got $60K when I turned 18, and tax penalties did not stop me from blowing it. What about putting the IRA in a trust? Has anyone ran through this situation? Then you can have control over the funds of your child. Is that even feasible?

I would personally not control my own children (not married; don't have any yet).

If I FORCE them to behave responsibly, they will likely behave irresponsibly after I am no longer able to control them.

It is better to give them full freedom and show complete trust.

Children (or subordinates at work for that matter) who are trusted try hard to maintain and justify the trust.

If they misuse the trust put in them and do something wrong with the money, I would consider that the tuition fee for a lesson that will hopefully have been well-learnt.

I would strongly recommend that you should never take steps that may make your daughter (or son) think that you have anything but complete faith and trust in them.

Anakin

wilsonshmilson said: some of the statements being made here are very good, but are probably more appropriate posts for the thread i quoted in my OP that spawned this thread. I hope to focus the discussion on money market accounts and CD's that can be opened in a Roth for those putting their cash reserves there. Penfed has decent rates, but i would say that a 3 year CD with a substantial withdrawl penalty isn't a great cash reserves vehicle (would be good for a portion of the cash reserves though). Is the only good money market the uninsured cash reserves fund at fidelity?

Corus Bank, BankDirect and NetBank have IRA CD and MMA options with competitive APYs.
Nexity Bank has competitive APY IRA CDs.

Anakin

Dus10 said: Does anyone know of a discount brokerage that will do IRAs for minors? I just got a response back from Sharebuilder that they do not offer them. They only offer custodial brokerage accounts and Coverdell ESAs, in that sense.

Did you look at this thread ?

Who has a Roth IRA for a minor?

Anakin

anakinskywalker said: anakinskywalker said: I have never used an FCIS-insured IRA MMA or IRA CD and am thinking of starting one now. [I have become very bearish about the stock market over the last several weeks.]

I have a question on IRA MMA's.

If I write a check on one IRA MMA to use it to open an IRA CD or MMA of same type (Roth or Traditional) at another bank, will writing that check be considered a distribution ? If not, how will the bank on which the check is drawn verify that I put the money inside another IRA ? If he cannot verify that, isn't the custodian supposed to deduct the 10% IRS penalty for early distributions ?

Also, is the act of writing a check on one IRA to move funds into another IRA considered a "rollover" and hence subject to rollover fees ?

People with FDIC-insured IRA experience, please advise.

Anakin

bump hoping for responses.

Anakin


I doubt that you could have checkwriting ability inside an IRA CD's yes but you would have to check with the bank

The IRA cusdodian doesn't normally withhold taxes unless you want him to.

You would address the 10% youngster penalty and well as the rollover issue when you do your tax return unless you made a direct transfer to the new custodian.

anakinskywalker said: doniam said: anakinskywalker said: anakinskywalker said: I have never used an FCIS-insured IRA MMA or IRA CD and am thinking of starting one now. [I have become very bearish about the stock market over the last several weeks.]

I have a question on IRA MMA's.

If I write a check on one IRA MMA to use it to open an IRA CD or MMA of same type (Roth or Traditional) at another bank, will writing that check be considered a distribution ? If not, how will the bank on which the check is drawn verify that I put the money inside another IRA ? If he cannot verify that, isn't the custodian supposed to deduct the 10% IRS penalty for early distributions ?

Also, is the act of writing a check on one IRA to move funds into another IRA considered a "rollover" and hence subject to rollover fees ?

People with FDIC-insured IRA experience, please advise.

Anakin

bump hoping for responses.

Anakin


I doubt that you could have checkwriting ability inside an IRA CD's yes but you would have to check with the bank

The IRA cusdodian doesn't normally withhold taxes unless you want him to.

You would address the 10% youngster penalty and well as the rollover issue when you do your tax return unless you made a direct transfer to the new custodian.

Thanks for your response. Sorry if my question was not clear enough: I am not talking about check-writing for IRA CD's, but IRA MMA's.

Can IRA MMA's be used for check-writing ?

The reason for my question is as follows: I want to open a reasonably high-yield IRA MMA. Then I want to use the MMA to chase high-rate IRA CD's from bank to bank. I'll open an IRA CD with a check from the IRA MMA. When the IRA CD matures, I will put the money back into the IRA MMA. Then I'll look for the next best IRA CD rate available.

I am thinking of this strategy because it will allow me to retain full flexibility in choosing which bank I want my IRA money to stay in, depending on the most competitive APY.

Anybody with experience with IRA MMAs ?

Anakin

bump hoping for a response....

Anakin

anakinskywalker said:
Thanks for your response. Sorry if my question was not clear enough: I am not talking about check-writing for IRA CD's, but IRA MMA's.

Can IRA MMA's be used for check-writing ?

The reason for my question is as follows: I want to open a reasonably high-yield IRA MMA. Then I want to use the MMA to chase high-rate IRA CD's from bank to bank. I'll open an IRA CD with a check from the IRA MMA. When the IRA CD matures, I will put the money back into the IRA MMA. Then I'll look for the next best IRA CD rate available.

I am thinking of this strategy because it will allow me to retain full flexibility in choosing which bank I want my IRA money to stay in, depending on the most competitive APY.

Anybody with experience with IRA MMAs ?

Anakin

Sorry I don't have specific advice, but I poked around in IRS Pub 590 and Googled for a while. First of all, I'm not sure how likely you are to find the combination of IRA + checkwriting, just because of the issues surrounding distributions, rollovers, time limits and waiting periods, etc.

I'm not sure if a check drawn on an IRA would count as a rollover since you don't actually get the money. However, it would probably be best to avoid the complication by setting up a direct transfer from the IRA MMA to the IRA CD (thus avoiding the 1-year waiting period between rollovers).

I'm going to be in an analogous situation in a couple of years. I have part of my Roth IRA in a money-market account at a brokerage (without checkwriting) and recently opened 2-year and 3-year Roth IRA CDs with new contributions. When the CDs come due I am planning on moving the money into my Roth IRA MMA, or possibly into more IRA CDs, and I hope I'll be able to do it as a direct transfer rather than a rollover.

That's just what I've come up with after a bit of quick research, but I'd appreciate any other insights!

Avoidance of taxes is a huge part of getting a great return on our retirement investing. So, here's my plan:

1. Don't have an emergency fund. Crazy, I know. why invest my money at 5% and pay 25% taxes on the interest? I have tons of CC money available and a HELOC that I can tap if I need to. It's riskier, but I don't lose out on the opportunity cost of NOT investing my money in vehicles with higher returns - stocks and REITS.

2. Fund the Rothschilds IRA every year, period. I can't imagine that taxes will go down from here, so why not take advantage of putting in today's income (taxed at 25%) for withdrawals later (taxed at ???). Put tax INEFFICIENT investments in the Rothschilds - REITS, junk bonds, managed, high turn-over mutual funds, stocks you plan on not holding for a year, etc.

3. Make sure that whatever REIT and bond holding you have are in a tax sheltered account - hopefully a Rothschilds, but equally as good in a traditional IRA or a 401k. This is especially important for REIT money, as the dividends can be very significant, and are usually not eligible for the 15% dividend tax rate. If you plan on staying in the same tax bracket forever and think that tax rates will stay constant, a traditional IRA is essentially identical to the Rothschilds. If you think taxes will be lower in the future, fund a traditional. If you think taxes will go up with time, fund the Rothschilds.

4. Don't forget that individual stocks (and basically a lot of ETFs and index funds, etc) have very favorable tax treatment OUTSIDE of IRAs, 401ks, etc. You don't pay taxes on the capital gains until you sell. Cap gains are taxed at 15% if you hold for a year or more (as are dividends). Why own stocks in an IRA if you hold for the long term? You are turning what would be a 15% taxed investment into a 25% taxed investment (for 25% bracket). Also, if you buy a flop, you can deduct it on your taxes if it's in a taxable account. A stock flop in an IRA gets zilch. I'd rather get something than nothing.

5. Always go for the company match on your 401k. It's easy money. Do some math on the benefit of going over the match. For most folks, it's better to NOT go over the match, but to invest additional STOCK money in a taxable account. Bond money should probably go in the IRA.

Application of these snippets is different for different folks, especially No. 1. I sleep fine knowing I don't have any emergency funds. Many people can't do that. You gotta take care of the "sleep at night" factor first, then minimize taxes second.

I also have a ready reserve of cash on hand doing the BT game... I keep track of my interest paid on BT's (BT fees and interest -- I have a lot at 1.9% and 3.9% now...). I deduct the interest paid, so I don't pay taxes on that part. This actually helps Mrs. Debentureboy (Debenture Girl?) sleep at night, knowing that we have $50 to $100K available at the drop of a hat to cope with emergencies.