My son is 19 and I had his taxes prepared yesterday.
He’s single and rents a home. He earned $26,000 last year.
The tax preparer completed the return and said my son owed about $300 in federal taxes and about $300 in state income taxes.
He said “let’s see where he would be if he invested $4,000 in an IRA”
He entered the numbers and we saw that my son would not owe for 2006 and instead would receive a $550 tax refund (federal) and about $50 refund from the state.
We made the changes and the tax return was filed. My son now has until April 15 to invest $4,000 in an IRA.
I went to my bank and saw they have 7 mo or 13 mo CD which are paying 5 + percent interest and that’s what we’ll be doing either today or tomorrow.
Is this the way to go for a nineteen year old?
^^^^^^
a Smith & Wesson beats four Aces
Replies
ABsolutley. As a start. And then in the next few months learn a little about investing and figure where to invest it. Then after the 7 months roll it over into a mutal fund.
Or he could start with a low cost brokerage or mutual fund company and put in the a money market account for a start.
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
can we start with the 7 month CD and then transfer the money into Vanguardhttps://flagship.vanguard.com/VGApp/hnw/HomepageOverview
^^^^^^
a Smith & Wesson beats four Aces
Yes.Once you have it setup you can go a trustee to trustee transfer.But call vanguard and you can probably get this one setup directly, today..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
My son will put $4,000 into an IRA tomorrow during his lunch hour.Fast forward to when he is 65 years old and he withdraws the money.What would be the tax consequence?^^^^^^
a Smith & Wesson beats four Aces
When money is taken out after age 59 then it is taxed as ordinary income. And starting out after age 70 1/2 it has to be taken out each year based on a formula. And there are a number of special rules for anyone that inherits.On the other hand the Roth also accumulates tax free over the years.You do not get any tax deduction from the contributions. But on the other hand there are no taxes when you take it out. And you don't have to take it out at any given rate. And there are no controls it when inherited.And after 5 years you can take out the contributions (but not the gains) tax & penalty free. But I am not sure of all of the details. That would be anvantage for something like a downpayment at some time.I forgot what the amount due the IRS, but lets say 500.That means that he is investing $4000, but only spending 3500 for a conventional IRA. With a Roth he will be investing only $3500 (unless he also has the extra $500).There are all kinds of calculation and assumpts on the net about which is best in the long run.But the main one is will his tax rate belower when he retires than now. And who in the h*ll can guess what is going to happen in 40+ years with either the tax rates or his income.My bias would be for the Roth.But he could put it in a conventional one and then roll it over into a Roth in a year or two if he thinks he wants to go that way. He will have to pay the taxes that did not pay now so you don't want to wait too long.Or just start a new Roth.BTW, you can have any number of IRA, both conventional and Roth at anyone time. And you can contribute to anynumber of accounts each year. The only limitation is that the total contributions each year is limited to $4000 (currently).
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
If he chooses a traditional IRA, he defers paying tax on that $4000 until he takes it out after age 59+. He will then be taxed at whatever the rate is then. He will also be taxed on all the money he earns on it in the meantime when he takes THAT money out.If he chooses a Roth IRA, he pays tax on the money this yer as he puts it in, but that is the only time he ever pays any incometax on it or the return on it. Supposing hten that he turns that four grand into a hundred grand eventually, inn a traditional IRA, assuming a 15% tax, he will pay the govt$15000.but with the same four grand turned into a hundred grnd in a Roth, he will pay $600 THIS yer, but never any more money. even if he makes a quarter million on it.But this is academi at this point if I recall, the 1040 is already filed based on his pllacing the money in a traditional IRA>Each person has to run their own numbers, but in genraal, a younger person with a decent sie income willl be vastly better off with a Roth, while those of us who aare loser to retirement and who expect a smaller retirement income can still do better long term with traditional.
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but in genraal, a younger person with a decent sie income willl be vastly better off with a Roth
Maybe, but probably not.
You are making a number of assumptions:
1. the tax treatment of Roth IRAs will not change in the next 40 years or so (unlikely, IMHO - they will probably be taxed at some point).
2. that the one year return on the Roth IRA is more than about 25% (otherwise they would be better off to get a traditional IRA and the deduction and recharacterize it after a year).
Unfortunately, there are no simple rules with investing - your comment may be accurate for some people, but will not be for a lot of people, because of their individual circumstances.
Apparantly you took my comment out of context. My first and primary line was that every person should run the numbers for themselves.So we agree.
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"Is this the way to go for a nineteen year old?"
given the time you have, yes.
While I'm not an invester, this give you time to look into other options, mutual funds etc, where incremental deposits can be made. also, I believe you can role over the IRA CD when it comes due.
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
Only if you want your son to be disappointed with his investment returns.
For money to be invested over the next 48 years (and not to be touched until then), there is no better place than a good Growth and Income mutual fund (unless he wants to be a bit more aggressive - but let's have him learn for a while on a less risky one).
Check this link: http://www.americanfunds.com
Click on "View All Funds."
Scroll down and note the lighter grey description behind each fund name as to whether it's a Growth Fund, Growth & Income, etc.
And then examine the investment performance. Ignore the 1 year returns for now. Focus upon the situation he will more likely experience - the 10 year or lifetime returns.
Yes, he will be paying a sales charge. Consider it a small price to pay for this type of high quality investment management. They will determine whether to invest in oil stocks, Real Estate, whatever. And they know far more than any of us on this board.
And by all means, he MUST understand this is NOT a trading vehicle. It's something he buys and puts away. Other than to add to each year.
Now, let's compare:
The CD you mentioned, IF it continues to pay 5% for the next 40 years, it will grow into $28,160. $41,605 if let alone for the full 48 years. This is with NO additional investments.
A mutual fund returning 10% over the same period will grow into $181, 037. $388,069 for the full 48 years.
A mutual fund doing 12% will provide $372,204 over 40 years, and $921,563 over the 48.
(It's not prudent to realistically consider returns greater than that. Although it's possible.)
You're his father, what would you recommend he do now that you have this information?
Do NOT make this mutual fund purchase at the bank. You'll shortchange yourself. Go to an AG Edwards, Edward Jones, or Raymond James office to do so. Ask the branch manager for a recommendation of a financial advisor that would be good for your son to grow and work with. Preferrably one with the letters, "CFP" after his name.
At this point in time, it's important that he have a satisfactory experience. Therefore he should avoid any direct investments in stocks or illiquid (not being able to get out of quickly) investments. Stay away from bond funds at this time. They will not give him that satisfactory experience. And tax exempt funds are woefully inappropriate for tax deferred accounts.
My congrats to your taxman for bringing up the issue. Keep him.
Wow, thanks for the info. I'll print it out and show my sonThanks again !^^^^^^
a Smith & Wesson beats four Aces
"It's not prudent to realistically consider returns greater than that. Although it's possible."Actually it is realistic. There are several mutual funds that have returned over 17% for 20 years.Most small businesses make 20%+ on capital. (You need to get professional help to set up this type of investment in an IRA.)Many people I know have made well over 20% on their investments for as long as I have know them.It just takes skill.
"It's not prudent to realistically consider returns greater than that. Although it's possible."
Actually it is realistic.
I know. I would consider myself a hack if I wasn't able to do better than 20.
But I stand with my professional comment, It is not prudent for any financial professional to suggest someone can routinely do better than 12. Especially when talking to a neophyte.
One stands to test his malpractice insurance to do otherwise.
Only if you want your son to be disappointed with his investment returns.
I think being disappointed with the initial return is a little beyond the original question.
Yes I would also reccommend a good mutual fund for the long run. But for a 19Y/O? having a few bucks in a CD at a bank close to home where it's readily available is a good confidence booster.
I sure wouldn't put $4K a year in CD each and every year but having $10K there or so never killed anyone. And besides that, Mutual funds do drop in value over the short term on occasion. Because of that, if ALL he has is the $4k? Then he needs something like a CD until he has a few months liquid cash. Because that's the time in his life when he's most likely to have to dig into his retirement, no matter how bad an idea, to head off the inevitable emergency.
When he's a little older and more secure, that's less likely and then he can afford to ignore those single year returns.
Now, if this 19Y/O kid is sitting on $25K cash and just needs to take some off the books for tax reasons, then the CD is a bad move.
I think you mmissed the point of the thread and of an IRA.The money in an IRA is NOT "available" money, nor should a nineteen year ood be taught to think of his retirement savings as "available"
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I think you mmissed the point of the thread and of an IRA.
I may well have. But, as I read it, his son was putting $4K into an IRA for a tax write off and was planning on buying a CD inside that IRA.
Now, If it were you and I, I doubt either of us would put that money in a CD inside of our IRA. And if the kid has four or so months worth of cash stacked up and liquid, then he shouldn't be looking at a CD either.
On the other hand, If he is putting $4K in a CD inside of an IRA just to avoid paying the taxes.....................and.........................That $4k is the bulk of his available cash, then I don't think it's appropriate to steer him towards anything that:
a. Holds a potential for a reduction in value
b. Is not "Right Now" liquid.
Yeah, I know there's a penelty and a withdrawl charge for taking money OUT of an IRA. And I know it defeats the whole purpose. But 19 is awful young and a lot of stuff is gonna happen to that young man between now and your age or mine. And we all know someone who has HAD TO dip into that investment because they hadn't kept enough liquid for the small emergencies.
I've been lucky in what I've chosen. I also have a brother who works for Allience Bernstien. Kinnda takes some of the guess work out of it.
But this year my mother in law asked me to go thru some of her stuff because she felt like the guy who handles her money is not being square with her. He's a reputable and respected local guy.
Last year, one of the Mutuals he put her in dropped 25%. Over a ten year average, the fund is at about 12% annually. But last year for some reason it took a 25% hit.
I'd hate to be a 20 Y/O who found out he put all his cash somewhere and now needs the 44K and can only get $3K.
My perspective may be different than yours this week because I'm helping my son (18) to get on the right track and I keep hearing from some alleged respected local professionals all about how he should lock up all his cash right now in a Mutual fund inside an IRA................right now today. And I don't think an 18 Y/o should put a few Grand in an IRA and leave himself with $200 and an uncashed paycheck.
Everybody gets an opinion....
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I don't think a CD can qualify as an IRA.
But I'm far from an expert on this subject...
I've been meaning to go, but I'm waiting for bat night.
http://www.irs.gov/publications/p590/index.html
Although it doesn't specifically mention CD's, it does discuss what will get you in trouble.
But yes, Cd's are fine, just under-performers.
I cringe and get a sick feeling in my stomach at the words "mutual funds".In april 2000 my son invested $22 K in Deleware Select Growth B mutual funds. DVEBXHe paid about $35 per share. He purchased about 650 shares.They went down the next day and went down from then on. Bill Clinton was in office but this is not a political thread.We got out after two years when the stock price was down to about $18 per share.I see today it's priced at about $25 per share.http://finance.yahoo.com/q?s=DVEBXWe had a really lousy experience investing in mutual funds.^^^^^^
a Smith & Wesson beats four Aces
I think you may have had a bad experience with mutual funds becuse you don't understand them- at least it appears that way. First you come here asking IRA questions and in a later post talk about buying class "B" shares of a mutual fund and then selling the "stock" later. I'm not trying to slam you- just pointing out that your initial bad experience could have been due to lack of knowledge. Mutual funds are not evil. Not as long as you understand what they ARE and what they ARE NOT. For long term investing (such as an IRA) mutual funds can be a great vehicle. You sound a little green in the investing arena and that's OK- so long as you don't let it stop you from saving. A CD is the absolute WORST thing a 19 year old could invest in long term. But it offers familiarity and security which is why I think you are looking at it. I could be completely off base here, I am basing my assumptions on some internet postings after all. My recommendation- get the IRA opened at the bank and put the money in the 7 month CD. do that NOW. (Or at least prior to 4/15). Then find yourself a good FEE BASED financial planner. Not one associated with any fund or financial company. An independent that charges a fee for service. The ones associated with brokerage houses may meet with you for free, but remember- they are almost always commissioned salespeople charged with getting assets in the door as their primary responsibility. That's why I recommend a FEE BASED planner. Pay them their fee and consider it tuition. Then learn about retirement investing. use the next 7 momths while the CD matures to learn what you can. There is as much misinformation out there as there is genuine solid advice. By the way -I like T. Rowe Price funds. http://www.troweprice.com. You could save the financial planner fee and learn a lot from the websites of investment companies. They are a local (to me) company and I started my career with them many moons ago- might be a little biased. But I waited a lot more than 2 years for my Science and Technology fund to come back after the correction of 2000 and 2001. There were a lot of overvalued items in that market during that period which probably contributed in large part to your bad initial experience with mutual funds. And one last thing- for a 19 year old, a ROTH IRA is the way to go. Will beat a traditional IRA hands down over the long term- but he won't get the immediate tax savings that your CPA is talking about.
Thanks and I appreciate your advice.^^^^^^
a Smith & Wesson beats four Aces
I currently have an IRA with 4 different investment firms. With one being a Roth. I agree don't deal with a bank. You can Goggle Vanguard, Trowrprice, schwab or who ever for info. Then make a phone call and talk to someone. Mutual funds are great! Start with a S&P index fund, they all have them, and start from there. You can "play' with mutual funds within the same family for no fee. Education is key. I'm no MBA, actually I'm just an old railroad man without a formal education, and I am making money. I'm not wealthy, but when I retire, 6 years, I will be very comfortable. Like I said educate yourself.
I been staying away from mutal funds lately. I had a 100k in funds for over seven years, after all the fees I made $250 in seven years, The six percent saving account are making the money right now.
And one last thing- for a 19 year old, a ROTH IRA is the way to go.
If he does, he will lose the tax break, which will outweigh the benefit of the roth.
However, if he opens the traditional IRA, he can later recharacterize it as a Roth IRA. He then has to pay the taxes, but I don't think he has to pay back the tax credit (but I am not positive - I haven't tried this or researched it).
Correction: You (He) had a bad experience with ONE mutual fund. Because it was bought high and sold low (you couldn't have picked a more inopportune time to either buy or sell). This same thing happens with stocks, bonds, real estate, wimmen, dogs, tulips, and anything else that is based upon supply and demand characteristics.
I bought my first house in 1979. Have had 4 others since. I have yet to make a dime on any of them. In fact, one I lost $250K on. Should I stop buying houses and start renting? Of course not. It was bad luck and bad timing, coupled with excessive fixup costs.
Back to your Delaware fund:
1. NEVER, NEVER, NEVER buy a class B mutual fund - from ANY fund family.
2. Any broker that suggests you do is admitting (in other words) that he (she) is a lousy broker, cannot understand the financials, and is skirting ethics issues.
3. Too bad it was decided to sell when you did. The following year, that Delaware fund increased by 36+%.
4. Your fund was (is) a questionably midcap limited exposure growth fund. Translated: Higher risk, bracket creep. The only time these should be used is when one is assembling a diversified portfolio of funds and recognizes a short exposure to this asset class. But the limited exposure casts further doubt on that need.
5. Morningstar rates the fund as a 2 star. Five stars is the best. Note that on that American Funds website I mentioned, the Fundamental Investors and Capital World Growth & Income Funds are rated 5 star. (You may have to google the symbol to get Morningstar's ratings.) But even the other American Funds growth & income funds that are 2 or 3 star rated have significantly higher returns than the Delaware one.
6. Note the funds annual operating expenses. I'll admit Vangaard has some of the lowest in the industry, but you'll see American Funds has about the second lowest. If neede, I can provide you with quotes from John Bogle attesting to their compentantcy.
Frontiercc makes an excellent point about the fee based planner. I wish to add three things:
1. Be sure the planner is a CFP, not a CLU or ChLU or any other alphabet soup. You're interested in a generalist with an keen interest in investments, not insurance products. Including variable annuities, which are NOT appropriate for your son's situation (as you present).
2. Your interest in the fee based planner is at this point, a fair unbiased insight into how investments function, what characteristics are important, and what your son's goals may be.
3. At all costs, avoid entering into a long term arrangement with said planner. These will cost you (him) an ongoing 1% or more asset management fee that is not necessary at this time (based upon the limited information provided). (Commonly, these independent planners do not have access to the level of research the brokers I mentioned earlier.) Pay him his coupla hundred for his time and then go follow the advice I gave earlier about finding one of those brokers. You're talking a simple IRA. With only a 4K investment. Buy one of those two funds (or split the investment betwixt both) I mentioned above and FORGET about them. You're not really buying in to the mutual fund, you're buying access to the incredible investment management expertise that Capital Research and Management offers.
One last point, the sales charge I mentioned is like Disneyland's admission fee. For one price, you can ride all of the rides for as long as you want without paying anything more (other than the annual custodial fee - which should be paid for out of taxable funds, not from the IRA account). Sure there may be cheeper funds, but in my 20 years of stockbrokering and financial planning experience, you're not going to find better ones. (Many times I had to apologize for Putnam, Franklin, Delaware, Fidelity (they have broker sold funds, too) and others. But NEVER did I ever have to apologize for any American Fund recommendations.) What do you get when you make a decision based upon price only? Commonly, something that performs less.
Plus these funds have what's called "Rights of Accumulation." Which means as the amounts grow within the mutual fund family, either by investment performance or additional investments, there are "breakpoints" in the fee structure where the fee is reduced. In addition, there is what's called, "Aggregation." This means any accounts (kids, taxable accounts, household members) within this fund family, are totalled towards the previously mentioned, "Rights of Accumulation."
Did I mention these American Funds often outperform the S&P 500 indexes? Again, Google the symbol and look over the relative past performance.
This way, your son can take care of you in your old age.
Thank you for taking the time to put all that together. It's amazing the amount of knowledge associated with Breaktime.Thanks again to everyone^^^^^^
a Smith & Wesson beats four Aces
generally decent advice, IMHO, but there is no point to buying load funds - there are no load funds that perform as well. The benefit of load funds is to the financial planner - he gets a commission.
not necessarily so. Two of about ten of my funds are load funds. one of those has been earning 15-17% since inception and the other has been earning 32-37% since my purchase. Both outperform my other no-load fuinds to enough of a degree to have warranted the fee in the first year alone.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
You know the story.
"You can lead a horse to water, but you can't make him drink."
"Free professional advice isn't worth the electrons wasted giving it."
"Oh well, the poor are destined to remain poor."
What other cliche's are applicable here?
Maybe I should have simply said,
Go for the Gates of Heaven's 12's of '08 trading at 75!?
So you picked up a couple of good ones, huh? I'm sincerely happy for you.
Sold a small position in TPP in the kid's account today due to a downgrade. Put 5K in it back on 12/31/01. Gathered 2,270 in cap gains plus another 2,240 in dividends over that time. Not a moonshot, but it worked.
Two of about ten of my funds are load funds. one of those has been earning 15-17% since inception and the other has been earning 32-37% since my purchase. Both outperform my other no-load fuinds to enough of a degree to have warranted the fee in the first year alone.
I understand that your load funds have outperformed your no load funds. But there are also noload funds that match or exceed the performance of essentially all load funds.
And of course, there is no guarantee that your load fund (or any other fund) will achieve any particular level of performance or return.
The benefit of load funds is to the financial planner - he gets a commission.
First comment: How horrible! Imagine someone getting paid for providing a valuable service to a client. How anti-socialism is that!!? Too bad more people aren't like you and work for others for free!
Second comment: Earlier it was mentioned that one should engage the services of a Fee Only Planner. Those boys got kids that need shoes too.
In my 20 years of financial services experience, the absolutely best value I ever came across was buying a load fund thru a CFP. As long as his name is on the statement as the financial advisor, a small trail fee (VERY small) was paid to his commission run. That entitled the client to ongoing free financial planning services for as long as the client held the asset within that fund family. Unlimited. Kind of a lifetime warranty.
Your clients get that?
Edited 4/13/2007 12:39 pm ET by peteshlagor
I've always referred to no-loads as the socialist means to investing in capitialism.
Who pays for those big ads one sees in the WSJ? Or Businessweek? Etc.
With a loaded fund, THAT investor pays his own marketing costs. ONCE. (Notice marketing costs are included in the price of a new car? Check the sticker or transaction document.)
With a no load fund, every existing investor continues to pay - forever - the marketing costs involved in gaining new clients. Now what value is that to the no load investor?
Considering the average no load expense ratio is about 1% higher than the corresponding loaded fund, coupled with the highest front load being 5.75%, factoring in the time value of money, after 5 years, that no load investor is getting ripped.
As evil as I believe class B shares are, at least after 5 to 6 years, they convert to A's.
Edited 4/13/2007 12:54 pm ET by peteshlagor
To determine who is correct in your particular situation - ask your CPA.
http://www.thestreet.com/_htmlatb/funds/maxira/10349786.htmlMore on the topic
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
It looks like you owned a below average fund and held it only during the worst performance period in its history. Don't let that poor performance experience and the poor judgement that caused it to happen cause you to make further poor judgements
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
no diversification will do that. you should have been spread out over 5 funds overall and 3 to 5 categories
I've yet to hear of, meet, see, whatever, anyone that got rich thru diversification.
Diversification provides stabilty. Concentration offers the possibility of wealth.
Bill Gates didn't get there by no S&P index fund.
you certainly do not want to be overly diversified. but investing as discussed in this thread is not meant to provide immediate wealth. I would put my 6 funds up against your single fund over 10 years or more. I am sure i would net more wealth than you looking to make a splash on a single investment.
investing as discussed in this thread is not meant to provide immediate wealth.
You're right. My comment was out of line considering the thread's topic.
But, believe me, and let's not take it further, you really don't want to take that bet.
I'm sitting here fat and happy - retired at 55.
And I don't pay any sales charges on my loaded mutual funds. Breakpoints take care of that.
I always find this a tough subject to discuss in person, let alone on a message board. I'm confident in my abilities as a contractor, but I'm not qualified as a financial adviser...either for myself or anyone else. I had a financial adviser who dealt solely in individual stocks, who bought and sold at his own discretion....called a discretionary account. I got a little concerned during the 2000 tech bubble, so I moved it to someone else who deals solely in mutual funds. I trust him and am happy with the results. Mutual funds can be much less volatile then individual stocks. Again, it's discretionary so he moves it around accordingly. They are no load funds and I pay a management fee. The better I do, the better he does. I check it online and can compare it to inception.....I'm pleased with the results. He's slowly been converting my 401s to ROTH IRAS.Bottom line, a good financial planner & accountant, whom you can trust, is a ticket to a comfortable retirement. If you can find someone like that, do your contractor thing and leave the financial stuff to a pro.jocobe
That is good to hear. I certainly do not begrudge anyone for financial success. I am young and look forward to a comfortable financial future. It certainly isn't something I expect to obtain in a single windfall...needless to say I have many years to go.
"I don't think a CD can qualify as an IRA."you get an IRA CD vs a CD.
bobl Volo, non valeo
Baloney detecter WFR
"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
Guess I learned something today...
Today I dialed a wrong number... The other person said, "Hello?"
"I said, "Hello, could I speak to Joey?"... "
They said, "Uh... I don't think so... he's only 2 months old."
"I said, "I'll hold."
I think Vanguard was a good idea, but why get a CD. Rather put it in a Vanguard Fund like the Prime Money Market, which is basically a savings fund without risk of market ups and downs. Then research the other Vanguard Funds and simply transfer it when he feels comfortable. I would definitly skip the CD. Vanguard is a great company with many choices with low costs. Go do their website, call them, go directly to them
I still say go with the CD. 'specially If he can get 5+% locked for 7 months at the bank and FDIC Insured to boot. Not too many money markets out there paying much more than 5. None of the Vanguards are paying over 5.09. T Rowe Price's Prime Reserve is under 5.
Thanks for posting this. I took another look at our taxes, transferred $2200 into my IRA, and saved us $600 with the Feds.
Best hurry, though. I don't know about your financial institutions, but mine (Vanguard) says it takes two business days. That means that today was the last day I could have gotten it done.
George Patterson, Patterson Handyman Service
I talked to my bank and we'll do it tomorrow on friday. My bank said technically we've got til the close of business on april 17 which is tuesday.^^^^^^
a Smith & Wesson beats four Aces
I'd say yes, but at 19 yrs old I'd be investing in a no-load mutual fund. At his age he should be willing to take more risk than a CD.
Don't confuse the place you set up your IRA with the investment you ultimately decide to go with. For instance, I have my IRA setup with Fidelity Investments, but that doesn't necessarily mean that I have my money invested with Fidelity. Rather, it just means that they handle all my trades and take care of all the paperwork. Through fidelity, I have access to invest my money in CDs, Money Market Accounts, Mutual Funds (1000s of them), Stocks, Bonds, etc. I can easily move my money from one investment to another and back again. For most mutual funds, and for their money market fund (which is where you probably want to park that money for the short term) there are no charges for investing. Other products (stocks, for instance) do charge fees for trades, but from the sounds of it youre a long way off from that.
Another thing I like about Fidelity is that they have their "Freedom Fund" series. These funds are set up for different retirement time horizons- Freedom Fund 2035 is for people who expect to retire sometime around 2035; Freedom Fund 2040 is for people who expect to retire around 2040; Freedom Fund 2045 is for.... For each time horizon, they invest your fund in a mix of stocks, bonds, and other investments that is appropriate for your time horizon. Therefore, if your retirment date is pretty far out, they will have you in minimal bonds and heavy on stocks (over the long run, this will be your best return). On the other hand, if you are close to retirement, they will have you heavier on the bonds to provide more stability and a more even (although likely lower) return.
Note that this approach is different from most mutual funds, which typically focus on one sector (Large Cap vs Small Cap, Value vs. Growth, Domestic vs. International). Therefore, to get a well balanced portfolio, you normally need to look at several investmetns (4 to 8) in different mutual funds. If you're willing to put the time into the research for that many investments, then you can probably expect a somehwat higher return. However, if you're not willing to put in the time, or if you don't yet have enough savings to invest in that many funds (most have a minimum investment of $2,500) then the Freedom Fund approach can be pretty useful. For me it was great way to get started.
Good luck!
Your Fidelity account as descibed is similarly available with most brokerage firms - most likely at a lower cost. Hint: the annual fee charged for this type of account is quite negotiable. I've seen it discounted up to 60% from list prices - without the traditional gouge placed upon the broker so's he's more likely to stay on your side. Not to mention the additional personal service that comes with real brokers.
As well as other poorly or non-advertised arrangements.
I went to my bank and saw they have 7 mo or 13 mo CD which are paying 5 + percent interest and that's what we'll be doing either today or tomorrow.
It got to be a IRA cant be a cd. IRS will put you in jail for tax fraud.
CD you can get back is seven months
IRA you dont get back till you turn 62.
Vangaurd is one of the best
http://www.clarkhoward.com
I'll find out more about this tomorrow but my understanding is you buy the CD and then report it's status every year to the IRS using their form #8606 entitled "Nondeductible IRA's"On that form you provide them with the amount of contributions for the tax year.Sure seems like a big headache to have to do this every year.^^^^^^
a Smith & Wesson beats four Aces
Go with the Roth IRA until you can't, because you make too much money. I have two IRAs (Roth and SEP), my wife has two (Roth and Traditional) and each of my two kids have an education IRA.
The problem is I started the first one when I was six years out of college, instead of right out of college.
http://finance.yahoo.com/q?d=t&s=CPNLQ.PK
I should have bought some Calpine stock yesterday when I saw them instead of sitting on the sidelines.
Edited 4/12/2007 7:29 pm by woodnuck
"I have two IRAs (Roth and SEP)"A SEP-IRA is really not an IRA. I don't know why they call it that. I guess because it has the same simple setup and reporting that an IRA has.For those that don't know the SEP-IRA is only for self-employeed (and I think employees of them). Before the SEPs the only option where HR-10 (Keogh) plans and they required a lot of paper work.But the contributions to SEP's are much different than for IRA's..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
For those that don't know the SEP-IRA is only for self-employeed (and I think employees of them).
I have a SEP-IRA as an employee of a corporation.
Do you know how to pronounce Keogh? I've only read about it and never heard it out loud.
Key-O.
Thx
("thanks")
shucks - all this time I have been pronouncing it kee-oh;)
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
OK now I'm confused. Which way is it?
both R the same - just diff phonetic spellink
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I no yust playin halong
"key-aug"
SEP-IRA: I did it about 5 or 6 years ago and this is what I remember: I am self-employeed with no employees. I was able to put in 20% or 25% of my gross income up to a certain value ($40,000). I think the deferred tax would then be 15% of the contribution, based on a 15% tax bracket. I just wish I would have learned about the ROTH-IRA earlier.
I am glad I got in Calpine last year at $0.55. I just I would have taken more of that cheap investment. But on the flip side I am also in at $3.50 from over 2 years ago.
There are a lot better investments than the stock market. Especially when just one stock analyst can affect the price of the stock just by saying something and it has nothing to do with how the books look for the company.
Woodnuck
"There are a lot better investments than the stock market."for you certainly, Run - quick, get all your money out!
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Too bad I put more money into to it today instead of the house I'm building.
Oh wait that's the IRA money I bought the stock with.
I guess I should have taken your advice before I put money into an IRA.
Woodnuck
No, no! I need your advice. Tell me what these better investments are...
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Go with the Roth IRA until you can't, because you make too much money.
Though there is a lot of debate on the subject, it's generally better to go with a traditional IRA instead of a Roth if you are in the income range where you can get the tax deduction for the traditional IRA (you don't get the deduction for the Roth IRA).
If you want, you can later recharacterize the traditional IRA as a Roth, and get the best of both worlds.
If you put $4K into a Roth IRA, you are potentially paying $1000+ in taxes you would not pay if you had chosen a traditional IRA.
"I'll find out more about this tomorrow but my understanding is you buy the CD and then report it's status every year to the IRS using their form #8606 entitled "Nondeductible IRA's""No.If he has a qualified retirement plan (and it will be reported on his W-2) and depending on his income than the amount of money that can be deducted for a convential IRA. Then remainder can into the convential IRA, but is not deductable. The 8606 is used to track the part that was not deductable and then is used to compute the taxes when withdrawn.But it can be a nightmare. YOU need to track that each year.With the Roth now available, even if you think that the conventional is better ONLY put the deductable amount in the conventional and the remainder in the ROTH..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
My wife has an IRA with a CD in it from before we got married. Each time it matures it rolls over into another CD, along with any gains made, until such time as we make another election as far as investing it...........Or.................withdraw it.
you can put damn near anything in an IRA if it's set up properly.
I have a book on how to invest in real estate via an IRA. There are a lot of rules for it but it's possible.
It is perfectly leagal to hold IRA money in a CD
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
"It got to be a IRA cant be a cd. IRS will put you in jail for tax fraud."You are right, but wrong.You can not buy a CD and call it an IRA.You open up an IRA account which a type of trust account. Many different instituitions offer IRA accounts. Banks, insurance companies, stock brokers, and mutual fund companies are the most common.Then within those trust account you an purchase most any prudent finace instruement. That can include CD, passbook saving account, individual stocks, bonds, annunities, mutal funds, etc.But once it is in the trust fund they it is "locked in" as an IRA and you are restricted to the funds being in an IRA account (without penalty), but you can buy different instruments in that account and transfer it to another trustee..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
I'm no expert...that's why I have my dad. He encouraged my to get a Roth IRA, and showed me figures on returns if I was able to keep putting in $4k a year. Thing with the Roth is that the money has already been taxed, so when you pull it out, you owe nothing. (Yes, this is a simplification. There are rules as to when and for what reasons you can pull money out.) If it is a self directed Roth (like Equitytrust) you can even buy property in its name, and any funds earned from that property are also untaxed.
Like I said, I'm no expert, but look at the difference between the IRAs. I've heard good things about Equitytrust (I don't have an account with them, nor do I or any one I know work for them, I've just heard good things), so they might be worth a call with some questions.
Since you're running short on time, the CD is probably ok for now - as long as it's a qualified IRA. The bank can help you with that.
Your son probably should connect with a good financial planner and set up some kind of regular witholding from his pay to fund his retirement. Does his employer have any kind of retirement plan? That would be another good place to start.
When my daughters graduated from college, I urged them to get into some kind of retirement account and start putting 8% - 10% of their pay away - and don't even open the statements when they come in the mail. They were giving me that "Yeah sure thing, Dad" attitude, so I showed them my latest statement that showed the results of maxing out every year for over 20 years. That got their attention! - lol
They're both in their early 30's now and are really appreciating the magic of a diversified portfolio and compound interest. #2 daughter got married last year and she and my SIL used some of their retirement money to make the downpayment on their house. They still had to stretch, but they couldn't have done it at all without that nestegg.
good advice. Thanks^^^^^^
a Smith & Wesson beats four Aces
The Motley Fool (http://www.fool.com) has a lot of good information on how to handle your finances--some real basic, some more advanced. There are also discussion boards for various investment methods and individual stocks, as well as all manner of other topics. I believe that much of it is free.
Kathleen
Thanks I'll check it out !I listen to radio talk shows about investing but I've never had enough interest to read the books, go to the websites, etc.I had a bad experience and it soured me on investing.My son had inherited $23 K and I talked to a friend at my bank where I had a checking account and they referred me to the Bank's "Trust Officer"This person was a financial advisor and so I asked for her help.She said "Let's put the money into a mutual fund which guarantees the principal amount" and I said "okay, what kind of return should we expect?"She said "I can't gaurantee anything, but the history of this mutual fund is 10 to 15%".I said "my son has 23 K total for college, lets invest 22"And so we did.After two years we were down 40% or so and I asked a friend's financial advisor to look at what we were doing.She told me I was in a poor investment which was not principal guaranteed.I went back to the financial advisor and asked if we could close the account and that some kind of mistake had been made and I asked for the return of the 22 K.She did this and this was considered to be a "settlement". My son got his $22 K back and we went straight into a CD.I was wrong for not knowing more about what we were doing.Anyway, that was my one experience with mutual funds.^^^^^^
a Smith & Wesson beats four Aces
So there WAS some substance behind that earlier comment about not doing such a transaction at a bank...
You did right by requesting the cash back under those circumstances. However, another step should have occured by reporting that person to the regulators.
The decent people in the business take a real dim view of those shysters.
And the banks hire those unable to make it at the real brokerage firms.
We're still getting fallout from our screwy deal.During March 2007 my son received a letter from the IRS saying they were going to levy his wages due to unpaid taxes.The IRS says my son owes about $4,500 in taxes, interest, and penalties for 2002.My son was 15 years old in 2002 and I called the IRS and said there must be some mistake.The IRS received a 1099 in 2002 regarding the sale of the mutual funds in my previous post.I did not file a tax return for my son in 2002. His net profit from the mutual funds was a couple of dollars.My son bought the mutual funds for $22 K and sold them two years later and got his 22 K back, however, the mutual funds company had submitted a 1099 to the IRS saying he sold the mutual funds for $26,500.The 1099 shows sale of mutual funds for $4,500 higher than what we received. Apparently these were fees and commissions.I've gathered all the pertinent info and will pay an accountant to do a tax return for my son for 2002.I think we'll get it worked out but something I've learned is if the IRS receives a 1099 and it's not addressed in a tax return they may be knocking on your door 4-5 years later.Sure would be nice if the IRS were more timely. It's not easy to go back five years and try to piece together financial records.^^^^^^
a Smith & Wesson beats four Aces
I don't believe $4500 is "fees and commisions." That fund would have had a total commission of $880. And that becomes part of your legit basis.
I'd be showing that IRS letter to the banks compliance officier. And threatening to notify your state's brokers regulatory agency as well as the NASD.
Verify that "advisor's" name. Get all of the evidence of that transaction you can find. Go to the NASD's website and put that "advisor's" name in the area where it leads you to check on a broker. Print out the results. "Settlements" of greater than $5,000 are supposed to show on the agent's U4. What else is there?
I'm suspecting something real stinky in Denmark.
BTW, that NASD website should be used by everybody unfamilar with their "advisor."
STAY AWAY FROM BANK'S INVESTMENT PEOPLE.
Edited 4/13/2007 8:38 am ET by peteshlagor
Edited 4/13/2007 8:39 am ET by peteshlagor
I went to the NASD website and entered her name.She has a different last name now.Under the heading "Disclosure of Customer Disputes, Disciplinary, and Regulatory events" there are no reports.Under the heading "Broker Qualifications" it says "This broker is not currently registered with an NASD firm".I had already heard she left kansas in 2003. I called this woman's financial services company two weeks ago and spoke with the compliance manager.I indicated the 1099 must be inaccurate. She indicated she felt the 1099 was probably accurate and reflected fees, commissions, etcAnyway, thanks for your suggestions. This is interesting.^^^^^^
a Smith & Wesson beats four Aces
I'm guessing I'll pay an accountant about $200 to do a tax return for my son.Do you think my bank should reimburse me the $200 ?^^^^^^
a Smith & Wesson beats four Aces
Gentlemen - I've been through all your suggestions, started with a Keogh plan in 1964, (fees) then incorporated - had pension and profit sharing plans that allowed me to put away 25% of salary tax deferred (fees). Funds got big enough that "financial advisor" advised me to go with a "capital management firm" (fees were really big). When I retired, I converted funds to Vanguard IRA (VERY SMALL FEES if less that .i8% -yes, that's less than 1%) The Vangard funds are in INDEX funds that consistently beat most so called "managed funds".
For the past fourteen years, I've been retired and much better off than I was when I tried to pick stocks and bonds. Indexing lets me sleep at night even when the market drops 200 points.
For the 19 year old, Roth would be best but he should start with regular IRA until he can afford a second IRA. Vanguard, Fidelity and T.Rowe Price all have index stock and bond funds, in all combinations, with all degrees of growth versus risks. It is the indexing that over time reward him the most!!
Trust me, I don't work for the Government!
From what little we know about this, and you keep coming up with more and more data that was never mentioned n the first place, Your state's banking commisioner needs to be notified.
That "compliance officier" is full of it.
LOL, you keep putting the stick in and stirring this pile and the stench keeps a-rising. if that 1099 reported that much gain, he should have more return coming back. Otherwise, they should be amending the 1099 for him.A lot of missing details, yes, but he should be on this like sticnk on a skink.
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That's right.
There's laws against 20% in commissions - especially when there are trailing commissions to boot.
There's more to this story than we've heard.
I inherited a Traditional IRA from my Dad in 2006.The amount was $3,700Do I owe taxes on the full amount ?^^^^^^
a Smith & Wesson beats four Aces
Yes.
You should have received a 1099 with the details.
Perhaps I should put in a qualifier:
Depends upon how you took the distribution. If it was in the form of a stretch IRA, then only the distributable amounts in the year received. The 1099 details the amount.
Edited 4/13/2007 11:12 am ET by peteshlagor
I did receive a 1099-R from the bankand I also received an "IRA withdrawal statement" from the bank which shows "net cash distributed" in the amount of the $3,700and it also shows the amount of interest earned in the current year which was $51None of the paperwork shows what Dad paid originally or when the account was established.^^^^^^
a Smith & Wesson beats four Aces
What dear ole Dad paid and when is irrelevant. The traditional IRA's distributions are fully taxable unless nondeductable contributions were made into the account and for those, the custodian is responsible for reporting such. If not on the 1099, it didn't happen.
Unless you're dealing with the same allegedly questionable bank mentioned earlier...
But in reality, nondeductible contributions only occur in unusual situations. If the account was only worth $3700, it's very unlikely any were made.
Waht your father paid in does not matter. What matters is when you take it out with a traditional IRA. It soundslike you closed it and took the cash so you pay on all of that #### indicated in the 1099
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I think that varies by how you recieved it. I believe there is a way to recieve it where you let it roll and only pay tax when you take out upon your retirement.but that is certainl;y something you want to be sitting down with an accountant on. I know i'll have to deal with things like that soon when Mom passes on. She has glorified me as the executor...
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This summarizes my experience with my Dad's estate Traditional IRA 100% taxable
Mutual Funds in IRA 100% taxablelife ins proceeds no tax consequence
CD no tax consequence
savings & checking no tax consequenceStocks calculate taxable amount by "sold price"
minus price per share on date of deathI only received 1099's for the traditional IRA and mutual funds in IRA.I have not yet sold the stocks at the bottom of the list.I think You need to look at your situation with your mother and arrange things to have as minimal tax consequence as possible.^^^^^^
a Smith & Wesson beats four Aces
You can't roll it over unless you are a spouse.Depending on a number of details you can either take it as a lump sum or over an extended perio of time that might be based on the rate that the holder was taking it, your lifespan, or 5 years."Inheriting a traditional IRA provides you with the unique opportunity to continue tax-deferred investing. Over time, that tax advantage can dramatically increase the value of the inheritance.That's the good news. The bad news is that IRS rules for making the most of the tax advantages that come with inherited IRAs -- finalized last summer -- run about 45 pages long and the caveats are as dense as trees in the Black Forest."But for 3700 it is not that big a deal.But make sure that there are name benificearies and an estate. And 2nd don't let the IRA trustee distribut it to the benifieries unless that is what they want. To get the other options it needs to be transfered into an Inherited IRA in the name of the benificerary.http://www.fool.com/Taxes/2000/taxes000804.htm
http://www.fool.com/investing/ira/2006/08/23/how-to-inherit-an-ira.aspx
http://www.bankrate.com/brm/news/ira/20041006a1.aspA google on - inherited ira options - gets these and others..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
I was wrong for not knowing more about what we were doing.
Sorry about your bad experience. Most people have a story or two like that--just like most contractors here have a story or two about flakey clients, GC's, architects, etc.
The Motley Fool's (TMF) primary emphasis is that you are the best person to make decisions about your money. And much of the learning is via on-line discussion groups, a lot like BreakTime--you post a question, you get responses from a bunch of people. Some are laymen, some are professionals in various aspects of finance. At least one of the regular posters on the tax board is a retired IRS agent; several are active tax accountants.
Investing is not something that has a "right" way and a "wrong" way (aside from legal points)--the best investment mix for you should be determined by you based on your particular situation and what you want to accomplish. Case in point--most people on TMF have considerable reservations about investing in bare land and are quick to point out the pitfalls of such a purchase. But it's been our best-performing investment to date. (Rule #1--invest in what you know and like.)
If you decide to check out the site, be sure to read about its philosophy. Ask lots of questions (use the search engines first please!), and take all responses with a grain of salt until you can verify them independently. There is a $30/year fee if you want to be able to post responses, but you can read as much as you want for free. As with BT, you eventually get to know certain posters.
help page--http://www.fool.com/help/index.htm?display=default&ref=G02A07#
discussion board selection--http://boards.fool.com/?ref=topnav
"My Dumbest Investment"--http://boards.fool.com/Messages.asp?bid=100102
Kathleen (no financial interest in TMF--just been a member since 1997)
Thanks I appreciate it.My son started with $22 K in 2000 and today he has a grand total of about $25 K in a money market account.Here we are seven years later and that's all the better we did.About a year ago we put the money in the money market account assuming he was going to college and then he didn't go and instead got a job.He moved out of my house about six months ago.I just wish we could have done better with the $$ these past seven years.^^^^^^
a Smith & Wesson beats four Aces