Volume 59: To submit a question to MFI's panel of experts, please write to us.

This week's panel:

Sidney Blum Sidney A. Blum, CFP, CPA/PFS, ChFC, is president of Successful Financial Solutions, Inc., a fee-only financial planning and registered advisory investment firm based in suburban Chicago. Sid specializes in comprehensive financial planning with an emphasis on income and estate taxes, retirement planning and investment planning. Sid has appeared on national and regional television and is frequently quoted in many major publications on financial planning and investment topics. He has been included the last three years in Worth magazine's, "The Best Financial Advisors". For more information, visit Sid's website or call (800) 417-1141.

Richard Chiozzi Richard E. Chiozzi is a founding principal of Successful Financial Solutions, Inc., a fee-only financial planning and registered advisory investment firm based in suburban Chicago. Richard is a Certified Financial Planner (CFP), and a Registered Securities Principal. He has been in the financial service industry since 1981 and has lectured at NAPFA and ICFP national and regional conferences. Richard is a frequent author on financial planning issues in leading financial publications and also hosts a one-on-one cable television talk show in suburban Chicago. Richard can be reached at his website or call (800) 417-1141.

Questions and Responses

• Should I sell my recently-purchased fund shares for a loss?
• Can I max out on my Roth IRA and still contribute to a 401(k)?
• Where should I put my variable annuity money?
• Can I have two Roth IRA accounts under different custodians?

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Should I sell my recently-puchased fund shares for a loss?

from Brian

Q: I have seen questions in which Sid warns against selling a mutual fund that is down for the year, because it may be up greatly over four or five years and would carry with it large capital gains taxes. However, I bought shares in AARP Growth and Income fund over a three month period from April through June of this year. My shares are way down for the year. Should I sell this at a loss, since I will not have a large capital gains tax through only six months of ownership?

A (Sid): Many individuals who purchased a mutual fund earlier in the year, only to see it decrease in value, have witnessed a recovery of most, if not all of their investment. If your fund is still below your cost, it may be worth selling the fund prior to year-end to take advantage of the tax loss. Before doing so, determine if your decision is based on a negative long-term view of the fund or whether you want to capitalize on taking the loss for tax purposes. If your decision is based on the tax ramifications, make sure the amount of the loss is large enough to justify your effort. After netting out short term and long term capital losses, the maximum net capital loss you can use to offset other income is $3,000 per year.

If you decide to sell and wish to retain your investment in the same type of fund, reinvest the proceeds immediately in a similar or better quality growth and income fund to avoid being out of the market. Otherwise you will have to wait at least 30 days under the wash sale rule before re-purchasing the same fund. If you violate the wash sale rule, your tax loss will be disallowed.

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Can I max out on my Roth IRA and still contribute to a 401(k)?

from Eternity

Q: I was informed that I would be able to contribute the maximum amount of money to our Roth IRA, $4000 ($2000 each), and still be able to contribute to my work's 401(k) plan. Is this true?

A (Richard): You are correct that individuals can contribute to both a Roth IRA and a 401(k), but you have to be careful regarding income limitations. As with regular IRA’s, you can contribute up to $2,000 annually (or 100% of compensation, if less). Individuals who are married can each contribute up to $2,000 annually, even if only one has income, again provided that the total IRA’s for the year do not exceed the compensation of the wage earner. The maximum 401(k) contribution for 1998 is $10,000, which is also subject to income limitations. Refer to your plan documents if you have any questions regarding 401(k) contributions.

Keep in mind that phase outs apply to Roth IRA contributions. For married taxpayers filling jointly, Adjusted Gross Income (AGI) must be less than $150,000 to qualify for the full amount. AGI between $150,000 and $160,000 will qualify for a reduced amount. AGI over $160,000 will disqualify a married couple from being eligible for any Roth IRA contribution for the year.

For couples married but filing separately, the phase out begins at 0 and is completely eliminated at $15,000. For single taxpayers the AGI phase out is between $95,000 and $110,000.

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Where should I put my variable annuity money?

from Socassidy

Q: I have a variable annunity with Northwest Mutual Life Insurance Company which has been invested long enough to run past the withdrawl penalty. This is pretax money and I would like to move it into a Roth IRA this year and am confused as to where to put it. I have some money in no-load equity income and growth income funds and in a world wide fund. What is the best strategy regarding where to put this annunity money given that I am 45 and NEVER raid my retirement funds.

I plan to keep this money untouched for at least another 15+ years. How about post tax money investments? I am concerned about the distributions from funds that trade a lot and my tax liability.

A (Sid): It’s important to keep in mind that annuities can be funded with either pre-tax or after-tax funds , even though the earnings and growth on both types are tax deferred until distribution begins.

Many annuities are purchased with after-tax funds. Since they are not held in a qualified manner, they cannot be converted to a Roth IRA.

Pre-tax annuities, however, may be held within a 403(b), IRA, or certain other types of qualified plans. If your annuity is held within a qualified plan, the first step is to determine if your plan is eligible to be converted into a traditional IRA. Next, you need to verify with your potential IRA custodian if they will accept the annuity in your current plan. If the answer to both questions is yes, you must first convert your plan to a traditional IRA and then transfer the traditional IRA to a Roth IRA.

If your IRA custodian will not hold your annuity, you’ll have to sell it prior to transferring it to the IRA. Although you’ve held your annuity long enough to avoid a surrender charge, many individuals would be assessed this fee. If your annuity is currently held within an IRA, (which I don’t recommend) you may convert it to a Roth IRA, provided the Roth IRA custodian will agree to accept it.

Remember that ordinary income tax will be due on the entire amount transferred to the Roth IRA if the funds are pre-tax. Individuals that convert before December 31, 1998, have the option of spreading the tax due on the transfer over the next four calendar years. Contact your IRA custodian to determine if additional steps may be required.

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Can I have two Roth IRA accounts under different custodians?

from Garret

Q: I started a Roth IRA account this year (1998) and have been putting in $166.66 per month for a total of $2000 for the year. The mutual funds in my Roth IRA account have a front end load of 5%. I am thinking of stopping my contributions to this account and opening a different account consisting of no-load funds. I would prefer to leave the existing account as is since I have already paid the front end load on the contributions and start a new account elsewhere.

Is it ok to have two Roth IRA accounts under different custodians or is it necessary to transfer my existing Roth IRA account to the new custodian?

A (Richard): To my knowledge, the IRS doesn’t care whether you have one or two Roths established. Each can have its own custodian. In your case, you can maintain your existing Roth with your front end loaded funds and can establish a second Roth to hold your no-load funds. The important thing to remember is that there are separate withdrawal rules for money converted from a traditional IRA and another for money you contribute on an after tax basis. I am assuming that neither one of your accounts will be from a rollover. Some other important things to remember:

• Your annual contribution to all IRAs combined is limited to $2,000.
• Contributions may be made even after you attain the age of 70 ½ assuming you have earned income.
• Minimum distribution rules applicable to IRA are not applicable to Roth IRAs.
• Allowable contributions begin to phase out for joint filers with AGI (Adjusted Gross Income) over $150,000 and for individuals with AGI over $95,000.

The only negative drawback I can see in your approach is maintaining the paperwork and paying the custodial fee on two separate accounts.

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Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.

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