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maxing out a new IRA with my bond fund - wise?

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  • maxing out a new IRA with my bond fund - wise?

    Hi guys,

    Since the income in my bond fund (TROWE Spectrum Income balance of $5,700) is being taxed, someone recommended that it should be moved to a Roth IRA.

    If I were to do that, I could max out my Roth in one fell swoop and commit these funds to retirement. (2 years ago, I created the fund as a supplemental lower-risk fund to a growing EF. Upon rethinking my goals and reevaluating my situation with a fully funded EF, I think this money should go towards retirement.)

    For 2011, this would then allow me to put $417/mo to a more aggressive stock fund than my Fidelity Target 2040 in my existing Roth IRA. (My current allocations for retirement are 70% stocks and I'd like to get closer to 80%.)

    So, should I pull the trigger and create a new IRA, fully funded for 2011 by this bond fund?

    Thanks!

  • #2
    I switched my ROTH from one institution to another in the past, and I had to liquidate the account to cash before moving it. So, you could theoretically just buy the fund again, but are you happy with it? How has it performed for you? How old are you and what is your tolerance for risk?
    Brian

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    • #3
      I called TROWE and I don't believe I would have to liquidate anything. They would just change it from an individual account to a Roth IRA. I would then have two IRAs (one at Fidelity, one at TRowe), but the TRowe would receive the entirety of my 2011 contributions.

      I have been pleased with the Spectrum Income's performance, however, I haven't done a detailed comparison to other bond funds. I am of course open to switching funds pending a good reason to do so and further research.

      I'm 33 and have a moderate tolerance for risk. But I do understand that I can tolerate a higher degree of risk since my retirement is not for another 30+ years.

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      • #4
        You can only contribute cash to a retirement account. You can't contribute a security.

        So you would have to sell the position, and repurchase in the IRA. If you ask them to transfer the stock into the Roth account, they'd likely just do the sale and repurchase behind the scenes.

        This is so that you don't try and contribute some stock that shot way up in value, and try to contribute it to avoid paying taxes on the gain.



        But I love the idea! It essentially turns your bond fund into a tax free bond fund! And you needed the money for retirement anyways, so I really like the idea.

        From: IRS Publication 590 (2010), Individual Retirement Arrangements (IRAs)

        Individual Retirement Account
        An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
        • The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
        • The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
        • Contributions, except for rollover contributions, must be in cash. See Rollovers , later.
        • You must have a nonforfeitable right to the amount at all times.
        • Money in your account cannot be used to buy a life insurance policy.
        • Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.

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