Raiding the ROTH

[danm]

Hi,
I started two ROTH's with some spare change last year for my wife and I, only to find they have the same obnoxious restrictions as a 401k. Looks like the mutual fund companies pushed Congress into preventing us from moving things around 'too frequently', 'for our own good'. At any rate I'd like to pull them out. Additionally I contributed for both 2006 and 2005, and this year as it's turning out my income will go over the max for a ROTH (not sure what'll happen with that ...)

At any rate, there's little gain at this point, my understanding is that the principle comes out penalty free (duh! I already paid taxes on it), and the gain will get ordinary income +10%. Any gotchas?

 

[Martha]

I am not quite sure why you want to take out the 2005 contribution. Can you give us more info?

The 2006 will be relatively easy to undo if you go over the income limits. There is a form you get to fill out from the place where you have the Roth and the contribution will be reversed. You need to do this before April 15, 2007, when your taxes are due.

Here is a thread that talks about reversing your contributions: http://early-retirement.org/forums/index.php?topic=6121.msg108900#msg108900

 

[danm]

Thanks Martha,
I'd like to take it out as I have more control over the money. I'm not a seriously active trader, but the restrictions in both investment options and frequency you can move money is annoying. In other words, I've had second thoughts and would rather put the money in a taxable account.

 

[Martha]

We have one teeny tiny Roth with Scottrade. I am not aware of any restrictions on what we can buy, or how often we trade, so long as it is stocks, bonds or mutual funds. What kind of restrictions are you talking about?

 

[Mwsinron]

Short term trading fee's? I know at Fidelity one of my funds has a 60 day short term trading fee. They dont restrict you from moving it though.

 

[danm]

You can only move stuff around, I forget the forumula, like once a quarter. "Excessive" trading they call it. The mutual fund companies got together and bullied Congress into regulating people from moving around 'too much' in their retirement accounts. Claimed it raised their costs too much, blah blah. Check your 401k, same deal there. They do have a small point that there used to be a loophole that you could play in your retirement accounts for free, you didn't get a tax hit by moving in and out of funds. If you move around too much they'll eventually restrict you.

The fact is, it forces investors into a buy and hold style - which for many is probably the best. Just having the restriction annoys me regardless. The point with these accounts is to give us more control over our retirement, why take control away? For our 'own good'?

 

[WRBT]

There's a fed regulation on how much trading happens in a Roth? I've never heard of it and never been hit by it? What do they charge a fee after trade number x?

Link?

 

[eridanus]

There have been some IRS concerns (read: they nail you) over employer plans and excessive trading, eg. day-trading in a 401k. These concerns, from what I've read, do not apply to self-directed retirement plans (IRAs).

Are you talking specifically about mutual funds or stocks? Mutual funds themselves put into place trading restrictions to prevent excessive churning.

Are you running into the day-trading restriction? That applies to brokerage accounts too. It's just easier to hit the wall in a Roth because the minimum is $25,000.

There's also the no-margin rule for IRAs. Any unsettled money can only be used once to buy securities. Otherwise, you need to wait for settlement (T+3 for securities).

 

[Nords]

      I'd like to take it out as I have more control over the money. I'm not a seriously active trader, but the restrictions in both investment options and frequency you can move money is annoying. In other words, I've had second thoughts and would rather put the money in a taxable account.

We have both conventional IRAs & Roths with Fidelity and with Tweedy, Browne. Other than Tweedy's recent short-term trading limits (60 days) we've never had any restrictions on types of funds/stocks we invest in, nor how often we can move them.

Instead of pulling out of your Roth, you may be looking for an in-kind transfer to a different fund company/broker.

 

[boutros]

If I am reading between the lines correctly you have been actively trading open end mutual funds.  Fidelity and many other firms have mutual fund trading restrictions in there accounts regardless of account type.  These apply to all fidelity funds other than the Select funds (which have ST redemption fees).  Basically you are allowed something like 4 or 5 round trip trades per year.  Meaning complete purchase and complete sale.  This is used to cut down on market timers using open end mutual funds.  Market timers increase the expenses of the fund for long term investors.  These are not federal restrictions they are firm rules... good ones in my opinion.

I used to work for a brokerage company and heard this from a retail trader.  A customer called up to trade out of an equity fund into a relatively small bond fund.  There was a note on the client's account to verify any trades into that bond fund with the portfolio manager who manages the fund.  The trader looked at the history of the account and the customer had used the bond fund as basically a money market trading in and out of some larger equity funds and individual stocks.  Often times several million $.  The trader called the PM of the fund.  The PM wanted to speak to the customer.  He conferenced in the customer and stayed on the phone long enough to hear the PM cuss out lecture the customer.