Questions and Responses

If I am left with no taxable income on my 1040 after deductions, can I still contribute to my Roth IRA up to the amount that I did earn?

Why would someone choose an income fund?

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What happens with my Roth IRA if I move to a state with income tax?

from Jay

Q: My wife and I currently reside in Texas which has no state income tax. It is likely that we may be relocating to another state that does have an income tax. 

In 1998, I converted our traditional IRAs to Roth IRAs, and utilized the option of dividing the taxes due over four years. If we relocate to a state with an income tax, will that state have any tax claim on the remaining years that taxes are due for the Roth IRAs?

A: (Sid)  You pose an interesting question.  First you must check with the state to where you are planning to move; each state has it’s own laws.  State law will regulate this issue.  Another alternative would be to check the web pages for that particular state’s revenue regulations. The rules could be different for each state.

If I am left with no taxable income on my 1040 after deductions, can I still contribute to my Roth IRA up to the amount that I did earn?

from Kevin

Q: I have a Roth IRA , and have been putting away the $2000 cap each year, but this year I was un-employed most of the year. My total income will only be about $1,600. Obviously I won't pay any taxes, but can I still contribute up to the $1,600? Although what I've earned is taxable income (not non-taxable like child support etc), by the time I finish my tax return with deductions etc I will show no taxable income.

When reviewing IRA contributions, does the IRS use earned, taxable income or taxable income as it is listed on a 1040 after personal deductions, etc.?

A: (Sid)  If your total income for the year is $1,600, you may make a Roth IRA contribution of $1,600.  The Internal Revenue Service uses the definition for income as “gross taxable wages” not net taxable income.

As long as the $1,600 contribution is based on wages or self employment income, you may make a $1,600 Roth contribution.  Wages and self employment income are amounts on which you pay social security and Medicare taxes.  Income earned from interest and capital gains does not qualify as income from wages.

Why would someone choose an income fund?

Q:  Why would someone wish to purchase an income mutual fund (closed end)? What are the features and benefits?

A: (Frank)  Income funds are generally bond funds. However, the definition is not set in stone. Prospectus objectives are never as clear as they might seem. The portfolio might also conceivably hold preferred stocks, convertible bonds, REITS, money market instruments, utilities, or other high yielding stocks. Assuming the stricter definition of an income fund as being a bond fund, they may invest in almost any type of bond. So, performance will be determined by the quality, and duration of the portfolio, the behavior of the bond market, and the success--or lack thereof--of the manager's trading policy.

Expenses are particularly important in bond funds. There are somewhat fewer opportunities to improve performance in bonds than in equities. Success is measured in hundredths of a percent over benchmark! So, there is a very direct relationship between cost and net returns to investors. Unlike open end funds, once a closed end bond fund sells it's initial offering, they no longer issue or redeem shares directly with the public. Shares are purchased and sold on the open market. Depending on supply and demand, after-market shares may trade at a discount or premium to the underlying securities' net asset value.

Some investors attempt to speculate on the change in premium or discount. Or, they may pick up after-market shares at a discount and obtain a somewhat higher yield. Of course, there are risks in these strategies. The discount may increase leading to a capital loss. Or, older funds may hold bonds closer to call date than comparable newer funds.

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.