r2i forum

r2iby2007;24600Desibabu,

Thanks again for spending time on my AAP. Now I started implementing. Here is the link for my AAP thread.

http://groups.msn.com/R2INRIFinanceAndInvestments/r2ifinance.msnw?action=get_message&mview=0&ID_Message=54344&all_topics=0

I have following questions: Can you please help?

In Message 50 you mention:

The above should be in taxable accounts with Vanguard. Instead of a joint account, open separate accounts, one in your
name, one in spouse's name and asisgn beneficiaries. This will make it easier from Indian tax perspective which
separately taxes the income of two spouses.


And on On Message 52 you mention:

I have addressed earlier regarding IRA liquidation, how much per year and conversion to ROTH.Since India imposes 3 year holding period on foreign equities to classify for long term gain, the sooner you move the money into the investments now into rolled over IRAs the better.

Now to my question:

Does this mean, I need one IRA account and another ROTH-IRA account? And maintain the Bond/Stock and fund distributions as suggested within these accounts? As per message 50, I need two separate accounts instead of joint account. Does the above mean, I need total of 4 accounts?

One more thing I am not clear : When I withdraw money from IRA (around 25K) in my first 4 years, does this gets invested in taxable account

I may have other questions, can I use the same method to ask?

Thanks again
SSSP[/quote]

EBS1972;27886Desi,

I was going through this APP and I have a question. In #28 you suggested moving IRA/401K to roth and funding kids eduction using custodial after tax a/c but in #49 you have suggested to use all of 401K(rolled over to IRA)311K+another 49K for kids education. So, does he really need a Roth a/c, if so what percentage of his 401K does he need to move to Roth.
[/quote]


EBS, Re custodial accounts there are later comments (post 49) that advise against it, as from a tax perspective in his case, Indian taxes will rule and override any benefits.

SSPP had indicated (If I remember correctly) that he had earmarked his 401K monies for kids and his other savings plus savings from salaries in India etc would suffice for retirement which was borne out by calculations.

It was estimated that the education expense plus tax ramifications of 401K, he would need about 360K of money at present. Since he had 311K in 401K, it meant supplementing this with additional 49K.

Moving money to ROTH from rollover IRA allows him to escape 10% penalty. As to what percentage should go in the ROTH IRAs, I am fairly certain that I must have addressed that in original AAP, please look there. If you still have a question after that, let me know. I will also have to go back to old AAP to refresh my memory.

[quote]
2. Also, in #50 you suggested to use after tax money of about 84K to fund their US portion of retirement a/c. My question is, why can't this money be used for kids eduction so that he only need to withdraw 311K-84K for kids education there by saving some taxes on the 84K?
[/quote]

Yes it can be done. The taxes on 84K at 15% are going to be 12.6K. These 12.6K are not savings but deferred taxes in that they eventually have to be paid, perhaps even higher than 12.6K if democrats raise taxes which are at their historical low. So by deferring one can make a gain of about 7% growth on this 12.6K which is about $900 a year. This $900 is further taxed when withdrawn by IRS and by GOI at marginal 30% plus rates as it accrues. So the net benefit of this is there, it is small however with the risk of rising taxes. GOI will tax growth as it accrues and IRS will tax when withdrawn.

A number of factors went into what I came up with. One was SSPP's wanting to keep 401Ks for kids (he had mentally allocated this for kids - so this was client input), Second was a plan to withdraw 401K when they were in the least tax bracket and have high deductions and personal exemptions including kids exemptions. Third was the recognition that the growth on tax money deferred is being taxed twice - once by India at a high rate every year as it accures and second by IRS when it is withdrawn. IRS will not give foreign tax credit for taxes paid to GOI years earlier.

Further to I believe that holding IRA for an Indian resident is not a good idea. India does not recognize tax deferral which is per US tax code only. So India will continue to tax any growth at high tax rates as growth is realized and US IRS will tax it also when withdrawn with no reprieve from dual taxation. While Indian taxes can be somewhat mitigated by putting IRA money in long term equities with low dividiends but that is also against the grain of having tax deferred accounts with fixed income. There is not an easy solution to this. In some cases it may make sense to hold the IRAs for Indian resident, but the benefits may be marginal.

There may be other reasons, but I will have to go thru the whole thread again.

[quote]
I am not questioning what you have suggested but only trying a get a clarification on the recommendation so that it would help in my AAP.

Many thanks.
[/quote]

No problems, it is only when questions are asked, I can catch my own errors.

Desi;27013

It was tough to refresh memory on this one. Fortunately, I had put enough detail in the posts.

I have recommended as follows:

Rollover IRA account for you and a rollover IRA account for your spouse.

ROTH IRA account for you and a ROTH IRA account for your spouse (money flows in as described in post #28. As also mentioned, you may not be eligible for ROTH based on gross salary, hence as suggested in the post, your ROTH accounts may have to be opened in January 2008. Make sure you take the paperwork with you and prepare the paperwork in advance. In case you two determine that you would be eligible for ROTH IRAs in 2007, then you can open in 2007, but based on income, you may not be eligible for 2007.


A taxable account for you and a taxable account for your spouse for investments targetted for self retirement.

A separate taxable account held by one of you in which you put in the investments targetted for Children's education. Some of these will come from rollover IRA accounts as mentioned in post # 28.



Yes. In the taxable account earmarked for children and per the AAP set for them, which I have explained in the post.[/quote]

r2iby2007;34332Hi Desi et al-,

Thanks for your reply.

The individual account I open for me and my spouse, can I put the other person as a nominee. Currently we have taxable account as "joint account with survivor" option. So the husband puts wife as nominee and wife puts husband as nominee. If we open as individual account, is this the best or easy way to get the proceeds in case something happens to the account owner.

Thank you and with regards
SSAP[/quote]

I have already addressed what accounts to open. For your taxable account, you can specify your spouse as beneficiary and your spouse will do vice versa.
For brokerage accounts a TOD (Transfer on Death) form is available from brokerages and this form should be filled out for the individual taxable accounts.

In case, something happens as far as brokerage is concerned, they will transfer assets upon satisfactory proof. The TOD establishes a Trust like account where the spousal instructions for transfer in TOD are sufficient.