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Q My husband and I started a JTWROS mutual fund with American Funds in 1986. I would like to roll this over to a Roth IRA in either my husband's or my name. This fund was started using after-tax dollars, and we have been paying taxes on the dividends and capital gains all these years.
Can I roll this over with no taxes due either to Minnesota or to the federal government? I would like this to be rolled over into a no-load fund.
JEANETTE, LESTER PRAIRIE
A For our readers, JTWROS stands for Joint Tenants With Right of Survivorship. It's a kind of brokerage account. According to Investopedia, the digital online financial encyclopedia, the brokerage account is owned by at least two people; all the owners have equal rights to the account's assets, and the survivors get the asset if an account holder dies.
With the JTWROS, Jeanette has a mutual fund investment in a taxable account. You can't roll that taxable investment account over into a Roth-IRA or convert it into a Roth IRA. A rollover or conversion into a Roth is limited to moving money from another tax-sheltered retirement plan.
The American Funds family of mutual funds, the biggest money managers most people have never heard of, has done well over the years. However, if you did want to transfer the money into another mutual fund you could always cash it in, pay capital taxes on the gain, and reinvest the proceeds in that fund.
Now, even though you can't turn this account into a Roth, I still think it's great that you've had a taxable mutual fund investment all these years. This isn't a brief against saving in tax-sheltered vehicles, such as a Roth or 401(k).
But it's a theme of this column that folks should consider investing mutual fund money in taxable accounts as well -- as you did. Yes, you'll pay taxes on dividends and realized capital gains along the way. But the big advantage of a taxable account is flexibility. Specifically, if you pull money out of a 401(k) you'll pay a 10 percent penalty plus your ordinary income tax rate on the withdrawal. You could borrow from the plan, but that maneuver reduces the long-term return on retirement savings.
Yet with a taxable account you can tap the money at any time without penalty. You will pay Uncle Sam a long-term capital gains tax rate when you cash it in -- assuming you've owned the investment for more than a year -- but it's still at a lower rate than ordinary income tax rates.
Another benefit to investing in taxable accounts is tax diversification. For instance, in retirement it may sometimes be tax smart to leave tax-sheltered savings alone and tap into taxable accounts, and vice versa.
By the way, if you qualify I would open up a Roth IRA. It's a terrific way to save for retirement.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.
