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Jul 13 2009 12:00AM

Question

My husband and I each started a Roth IRA and a jointly-owned mutual fund that had front-end sales charges. Now that this fund is no longer available to new investors we want our financial representative to transfer the bulk of the accounts to other funds so there are more investors in the "pool" and there is a better possibility of the funds growing. Our financial representative suggested that we do not transfer anything from the Roth IRAs since it could have tax implications. He suggested moving some funds from the jointly owned mutual fund. Are there tax implications to transfer our current Roth IRA into other Roth IRAs that have more investors?

Answer


According to FPA member, Daniel Sands, CFP®, of Silversage Advisors, it appears as if the mutual fund investments for your Roth IRAs and joint account are now closed to new investors. "Fund managers often close a fund to new investors in order to keep the size of the fund smaller and therefore more manageable," he said. "The manager might want to do this because they have more money coming into the fund than investment opportunities available."

According to Sands, there are two ways a manager often closes a fund. "The first way is what we refer to as a 'hard close,' no new investments from new investors or existing investors," he said. "The second type is a 'soft close,' existing investors can add new monies and new investors cannot. A manager might prefer a soft close in order to slow the amount of monies coming into the fund and provide liquidity for investors withdrawing from the fund. Having a good balance between money coming into and out of the fund allows the manager to not disrupt the underlying investments with constant buying and selling."

"Closing a fund also helps keep fees and expenses down," Sands said. "A fund closing to new investors is not necessarily bad, often times it may actually be good for existing shareholders.  During this recent downturn in the market, many funds that were once closed to new investors have since reopened."

"The total return of a mutual fund comes from three basic areas:

  • Income from dividends and interest
  • Price appreciation or depreciation of the underlying investments
  • Fees and expenses

A mutual fund's net asset value (NAV) is based on the underlying investments, not additional investors purchasing the fund, "he said. "While a fund being open to new investors may mean additional purchases of the underlying securities, I would question if it is enough to have any impact on return. With the exception of closed-end mutual funds which trade on a stock exchange, mutual funds do not trade on a supply and demand basis. I would suggest reviewing your investments for other merits before selling a fund simply because it is closed to new investors."

With respect to the tax implications, Sands said you can sell funds within a Roth IRA as long as you continue to keep the monies inside a Roth. "If the account is directly at the fund company you may either exchange the funds within their other offerings and not pay any additional loads or open a new Roth at another fund company and have the assets transferred," he said. "Transferring assets from one Roth to another will not cause any tax implications, if everything is done properly. If the Roth IRA is in a brokerage account, you may buy, sell or exchange all within the one account without creating any tax implications. Be mindful that any purchases could create new loads depending on the type of fund you purchase."

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