To Roth IRA or Not To
by Rob Landley
Austin, TX (Sep. 25, 1998) -- It's Friday. By the time this column makes it up to the Web, it'll be Friday evening. Time to relax. No heavy analysis or philosophizing today, just a few random observations as you head out into the weekend.
If you haven't done so yet, look into the new Roth IRA. The traditional IRA allows you to put money into an account before it's ever taxed and then defer any taxes on your investment gains until the money is withdrawn at retirement. But the new Roth IRA allows you to put normal after-tax money into an account that can earn investment income that potentially never gets taxed at all.
Your reaction, like mine, may be the exclamation: "Wow, this is a good deal or what!" But remember that Congress is desperate to balance the federal budget, and keep it balanced, at least in the short term. The Roth IRA helped out. It was a way to get everybody to suddenly pay the accumulated taxes on all that money locked away in IRA plans and to start getting the tax money from similar savings upfront. This gives them a short-term surge in tax income which will help them balance the budget -- and possibly keep it balanced long enough so that this bizarre "balanced budget" concept actually starts to stick.
Now, to get individual investors to cough up the tax money, the government had to offer us a better deal than we were getting before -- tax-free instead of tax-deferred accounts and higher income limits. And they've really given us the ability to put more money in, since the limit is applied to after-tax rather than before-tax money. Plus, you can now have a Roth IRA even if you already participate in an employer-sponsored 401k plan.
They threw up a doozy for us.
The reason I'm reminding everyone of this today is that there's an important deadline fast approaching. If we roll classic IRA's over into Roth IRAs in the 1998 tax year, we earn a one-time tax benefit. Yep, we have to pay taxes on the rolled over funds (they've haven't been taxed as income yet), but if we do it this year we get to spread that income tax hit out over the four years. If we instead roll it over next year, we have to take the rolled-over money as one big lump sum of income, probably dropping us in a higher tax bracket.
Roy Lewis (TMF Taxes) has written several articles on Roth IRAs that are available in the Fool's tax area. See the Roth IRA series, and also try these: Which is Better: Regular IRA or Roth IRA? and Should I Convert My IRA into a Roth IRA?.
That's the message for today -- if you're going to roll over a Traditional IRA to a Roth IRA, make the move before the end of this year.
And now, to close the week... why not a few random musings?
1. To anyone who has emailed us recently to ask if they should just duplicate this portfolio: please read the 11 Steps to Cash-King Investing. Doing this all yourself takes but a few hours a year (if that).
2. There is something disturbing about singer Lyle Lovett's hair, isn't there?
3. If anybody wonders how I keep up to date on goings-on in the high-tech industry, other than having no social life (which seems to be a prerequisite), I find the website "OS News" (www.osnews.com) to be invaluable. "Linux Weekly News" (www.lwn.net) is valuable, too. Both will connect you to zillions of other sites that you may want to bookmark if you're following technology stocks.
3. Back on that IRA thing for a second. Tax-deferred (or tax-free) accounts are great fun, but ask yourself if you're sure you don't want to retire before the age of 59 1/2. If you want to retire in your 50s or 40s, savings outside of 401k and IRA might be a good idea. Might I suggest the automatic tax deferred nature of long-term buy and hold investing?
4. The Treasury Department is now running television ads (ok, "public service announcements") for the new $20 bill. They should be running the same ads in Russia.
5. I'm coming to love The Motley Fool's new "Breakfast with The Fool" feature.
6. A Fool's job is to amuse as much as educate or enrich. Several of my favorite humor sites include comic strips:
c. "News of the weird" at www.nine.org/notw
d. The not-exactly-newspaper "The Onion" archive at: www.theonion.com/archives_index.html
e. Dave Barry's humor columns at www.herald.com/archive/barry/ (the most recent one is about Alan Greenspan... gave me a chuckle).
7. It's Friday night, or the weekend, so get out have some fun. This is Cash-King investing; your portfolio will still be here on Monday.
- Rob Landley (Oak)
Stock Change Bid AXP +1 1/8 80.50 CHV +1 3/16 83.38 CSCO +1 1/2 66.44 KO - 7/16 56.25 GPS - 5/8 53.38 EK -1 1/2 80.88 XON -1 68.38 GM +1 7/16 58.69 INTC +3 88.31 MSFT +2 15/16 113.06 PFE - 13/16 106.63 SGP -1 3/8 101.25 TROW + 5/8 29.88
Day Month Year History C-K 0.66% 9.06% 7.48% 7.48% S&P 500 0.19% 9.11% 3.85% 3.85% Nasdaq 1.35% 16.30% 4.64% 4.64% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 113.06 44.45% 2/3/98 22 Pfizer 82.30 106.63 29.56% 6/23/98 34.5 Cisco Syst 57.56 66.44 15.42% 8/21/98 22 Schering-P 95.99 101.25 5.48% 5/1/98 37 Gap Inc. 51.09 53.38 4.47% 2/13/98 22 Intel 84.67 88.31 4.30% 2/6/98 56 T. Rowe Pr 33.67 29.88 -11.28% 2/27/98 27 Coca-Cola 69.11 56.25 -18.60% 5/26/98 18 AmExpress 104.07 80.50 -22.65% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 80.88 28.07% 3/12/98 20 Exxon 64.34 68.38 6.28% 3/12/98 15 Chevron 83.34 83.38 0.04% 3/12/98 17 General Mo 72.41 58.69 -18.95% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2713.50 $835.05 2/3/98 22 Pfizer 1810.58 2345.75 $535.17 6/23/98 34.5 Cisco Syst 1985.95 2292.09 $306.14 8/21/98 22 Schering-P 2111.7 2227.50 $115.80 5/1/98 37 Gap Inc. 1890.33 1974.88 $84.55 2/13/98 22 Intel 1862.83 1942.88 $80.05 2/6/98 56 T. Rowe Pr 1885.70 1673.00 -$212.70 2/27/98 27 Coca-Cola 1865.89 1518.75 -$347.14 5/26/98 18 AmExpress 1873.20 1449.00 -$424.20 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1617.50 $354.55 3/12/98 20 Exxon 1286.70 1367.50 $80.80 3/12/98 15 Chevron 1250.14 1250.63 $0.48 3/12/98 17 General Mo 1230.89 997.69 -$233.20 CASH $48.07 TOTAL $23418.73 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.
*The year for the S&P and Nasdaq will be as of 02/03/98