Dec 9, 1999 at 12:00AM
A traditional IRA allows you to deduct the amount of money you contribute (up to $2,000) from your taxable income for the year, and defers counting the increase of value in the account as taxable income until you actually withdraw money from the account. (Although if you withdraw any money before you're age 59 1/2, they fine you 10% of the amount because it's supposed to be a retirement account, not normal savings.)
The Roth IRA is a new variant on this idea introduced in 1997. Instead of allowing you to deduct contributions and defer the taxes, it allows you to invest up to $2000 of normal income that's already been taxed each year, and then never pay taxes on the investment earnings. A Roth IRA compounds tax-FREE. It even lets you withdraw money under certain circumstances (like the purchase of a first house) before age 59 1/2 without the 10% early withdrawal penalty.
A Roth IRA has a bunch of other nice features over a traditional IRA, including no penalties for withdrawing too much money in one year, no upper age limit beyond which you can no longer participate, and a higher annual salary you can earn and still qualify to make contributions to the plan.
Many online brokerages are now offering self-directed Roth IRA accounts, which allow you to buy shares of individual stocks with your Roth money just as if it were a normal brokerage account. Although Rule Maker investing was designed for taxable accounts (minimizing taxes by minimizing asset turnover, and thus deferring recognition of gains), keep in mind that self-directed IRA accounts (traditional or Roth) require that you pay the trading commissions out of your $2000 contribution. You don't want to go wild trading or commissions will still kill your returns.
Although you have up until tax day next year (April 15, 2000) to make your $2,000 IRA contribution for 1999, I thought I'd remind everybody now since we tend to encourage a bit of procrastination here at the Rule Maker portfolio.
The Fool has a section with more info about the Roth IRA: All About IRAs. On a similar topic, have you seen that the Fool has opened three new real-money retirement portfolios?
Moving on to the second topic for this column, if you hurry you might be able to give stock for the holidays. What you need is the recipient's full name, address, and social security number, and you can transfer some of your stock in his or her name. You can have this stock issued as stock certificates, which make great stocking stuffers.
Even very young children might like shares of a company they understand, like Coke or Disney. And if the stock issues dividends, weigh the benefits of a DRIP plan against the psychological impact of a small child receiving quarterly checks in their own name. (Even a few cents can impress young children: it's their own money.)
Another way to help children is through this year's Fool Charity Drive and such Foolanthropic organizations as the Make-A-Wish Foundation, which exists to make dreams come true for children under the age of 18 who have life-threatening illnesses.
For older children and adults, shares of a good Rule Maker or Rule Breaker stock are still a great gift. They might also (shameless plug warning) enjoy some of the many items available from FoolMart (www.foolmart.com), although you'd better order fast if you want any chance of getting it there before the holidays. And Amazon.com might still have time to deliver some of the books we've mentioned in this column, such as The Innovator's Dilemma, Crossing the Chasm, Stocks for the Long Run, or Common Stocks and Uncommon Profits. And don't forget that the brothers Gardner have written their own trilogy, of which Rule Breakers, Rule Makers is now available in paperback. Many of these titles are available in FoolMart's book section, but if not you can purchase books through Amazon and give the Fool a small (but much appreciated!) cut of the proceeds by using this link.
In any case, try to avoid racking up too much credit card debt while you're out shopping for gifts. Remember, it's the thought that counts, and it turns out the Y2K bug probably won't erase your credit card bill after all.