John G

Case law? I can't answer that part, perhaps our trusty accountants can weigh in. Experience? I have done this myself for my two girls. I have known others to do it as well. Outside of modeling, you are looking at the level of compensation vs what kind of contribution could be made. If you are talking of just $500, you can use an educational IRA and avoid the probelm entirely. If you are talking more money each year, then you have a greater burden. Filing, shredding, sweeping, decorating, fetching stock, serving Christmas refreshments, loading the cash register (something I did for my mom at age 6 with her bakery), copying, etc. Most of these functions could be done by a teenager. To hit the max of $3,000 you may be talking an average of 10 hours a week at something slightly over minimum wage. These are rarely functions someone under the age of 12 could do well. I think you would have a hard time convincing the tax court that a 5 year old could earn $3k. It would be pretty easy to defend that with a teenager. You should understand that you have to go through all the formalities of having a payroll with SSN and withholding to best support your case. You might need some time records to support your compensation. You are unlikely to be challenged when the arrangement appears sensible, but you should be prepared anyway. Remember that their are other methods of starting a tax shelter - such as the 529 and college prepay plans that do not hinge on "earned income".

Five hundred is a modest amount. It presents some practical problems if you are not planning to add more in the future. Here is why. Many custodians require a larger initial amount, and many charge annual fees. You may navigate past the first problem by asking the custodian what their minimum is if you adopt a monthly contribution program. The second issue, annual fees, can eat up most of the annual return of a small IRA. Here you also have some options. The monthly contribution sometimes eliminates the annual fee. A second option is to ask the financial organization where your family does the most business if they will waive the annual fee. If $500 is a problem, you can a few other things. First you can wait until later this year if you think you may have more resources to allow a larger contribution. You can also consider just putting the funds into a basic savings account and build it up a few thousand and then open the IRA. If the $500 still looks like a problem, you can see if your employer has any plan that your can contribute to like a 401k or 403b. To find out more about your options, your first step is to contact a custodian. They come in many flavors: banks, brokerages and mutual funds. These vary in terms of the investment options they offer, minimum amounts to start and annual fees. You can use any decent financial magazine to get some names of potential custodians. Your local newspaper will also list community options in March or April when folks are filing tax returns. I would call three possible choices and ask them to send you information they would recommend for someone just beginning... some of these are quite good. Post again if you have more questions or want to provide more facts about your plans, age, etc.

This thread is getting a little thread-worn - and desolving into speculation and offtopic. As one of the board moderators, I am going to close this thread. Anyone may open a new thread... but hopefully we will have some facts or circumstances to think about or focus the comments. Thanks all for posting on this topic.

Clarification: the child needs "earned income". Dividends, interest, capital gains or gifts do not count. I concur with Barry. At age 4, there is little that a child can do to earn money. Model or child actor is about it. You often see the children of entreprenuers in their TV ads (Buy a car from my dad!) and is reasonable for the child to be paid for participating. This means the child could have W2s and would be filing a tax return (the paperwork that Pax is probably refering to). This is one of the benefits a small business has over a payroll worker. Teens are much more likely to have earned income. This can include a newspaper route, babysitting, dog watching, yard work, and my favorite selling lemonade on a hot day. You can make a more convincing case of hiring them for a small business. From age 15 on, my kids have been paid for filing, copying, shredding and cleaning to give them a small income to qualify for Roths. The Roth contribution does not have to come from the kid's account, but they must qualify based upon their own earned income. You may want to consider other kinds of savings or investments for a 4 year old child. You could be the custodian for a tax managed or index mutual fund. You could buy stocks and hold them for a long term (to avoid tax events. Some colleges/states have prepaid tuition plans. There is a range of "529 Plans" and also the Coverdale Plans (also called Education IRAs). Some of these are flexible and good, some are just awful. Here are some website references on minor investing. http://www.nasd.com/Investor/Choices/Colle.../529_saving.asp http://www.kiplinger.com/tools/managing/co...1/states01.html http://www.ici.org/ici_frameset.html You will also find Fidelity, Vanguard, Twentieth Century, Scwab and a host of other mutual fund families and brokerage have their own plans. Some key things to consider: how flexible are these plans, will the plan maximums meet the anticipated goals, when (if) the child gets control of the funds, what are allowed expenditures, what investment options are offered, fees, can they be shared across family members or are they child specific, and what happens if the child does not go to college.

DH - I have focues on correcting inaccurate comments your have made about investment fundamentals (now edited out from some of your prior posts). If you will look at the original post... this thread was about a 19 something college student starting a Roth. The first person asked basic questions about where to invest and how to get started. A second student joined the thread and asked "Where do I enroll?" I stand by my original responses as being directed to the questions raised. A simple approach for someone just getting started. I have never said that individuals "cannot intelligently manage their investments", the words you want to put into my replies. What I have insisted is that their is no simple solution to success. There is no single way that always beats the average and works all the time. Go back and read your prior posts. You have alluded to a number of simplistic solutions - like just select value funds, or just pick the top 20% performing funds. No one can tell in advance what will be the most successful region, industry, sector or fund manager in the coming year. To suggest otherwise is to mislead a starting investor. Lower Manhatten is littered with investment methods that stopped working - like the Nifty Fifty, Dogs of the Dow, Cashflow momentum, etc. A current theory is that the best stock pickers now all work for hedge funds because they are more highly compensated there... but isn't that off topic for beginner college students. I write not to discourage individuals but to give them a realistic view of some investment approaches, the work required, and what they may be able to achieve. For a beginning investor who is still in college, an index fund is an outstanding way to start because it is diversified, simple and easy to initiate. While the private investor has some advantages that can be used to chisel a successful portfolio - this takes a lot of work, an ability to analize accounting data and a sense for competitive advances. I know this from personal experience, I spend a large part of each year investigating stocks. I read annual reports, 10Qs, press releases, brokerage analyst document, company websites and four financial newspaper/magazines... every week. I have been doing this for 20+ years, and I typically make about 200+ buy/sell decisions every year involving over 50 stocks. I make my living though these decisions and am not an average investor. I do not assume that many other people are likely to take this path, especially not a 19 something college student. They don't need rambling theories about "irrationalities" on Wall Street, but practical advice of how to get started. Accurate advice.

DH - you have now posted on this message board at total of 11 times. As Barry Picker and I have pointed out, you have made a number of inaccurate statements both on factual and procedural issues. I am not sure why you feel compelled to post in areas where you have no expertise. You are trying to pass on your personal viewpoint as fact, rather than your opinions. Some of these message threads are viewed by over 300 people, you have an obligation to post accurate information. From your prior posts, you clearly do not understand how index funds work. You do not know about the wide range of types that have been created, their relatively low portfolio turnover rate, the historical performance, the role they might play in personal investment portfolios, and why they often out perform actively managed funds. In the most recent message you declare that index funds do not mimic the underlying list on which they are based. This would be news to the fund industry. I have never heard anyone else make such an assertion. Time to stop posting about investment issues on which you have no knowledge. ---------------------------- Other readers can tap into a range of web sources on index funds. Here are a few articles: http://www.fool.com/mutualfunds/indexfunds...ndexfunds01.htm http://invest-faq.com/articles/mfund-index.html http://www.geocities.com/dalemaley/faq116.html http://flagship.vanguard.com/web/planret/A...ntIndexing.html --------------------------------------- Other comments: You said "There's also the fact that the people "managing" the fund {index] are getting rich for basically doing nothing." This is a childs view of business. Folks who run a business are motivate by profit, which gives them an incentive to be innovative and efficient. We live in a free market system. If the operators of a mutual fund are "getting rich", others will enter the marketplace and offer to slightly undercut the original providers. How ironic that you complain about the incomes of index fund managers, rather than actively managed funds. It is the index funds that have entered the market to undercut the high expenses of managed funds. Index funds have very little adminstative overhead - so the concept that a bunch of managers are "doing nothing" is ridiculous. It is apparent you do not know much about the historic development of index funds at Vanguard and the ruthless cost cutting instituted by John Bogle to achieve ultra low annual expenses that have become an industry standard.

You said "I do not agree that "event-driven investing" is a credible alternative approach to holding onto stocks for long periods of time, since I don't see how that's different than market-timing. " I don't think you understand event drive investing. This is a common mode in actively managed funds - value, growth, or any other type. It is different from market timing. I previously referenced: news, earnings, product rollout, regulatory changes, mgmt turnover, M&A ... you could add competitors activities, trade treaties, etc. You will note that I did not mention market level or stock price. Event driven means exactly that, making decisions on events rather than just the stock price or market levels. It is making decisions based upon the fundamentals involving a specific investment. Market timing is something different, it refers to making decisions based upon valuation changes of a specific investment or the overall market. Event driven could trigger a change in portfolio when neither the stock nor the market moved. By their nature, events are not predictable (perhaps with the exception of earnings announcements which follow a schedule) and therefore the timing of investment decisions are not predictable. I sure hope you don't think that actively managed funds hold all investments for more than one year. Usually some portion of a portfolio, perhaps even a significant portion, will be event driven or opportunistic investing. You have said: "You can convert back and forth from Roth IRA's to traditional IRA's...In any situation where your RothIRA value declines over a year, it is valuable to convert it to a traditional and then reconvert asap to a Roth. " You scheme is vaguely described and is indeed an administrative nightmare. You seem to be talking about current year contributions rather than Roth conversions. I do not believe under any ordinary circumstances a tax payer can make changes to prior years after the extended filing deadline is passed. Some brokerages are now charging for these kinds of current year transactions as a method to deter multiple processing on small asset accounts. You can not just flip back and forth Roth assets, which was your nonqualified statement. I am hoping that Barry or one of the accountants will respond further on the legality, applicability and practicality of you suggstion.

DH: your reply has additional errors. [1] You said "The larger the list of stocks that you want your index fund to mimic, the more difficult it will be to mimic that list. Perhaps not impossible. I do not see how, given the huge number of stocks you'd need to invest in to mimic the NYSE, one could accurately mimic it's performance. The above quote indicates that you do not understand index funds. What you think is difficult or impossible has existed for many years. Index funds are almost completely automated - it is how they can have low annual expenses - and automated systems do not have problems working with a large lists of stocks. The index fund programs are set to periodically evaluate the "list" (usually selected from a third party source), they then create automated trades to adjust the portfolio. There is virtually no difference between modeling just 30 or 500. They trade in the wholesale environment, and this step is often automated. By "Accuracy" I assume that you mean ability to mimic the performance of the underlying list, which is by definition nearly automatic. This is not theory, it has been done. There is no limit on the number of stocks that can be on a list. Many of the broadly defined total market indexes can include 5000 stocks. [2] You also said "However, why waste time with an index fund for the DJIA? Since it's only 30 stocks, any individual can handle that himself or herself, probably at even lower expenses than an index fund. So, the question becomes, why would anyone pay any expense ratio for a DJIA index fund, unless the cost of stock-transactions is higher than the yearly fund-expenses?" Your suggestion makes no practical sense. You raise two issues: wasting time and cost of do-it-yourself. I think most folks would have problems with the amount of effort required and their costs to build a DOW portfolio. An index fund is normally a weighted portfolio, which is very different from just owning a block of each company. An index fund is not only weighted but periodically adjusted. Let's look at the simplest example, a DOW 30 industrial. Here is the list of DOW industrials as of July 18 and the rounded stock prices: Alcoa Inc. 25 Altria Group 40 American Exp 46 AT&T Corp. 19 Boeing Co. 33 Caterpillar Inc. 66 Citigroup Inc. 46 Coca-Cola Co. 45 DuPont Co. 43 Eastman Kodak 26 Exxon Mobil 35 G E 28 Gen Motors 36 Hewlett-Packard 23 Home Depot 33 Honeywell 28 Intel 25 IBM 84 Internatl Paper 38 JP Morgan/Chase 35 Johnson & Johnson 53 McDonald's 21 Merk 62 Microsoft 27 3M 130 Procter & Gamble 90 SBC Commun 24 United Technol 74 Disney 21 Wal-Mart 57 To own just one share of each of these firms requires about $1,300. To own 100 shares each would require $128,000. This is a simplistic example because you would have a different numbers of shares for each firm and because prices change, the weighting should change over the year. Assuming that you could make single block trades for $15, your commissions just to purchase the portfolio would be about $450, and another $450 to sell. It would cost more to make periodic adjustments to the list. In my opinion, there would be a lot of work for an individual to create and maintain a portfolio. Setting that problem aside, lets compare the costs for a individual's do-it-yourself DOW portfolio with a DOW index fund. A no load index fund might have annual expenses of 2/10 of one percent, so on a base of $128,000 would cost $256 in the first year. For a million in assets, the index fund would take $2,000. 100% contrary to your assumption, my example shows that it would be both expensive and a waste of time to create a do-it-yourself DOW 30 portfolio for the average investor. It might not even be efficient use of time or cost effective if the individual has assets that exceed 1 million. A do-it-yourself approach to any broader index like the S&P500 or Wilshire 5000 would be rediculous. [3] You said: "Index funds are very much tied to the irrationalities of Wall-Street" Well I guess you want to make a theoretical argument. The word "irrationalities" appears to be a bias you bring to investing. ALL markets move up and down, sometimes in a boom and bust mode ... commodity, real estate, stock. I am not sure were the "irrationality" part fits in. I sure hope that you are not implying that some investments areas manage to avoid this. Every bright person I know invests in one form or another. I don't think of them as "irrational". The market is not some abstract beast that has a mind of its own, it is a reflection of investors... us. You said: "Your praise of index-funds is also difficult to understand. " I think if you read all of my posts at this message board, you will realize that I have tried to explained how index funds work and why they might be useful to beginners or as a component of peoples portfolios. No load index funds are useful for anyone with modest assets, little knowledge of investing, is just begining or does not want to devote a lot of hours to research, analysis, stock selection and portfolio tracking. I do not currently own any index funds as I am a stock picker. I devote approximately 1000 hours a year to evaluation of investments and would not assume that others have an inclination to do what I do. You said "That's still no reason to take them {index funds} over the 20% of funds that they don't beat ." You comment is absurd and has no practical application. Exactly how do you expect to determine in advance the 20% of funds that at year end are going to beat index funds? Everyone would love to only pick the winners, regardless of what type of investing. The problem is that you must know in advance who will be the winners and there is no reliable method of doing this. If there was, the "losers" would die off completely. Backing just the winners is not a strategy but an impossible dream. You said "History has shown that value-investing produces impressive results that beat the index..... and .....There are funds today -- managed by the same manager for the past 10 or more years -- that have beaten the index' applicable to them over the past 10 years." You the first remark about a general style of investing and your statement is false. It may be true if you compare selective timeframes or selective funds. But that is historical cherry picking. There have been periods of time when a style of investing or a specific fund or fund manager has had outstanding results, and other periods when they have performed poorly. Yes, Peter Lynch was a great stock picker at Fidelity Magellan for about a decade if my memory serves. But, he no longer runs any fund. Tom Marsico had a great run at Janus, but left to start his own fund and stumbled. There is no mechanism to determine which fund managers over the next ten years will have a great record. You can't even guarentee that the fund manager will even be at the same fund for ten years. The idea of moving money to fund managers with a great track record has some elements of "chasing performance". If you did this in the 1990s, you would have lost a ton of money by backing funds that were momentum players of the dot.com bubble. You said "DJIA index (which usually outperforms the S&P 500 anyways). Where do you come up with these facts? First, the DOW30, DJIA and S&P500 have a large amount of overlap. They don't track each other perfectly, but over a long period of time they are very close. I have added a link that may show the SP500, DJIA and Nasdaq from 1950. There are major differences between investment classes (stocks, bonds, cds, etc.) but much less differences within an asset class. href='http://finance.yahoo.com/q?d=c&c=&k=c1&t=my&s=%5Egspc&a=v&p=s&l=on&z=m&q=l&y=on&w=on'>http://finance.yahoo.com/q?d=c&c=&k=c1&t=m...m&q=l&y=on&w=on</a> The fundamental flaw in your posts is that you assume that it is possible to avoid bad investments and only pick winners. Tell that to Warren Buffet and see if he hires you. If you went to a brokerage and made that claim your interview would be over at 5 minutes. The concept is deeply flawed. Please stop misleading people on this site that there is some magical style of investing that always beats everyone else. It does not exist. Investing is organic in nature, we attempt to understand investment options in a dynamic environment. What works in one year or one cycle is often the worse investment in the following cycle. Simple solutions should be ignored.

DH, you are posting inaccurate investment information at this website and need to stop posting on topics were your information is shakey. In your prior response, you have said that index funds have a high turnover rate. {subsequently edited out of prior post} Compared to what? Index funds are based upon a mathematical process based upon a list of stocks. Stocks are occasionally added or dropped from an index due to merger/acquisition or a significant change in market capitalization (shares * price = market cap). Some lists on which indexes are based change only one time each year. Each index fund makes small adjustments during the year to adjust the portfolio to reflect the percent mix of various stocks. But... the overall turnover is extremely low compared with actively managed funds. To say "extra-ordinary high turnover rates" is just flat out wrong. You make a statement the the NAZDAQ is all growth stocks. This is not correct. While MSFT, INTL, CSCO and DELL are part of the bigger firms, the overall NAZ includes a substantial number of other companies. For example, a big component is banks, thrifts and other financials. REITs and other stocks you would not call growth stocks can be found on the NAZ. You link turnover rate to taxable gains. No link has to exist. Some index funds have a tax management component to them so that they try to reduce or eliminate even the small capital gains at year end. The Schwab 1000 was design for this purpose and last time I looked at it they had operated for many years with no capital gains to report. They sold a few stocks that were down to offset the gains from small changes. In a taxable account, you would have little or no tax implications of the little turnover that might have occured. Index funds used to mean S&P500 funds. In the past decade all major mutual funds have created index funds to keep up with Vanguard's 500. The group includes S&P500, total market, Russell 1000, Russell 2000, etc. Some of these indexes are narrowly cast and drift away from the general principles of mathematical determination (as opposed to actively managed) and low annual expense. My comments are directed to the big general market versions of index funds, not the sector specific indexes. You also said "The reason I dislike index funds is that they tie you to the irrationalities of Wall-Street " Index funds are on the opposite end of the spectrum from actively managed funds. They drive Wall Street stock pickers crazy because they often provide better returns. They are unemotional. The PC that calculates the list and therefore portfolio percentages does not read the Wall Street Journal. It does not play golf with corporate execs on a site visit. It does not attend road shows. I have a hard time figuring out how a list based, mathematically determined fund is tied to "irrationalities" You also said "One thing clear to me is that index funds have no potential to be anything but average" You seem to think this is a negative, it is not. It is actually the goal of index funds to mimic the performance of the market on which they are based, except that due to lower annual expenses, the investor is likely to keep a great portion of the annual result. Actively managed funds often have annual expenses between 1.2 and 2.5%. Index funds come in around 0.2 to 0.4 percent. That gives them anywhere from 1 to 2% edge immediately over actively managed funds. This is not theory, this basic fund history. The proponents of index funds often say something like "index funds beat the annual performance of 80% of all actively managed funds". I have not vetted that statement, but I have seen it in the WSJ, Worth, Money and Kiplinger and every reporter/editor plus all the active managers have had lots of time to take shots at the statement. You also make the statement "it is almost certain that over the long-run (10, 15, 20, 25 years), index funds will have impressive average yearly percentages (7-8%)" What is so impressive about 7-8% returns? This level of return is more commonly associated with long term bonds or high dividend utility stocks. The returns of broadly based index funds like the S&P500 and total market indexes are likely over the long haul to be about 3% higher. The reasons are many but include the premium based upon growth potential and market risk. No one can tell you with complete certainty what the return for various asset classes will be over any time period in the future. However, for a century the relationships between asset classes have stayed similiar. Guarenteed products provide the lowest return, and tax free bonds are very similiar. Corporate bonds are higher. Equities (aka stocks) are a notch higher. These relationships are based upon the free movement of money back and forth across and within markets. Short term snapshots can vary, but the long term relationships have been consistent. You assert: "most index funds are S&P500, as a DJIA-index fund would be impossible" {also subsequently deleted from prior post} Because of the success of S&P500 funds, the first half of this quote is likely to be correct. The second half is completely wrong - it is not impossible. There are hundreds of index funds and some mimic the DOW 30, the DOW transports and the complete NYSE. Firms are inventing new index funds every week. If you can define a list, someone can create a fund. I have no idea why you would think any index fund would be impossible. It just doesn't make sense. You make the incredible statement "However, value, growth, and value/growth blend funds could have even more {annual returns}, while avoiding some of the stings of the down markets." This is completely wrong. First, value and growth funds are almost always actively managed, with average to above average annual expenses (I observe that the smaller the niche, the higher the annual expenses). Your comment flies in the face of what we have just witnessed. In the most recent down market, the growth funds were hit the hardest. Some of the Janus funds lost 70% of their value. You statement defies a basic principle of investing - the broader the base (greater diversification) the less a portfolio is effected by negative events. You also suggest that value funds might somehow avoid market downturns. Sometimes they do, but there have been prolonged periods when value funds underperformed the overall market and fell woefully short of anything with a slight growth component. Finally, you dwell on recent history of funds or the stock market. Following hingsight will get you into trouble. Past track records are not a valid predictor of future results. The SEC requires this kind of statement in promo material. All types of investing run in cycles. Tech and telecom were hot for most of the 1990s. Plastics and the Nifty 50 were equally hot decades earlier. Security stocks caught fire after 9/11. Neither you nor I can accurately predict in advance when any of these cycles will start or end. Making recommendations for the future based upon what worked well in the past few years is extremely foolish. You can readily get caught up in a "buy high" mode. In the industry it is called chasing performance. Investment success does not come from jumping on the bandwagon after it has been circulating town for a few years. DH - If you plan to post on this message board, please restrict your posts to areas where you have accurate information. You are free to post opinion, but please label it as such. Disclosure: I have never worked for any mutual fund or brokerage and have never had any business relationship with either except for my personal accounts.

DH, the prior post includes some comments I just don't understand. I will reply to three parts: [1] You said: Another thing is that placing short-term investments in retirement plans doesn't make sense. You should invest short-term when you need the money in the short-term. For retirement investments in 401/403/Roth, you won't get the money until retirement. And why would you place your longer-term investments outside of your retirement plan, giving you temptation to not stick with the long-term plan? I have multiple problems with this statement. First, it assumes that a taxpayer knows in advance if something is a short term or long term investment. In stock investing, you do not control the market. The sell timing can be triggered by news, earnings, product rollout, regulatory changes, mgmt turnover, M&A and other circumstances beyond the investors control. Fifty years ago, people often bought and held stocks for decades. That style of investments is still common but "event driven" investing has become a credible alternative approach. Second, if you buy something and it rises rapidly, you may have good reasons to sell. There are no consequences in an IRA or Roth for selling with less than a one year hold. There is a major tax penalty for selling short term in a taxable account. Recently, the delta between long and short term taxes has grown and it can make folks hesitate to sell anything short term taxable, even if the stock. Third, you say your should "invest short term when you need the money short term". This seems to confuse two subtle issues: the length a specific investment is held and the period of time when you are actively investing. For may households, the period of actively investing can be decades to your remaining lifetime. Companies rise and decline typically on much shorter timeframes, and attractive periods to invest in a company cycle on even shorter time horizons. (eg. IBM has been around for decades, but there have been cycles of decline and rise for the stock.) I do not believe that anyone should have a lot of confidence that their view of the future has a high probability, especially with regard to specific investments. Sorting investments by accounts based upon your predictions will often be wrong. More wrong over long time periods. [2] You also said: "Because the earnings in RothIRA's are tax-exempt, your most aggressive investments should be in your RothIRAs (if they lose money before the end of the year, you can always turn them into traditional IRAs so you don't get stuck paying taxes on $3000 contributed that's now only worth $2000). You can then -- at the soonest possible time by IRS regulations -- convert the Traditional IRA back to a RothIRA, still be able to contribute $3k that year." Perhaps the accountants can evaluate to what extent your proposal is legal. I can not recommend this approach on a number of practical grounds. You can't convert prior year Roth assets back and forth. For most folks, prior year assets should be greater than the current contribution (if any), so this statement is limited in scope. In a normal investing environment, it is rare to see a stock drop 50% in a year. If your picks are doing this, you have more fundamental problems than your taxes. Not everyone can qualify for a Roth every year. It is an administrative mess. I don't think anyone should make investments using this concept as a backstop. [3] You said: "Regarding I-bonds, I think that they're a good option right about now, with rates of around 4.66% (alot better than anything offered by money-markets or CDs, even if you're penalized 3mo interest for withdrawing before 5 years). " Blanket recommendations about investing often miss the mark. What is the level of investor knowledge and experience? What is their tolerance for risk? How before the assets will be tapped for living expenses. How much time do they expect to spend? What proportion of the portfolio are you describing? Each household has unique circumstances and anything that looks like a general purpose recommendation should be avoided. {I would depart from this only with folks getting started where you are talking about modest initial contributions when the level of knowledge is low and the primary goal is getting someone started.} I-bonds are hardly zero risk. You run a long term risk of your assets not providing enough return to reach your goals.

DH, there are two very big reasons why I recommended an index fund. First, a college kid is unlikely to want to spend hours reading over material on different funds. If the hurtle for getting started is perceived too be high, they might just bag it. Second, index funds have a wonderful advantage of very low annual expenses that eat only a very small part of the annual return which makes their performance hard to beat. I have no problem with a broadly based value fund, but you can not know today that they will perform equal to the marketplace over any few year snapshot. Value funds have had a wonderful run while the dot.com's burned... but that is history which may or may not continue. Frankly, one could make a very solid argument for someone in their 20s to put money into funds slanted towards growth. As long as its NO LOAD and broadly diversified (holding hundreds of different stocks) the initial choice is not a life and death issue. Getting off the snide is an issue, so keeping a beginners plan simple is important. After a few years of performance, curiosity will take its course and the beginner will want to know how it all works. I have taken about five people in the 18-26 year age group through the process. They may not mind spending a little time learning about their choices... but most of them do not have the experience or judgement to evaluate what they are reading. When given 3 to 5 no load funds to consider (all respectable, two index, a growth, worldwide and value) they invariably turn and say to me ..... "what would you pick?". One of these kids now has 50k in her Roth and is just amazed by the process. They typically don't learn about this in school and sadly many adults either don't know or forget to talk about investing with their kids.

DH, you seem to be worrying about the wrong things. The single most important defense against bad behavior by government is our faith in "the people" and reasonableness. The Jimmy Stewarts outnumber the bad guys 1000x to one. If Congress starts to renege on their promises, the system breaks down, distrust grows and all sorts of negative things like tax compliance start to collapse. If the actions get too personal, politicians run the risk of someone using a weapon in lunatic attack. (think George Wallace among many) I normally tell folks that they have little to fear from terrorism, the probability of being effected is far less than dieing in a car accident or in a medical treatment mistake. For you, I recommend that you substitute worry about these things then worry about Congress retroactively changing IRAs. If that does not work, try global warming, over population, ozone holes, ocean pollution or any other real threat. Folks worried about the impact of creditors and divorce on their IRAs might redirect the efforts into doing something to pay their creditors and make their marrage work. I would not spend a lot of time being concerned about retroactive Congressional rules. Things change incrementally. The SSN retirement age for example.

Good additions Mbozek... I thought of one additional thing. "State" is an issue when contributions are made, where you live at the time of a conversion and where you live when you withdraw funds. Ideally you would want to do a conversion in a state with favorable tax treatment and withdraw in a state with favorable tax treatment. They may not be the same state..... just to make things a little more complex. There are about 8 states that do not have income taxes.

I will respond to points 5 and 6: "Can Congress retroactively revoke the tax-free status of earnings in a Roth IRA? If they can retroactively extend copyright laws, why not retroactively extend taxes? Are the earnings in Roth IRAs exempt from taxes other than the capital gains tax, like state and local taxes? If they are, could states retroactively revoke those exemptions?" Can Congress - sure they can... but in my opinion they would have a combination of problems with any direct changes as taxes were paid and unless they turn accounting rules upside down they would have a problem with "basis". Congress would have a major rebellion on their hands as some heads would roll over reneging on the rules. As more and more people have Roths, there is greater protection in large numbers. Think AARP and senior issues. States - treatment varies from state to state, but many states use the information on specific lines of the 1040 as the basis for their taxable income. If it is not reported on the federal form, in these states it doesn't show up on their tax forms. Sure they can change the rules... but States would have the same problems outlined above. There are no 100% guarentees. I think the basic elements of the Roth are currently going to hold. If changes are made, the existing Roth assets would probably be grandfathered under the old rules. It is more likely that any erosion of Roth value would be done indirectly through failure to modify the AMT. The most recent trend is towards expanding and relaxing rather than narrowing or eliminating these kinds of retirement options.

DH, the investment advice business is not all that different from the biz/gov consulting business where I used to work. You find "I'm smart and you are not", lots of jargon to maintain a false intellectual superiority, a dash of sensasionalism (avoid boring) and find a credible boogyman (inflation, deflation, job riffs, college costs, taxes, etc.). Suze's package has absolutely changed in the past five years, moving from a major emphasis on equities to pitching to middle age uncertainty about having enough, when can you retire and what do you actual know about investing. Her folksie advice about family finances may have some good points, but you sure would not want to listen to her about investing. I have watched her PBS shows and its awfully simplistic. But, hey. Look at what Merrill, Fidelity and Schwab are now pitching. Schwab used to emphasize they never give advice, now they say they give unbiased advice (compared to the big bad brokerages where analysts are less than truthful). Merrill, which used to be the biggest of the bull brokerages with bulls running down Broadway, now lays the bull down in the customer's living room like a family pet. Great marketing angles in this market. These pitches will all change again after we have had an upbeat 12 months. For the novice investor... building wealth has little to do with "luck" or "timing" or worse "a system". You build wealth in the USA when you back our economic structure - capitalism, personal ownership, growth, freedom, and invention. You don't need to pick long shots. You don't need inside information. Good investors think very long term and have a disciplined approach to balancing risk and reward. You mention 50% in stocks. I find no one solution fits all. Some folks should be virtually 100% in stocks. Some less than 1/3. The choice has a lot to do with their investment goals, age and risk tolerance. No one should "recommend" a specific stock or narrowly defined mutual fund at this site. I suggest you edit out the specific stock references in your posts. In previous posts I have suggested broadly index funds like Vanguard's S&P 500 or Schwabs 1000 - this is as far as I will go, and each suggestion was related to someone just getting started.

Eligibility is a function of how you file your tax return, adjusted gross income and amount of earned income. If you file either a single or a married return you should be just fine, it is married filling separately that is a disaster given the IRS rules. As a college student, it is unlikely that your total income exceeds the upper threshold of eligibility, so no problem there. You can only deposit the higher of your "earned income" or $3,000 this year. (This max number is scheduled to change in future years.) Paychecks definitely qualify for earned income, but interest, dividends, gifts, etc. do not. It seems that you would meet these qualifications. Your parents can fund your IRA, it does not have to be funded by your money.... maybe you should talk to your parents about a matching amount. If you are eligible, the next step is to find a "custodian"... a financial institution that is set up to handle IRA accounts. You have lots of choices including: banks, mutual funds and brokerages. Since you are not initially going to have a lot to invest, I suggest that you stick with mutual funds - especially NO LOAD, INDEX funds. These give you diversification and have no transaction costs. You can get these directly from a mutual fund "family" like Vanguard, T Rowe, Strong, etc. or via a brokerage that has links to mutual funds like Schwab, Etrade, Scottrade, or Brown. You can find lots of choices on the web. They will vary in the annual fees that they charge, the minimum to start, and the investment options they support. Talk to at least three different firms and ASK THEM FOR THEIR BEGINNER PACKAGE. You will learn a lot from reading over this basic material. You are young and are planning to build your investments over many years. Right now your primary focus should be on school. Keep your arrangements simple. One general no load index fund. I recommend "equities" which is a fancy name for stocks. Stocks have traditionally given a very good return over long hold periods. Don't watch your account each day as stock prices flucuate. If you have a mutual fund, just checking it for accurate deposits and twice a year for performance is enough. If you wish, you can set up with most firms to deposit a fixed amount each month from your checking account. Often firms let you start at a lower amount or may wiave there annual fees when you are a predictable customer. Ask for a fee waiver with each firm and see what they say. You can take contributions out of an Roth IRA at any time, for any reason.... not that you should be thinking about robbing your personal tax shelter! I would definitely go the ROTH route as the retirement withdrawals will be tax free. You may also get a fee waiver if you put your money in a firm that handles your parents accounts. I would highly recommend that you take an hour at a local library to read the retirement planning articles in Consumer Reports each March issue - great for the beginner. You will also learn a lot about investing, IRAs, careers, loans, car buying and home buying by subscribing to Kiplinger Financial magazine which I think is under $20. You will easily get advice worth 10x that each year at your age. Post again if you have further questions. You are wise to consider investing early.

An interesting MSN Money article on this topic... covers just a few points: http://moneycentral.msn.com/content/Retire...ills/P50423.asp

Normally at your age you need some contingency money. However, if you think that your family resources cover downside events, then you might consider putting money into a retirement plan. Assuming that you have the above issue under control, I will keep my recommendation short.... 1. Roth IRA is likely to be your best option as long as you have earned income - like paychecks from an employer. 2. With a small amount of money, you want to use a NO LOAD mutual fund. NO LOAD means they do not charge either an up front commission or a back end commission. Further, I would recommend a low expense index fund. There are many of these but I would recommend that you choose VANGUARD and ask for the no load S&P500 index fund. You can use this vehicle for many years. You get very low expenses, a tolerably small annual IRA fee, and broad diversification. I recommend equities (aka stocks) because of your comments about risk and the fact your will be keeping this investment for many decades. If you don't understand why I suggest a mutual fund stock portfolio, post again and I will walk you through the various "typical" returns. 3. A decade from now, you may want a more elaborate plan, when your assets have grown. Right now, keep things simple and focus on the degree and your career options. Index funds are low mind maintenance investments. 4. Is now a good time to do this? No one can answer this question. You are right that starting early is good. You may want to buy into the Roth 1/3, 1/3, 1/3 over the year. I am not sure what Vanguard will want for an initial deposit. If that first check is too much, ask them about a monthly or periodic deposit program as these usually start lower.

Mary Kay, my thinking on brokerages vs traditional IRA goes like this: Comparison: regular deductable IRA vs putting fund into a brokerage account and buy equities for long term. Possible plusses for brokerage approach: (1) no restrictive max contributiions each year, (2) no income or filing status qualifications to meet, (3) no forced annual distribution schedule at any age, (4) stepped up basis upon death, (5) marginable assets, (6) can be pledged as security for a loan, and (7) it is possible to minimize any income taxes each year by either buy and hold, index fund or tax managed fund. Extra plusses if capital gain tax rate stays low vs treatment of all growth as ordinary income for an IRA. Extra plusses if dividends are treated as capital gains. Negatives: (1) still have some taxes before withdrawal, (2) unclear protection in bankruptcy, divorce, or against lawsuits, (3) possible higher negatives than retirement money in college scholarship math, (4) tax law changes, (5) no immediate tax deduction, (6) state tax laws mostly remain the same. I have probably left out a number of other factors and can update the tick points if anyone comments. I think the gap between IRA and brokerage approach to retirement savings narrowed with the new tax law changes. Time will tell if any or all of the changes are made permanent. My point is that the standard brokerage approach to retirement investing has some powerful plusses and for people who started late or are likely to invest in things that primarily have tax consequences when start to cash out, the brokerage route is not bad and looking better.

First thoughts: I was surprised that they managed to get both a capital gains tax reduction and new treatment for dividends in the recent bill... especially during a time of growing deficits. Who knows how long these changes might stay in effect. Regardless of the dates put into the bill, there is a lot more uncertainty about these rules going into the future than Roths which would probably be grandfathered. I think traditional IRA loses some of its appeal under the new rules. Dividends are treated like ordinary income. Capital gains are treated as ordinary income. A simple brokerage account for some investors, especially buy and hold folks, looks pretty good. Also consider that taxable holdings get a stepped up basis upon death. Roth IRA probably holds its own for now. You don't need to worry about transaction timing. Less record keeping. Plenty of options for handling dispersement timing. Tax shelter can be passed to next generation - but no stepped up basis. Roth looks better for more frequent trader. Where does AMT fit into the new rules? I have seen very little said about this. AMT can negate other tax cuts if it is not changed as well.

I think it might be useful for some of the authors to post about how the new tax laws, especially as relate to capital gains and dividends, might change investment/retirement basics. {I have only started to think about this and will post the first reply! with some of my ideas}

If you will qualify over many years (teachers salaries?), then you might convert part of the account each year to avoid tax bracket creep. A hybrid of IRA/Roth is often a very practical option as you can let the Roth roll into the future, controlling dispursements on your timing, or even using it as part of your estate. I am assuming that your are talking about a 403b or a "thrift plan".

I think of Ibonds as something of a gimic investment and I have no interest in them personally. It would not make financial sense to use a Roth or IRA to buy a lower yielding bond of any kind that has some kind of imbedded tax break. The Roths and IRAs are already a tax shelter. Godmom, I have no information on any regulatory impact Ibonds would have on IRAs - they just are just a terrible match for any tax sheltered retirement account, you are giving up too much in yield. Here is a web site ref on ibonds that may be helpful, but no promises from me, I have not vetted the site: http://center4debtmanagement.com/Bookshelf/Articles/IBonds.shtml#college If you were to take money out of a Roth, this Q&A might apply: I was thinking about using I Bonds as part of my children's college fund. Is there a tax break the same for I Bonds as for Series EE Bonds? Yes. If you qualify, you can exclude all or part of the interest on I Bonds from income as long as the proceeds are used to pay for tuition and fees at eligible post-secondary educational institutions. Details are available in IRS Publication 550, "Investment Income and Expenses." Contact your nearest Internal Revenue Service District Office to get this publication. You may also find this Street.com article useful, it is frank and very clear about the + and - of Ibonds. http://www.thestreet.com/markets/ericgillin/10004114.html Brokerages, mutual funds and banks are all harping about investment risk right now. Does anyone get tired of this three year too late emphasis? Why is this happening? Because so many investors do not really understand the flucuations in the stock market and feel they were "burned". Now the financial gurus (like Suze) and the industry is feeding on folk's anxiety over their IRAs and their fear of how little they really know about investing. Look at the ads in all the financial magazines and the TV ads by Merrill, Schwab, Fidelity. The industry can't sell success right now so they are hucksters for fear. A prediction: Many folks will sit on the sidelines with "guarentees" and "insured" CDs or perhaps utility stocks. They are overreacting to 2+ negative years. Perhaps two years from now they will panic again when they realize they missed out on equity appreciation. It is amazing how many folks get the buy-low, sell-high confused. The short term penache of Ibonds is just another manifestation of this cycle. An Uncle Lou style investor does not fret over these cycles. They come and go. You can't accurately predict them. I can't, Lou can't, you can't. The stock market cycles, the economy cycles, political styles come and go. When it comes to investing, ignoring some of these and sticking to fundamentals has some merit. Think long term and stay with a solid plan.

Mbozek, thanks for expanding the info on Drips. I hardly mentioned them and gave no explaination. I caution people to read the fine print on any ideas that supposedly reduce commissions. There is a whole slew of other "low cost" options, but usually you lose control over the timing of the purchase and the price you want to pay. The novices should also understand that NAZDAQ bid/asks are not just two numbers but reflect the numbers of a specific market maker. Some firms have internal bid/asks that are not the best price and will steer the "low cost" business in that direction so while you may be paying a micro-commission, you may be losing a lot on what brokerages call "execution". Yes, there is a wide range of commission structures, but ultra low commissions means a firm must find some other way to make up for the cost of maintaining the account. That can be inactivity fees, annual fees, charges for checks, long phone waits for customer service, etc. The brokerages saw severe revenue shrinkage the last three years when trading volume went down. The recent trend for brokerages is to boost any fee they can pass on to customers to supplement the lower revenues. The big players that trade in multiple 1000x blocks get a natural economy of scale and therefore commissions are only a small fraction of the total investment. Ont the other end of the spectrum, if you are trading less than 100 shares at a time you get slaughtered over small lot execution. The Schwab commission schedule favors: internet orders, trades between 500 and 1000 shares, and they have one of the industries best "execution" system as you can sometimes buy at the bid and sell at the asked because they apparently cross internally some orders. If you are trading beyond 1000 shares, other internet brokerages may be better as many have flat schedules for all trades 1000 to 5000 or higher. Commissions is not the only factor to consider. Brokerages vary in terms of the quality of general service, access to information, access to real time quotes, options for mutual fund purchases, access to account info by internet (hard to believe, but true), margin interest rates (not applicable to IRAs), etc. When you choose a brokerage, you are choosing a "bundle" of features or capabilities. For example, you can talk to Schwab 24/7/365 while some brokerages are only around during NYSE trading hours.

You did not disclose the assets in your account, your trading frequency or the number of share you typically buy. What are you spending for commissions in a year? How many times in a year do you trade? What percent of your investment are your commissions? You also did not say your age, investment knowledge and how long until you retire. I can give you a much better answer if your tell me a little more about yourself. Brokerages charge commissions to cover there transaction costs, the brokerages that say they don't are playing games with the prices they show you for trades (which will cost you more) or have special programs for the whale accounts... multi million dollar accounts. I am going to make some assumptions that will leave a useful message for others that might fall into the following common scenario: tax payer has less than $30,000 in IRA assets, trades perhaps 4-8 times a year, rarely more than 300 shares of any one stock, holds 6 stocks, commissions are costing between $150 and $350 per year. If this is you, here is my answer. You probably should not be buying and selling individual stocks when your assets are below $30,000. Reasons: (1) you can't get a reasonable amount of diversification with 6 stocks, (2) commissions are a large percent of your assets, and (3) to make good investments (as opposed to guesses or following the herd) eats up a lot of time and it is not likely to be cost effective. Alternative: own one or perhaps two general mutual funds, one of which is a stock index fund with ultra low expenses and the other is a broad based growth fund. These would be NO LOAD funds. Frankly, some people with huge IRAs still use this simple system with good success. The index fund buys you general market performance, the growth fund gives you a small bias towards young/growing/future companies. You are not going to hear this kind of solution from many people in the investment community because they have a financial self interest in generating commissions. Same is true with asking a realtor about FSBO option. Trading is not for everybody - some panic an sell low, only to panic again and buy high. It takes time, it requires discipline and your MUST honestly track your results and keep records (not for the IRS) to learn from the mistakes you will make. Other options to reduce trading cost: (1) use internet for Schwab trades to get the lowest possible rate, (2) switch to a low cost internet brokerage like Etrade, Brown, etc. with a commission schedule that most matches your trading pattern, (3) trade less often - buy bigger blocks, hold longer, etc. (4) consider DRIPS for div reinvestment, (5) have a core of no load mutual funds that you supplement with a few stock picks, (6) speak to Schwab and tell them what bugs you as you may qualify for some other program that would lower your commissions. All of these strategies have other issues like annual fees, investment risk, required effort, etc. You should know that trading in larger blocks like 2,000 to 5,000 at many brokerages is not any different then trading 400 shares. (not true with Schwab's commission structure which is linear over 1,000 shares for most customers) Stock commissions are not the only issue in trading. You also have the bid/ask spread (especially on the NAZDAQ, and even more so with options) . Please post again with some more details and I will take a second shot at answering your circumstances. Disclosures: I have no business affiliations with any brokerages or mutual funds, just basic accounts like most people. I own a variety of mutual funds, trade stocks over 200 times a year, and have 20+ years of investing experience. What I do for myself is not appropriate for 98% of the public. I advise at no charge a number of people about investing strategies and teach investing basics (part of Junior Achievement) at the high school level for the last 15 years.