John G

Answers to more Qs: 1. "Separate and unequal" - the I in IRA stands for individual.... each account is separate in the individuals name only. Why unequal? because you typically will not get the same performance unless every contribution and investment is identical, and that is too much a hassle to attempt. 2. Vanguard has a significant advantage because most of their funds have a very very low annual expense percent. Their flagship S&P500 fund is huge, reflects 500 major companies (diverse), has little turnover, is NO LOAD (no front end or back end commisions), low turnover (small capital gains - only relevant in taxable investments rather than IRAs), and ultra low annual expenses. A great initial fund for a begining investor. Since I spent a large part of my life in energy consulting and corporate planning, I do not like your second choice. First, the track record of exotic energy stocks is littered with failures and even the companies that have stayed afloat have performed poorly. Second, you do not want all your IRA assets is ANY niche sector, market cap size, region, or country. Keep your gambling in small stakes stuff like we have in Colorado (limit $5 not $2000, hope you don't object to the "plug"), investing for the future should not be based upon long shots. You don't need to seek gigantic returns to get wonderful results in an IRA. A few months ago a fellow posted on this message board a question about how to take a tax loss... if I recall in less than a year his IRA had lost 75% in value. He narrowly backed some niche technology firms that lost favor. That is a painful lesson in the difference in gambling vs investing. Same thing with single company bets in a brokerage. How many folks do you think loaded up on Lucent (LU) because it was a sure thing in the telecomm, wireless, and fiber optic side of the internet... and saw the stock price drop from $84 to $20 in six months. This was no pennystock but the Bell Labs spin off from AT&T. And, there was once a time that folks said buy Xerox for life... check that chart out. My point: don't invest narrowly, don't assume that whatever "worked" last year will always work, and be diversified. If you are not planning to spend time researching before you buy a stock, stick to mutual fund investing for now.

Answers: 1. Very little is needed to start a Roth at many mutual funds if you elect the monthly direct draw from your checking account. In some cases there may be no minimum with auto-draw down. This approach is a forced dollar cost average system. The minimum initial deposit for IRAs if not using the monthly option varies among custodians, but there are firms that have initial miniums of $250 or $500. Max IRA annual contributioin is currently $2,000 each for you and your wife if you make atleast that much in earned income. 2. You are not limited to just one fund. However, to keep things simple, reduce paperwork and statements and to avoid account fees it may make sense to have one fund. You can also have funds with different organizations, but given the range of offerings in most fund families I don't see a big need to shop elsewhere. Bear in mind that many funds in the same family have a substantial overlap of holdings. If you opt for two or three funds, I would think the primary value will be in stimulating your interest in the "horse race" of how they perform. There may be some value in that if it encourages you to learn more about investing. There are perhaps 10,000 or more mutual funds in the USA. Some folks get good results with just one good broadbased fund. 3. A self directed portfolio is definitely an option you can consider. Some of the negatives: higher transaction costs, difficulty in buying any reasonable amount of shares (odd lot problems), more time spent researching, less diversification, more tracking and confirming, and possible greater risk of excessive trading just because you can trade so easily. Positives: nothing like learning from your mistakes and you will make mistakes so perhaps you will learn more about investing (mistakes a mutual fund makes gets buried in the average), chance to buy overlooked stocks, option to control moral choices (like cigarette firms), and clearly other positives that just don't come to mind. If you go this route, you may want to use the lower cost internet brokerages so you transaction costs are low. Think Etrade, Ameritrade or similar www service. Fees and initial required investment vary. The self directed account might work much better after you have built up the size of your account from a few years of contributions and growth.

Some more ideas: Index funds often have little capital gains or dividends. Some index funds are also tax managed, such as the Schwab1000, which I think has never had any forced capital gain distributions. You accomplish much the same thing by investing without selling stocks, and if no/low dividends better still. Other ideas: take losses next year, schedule any lumps in this year (like year end bonuses) Changing deductions has no impact on MAGI. Note the conversion itself has no impact on the qualifying income. If you start a company and have initial expenses/losses, they come off 1040 page one often as Sched C items. Finally, you may see in future years some changes to the 100K limitation. Write your congressional reps and let them know. Also, there are a number of proposals that could change the estate taxes, so you need to keep an eye on those as well. Bush wants to eliminate estate taxes entirely, the Dems have proposals to increase the current thresholds. Lots of talk, maybe someone will give that rock a nudge. You can easily outsmart yourself about changing your afairs based upon tax issues. Be flexible, be alert for regulatory changes.

The deductability of traditional IRAs is something of a "tease", especially if your tax bracket is low. Here is why. You will be growing your IRA assets for more than four decades (you don't ussually take all of the retirement assets out the day after you retire), your IRA assets may stay invested 60 years! Over that time you retirement assets should grow to a considerable amount (contribute 2k a year for 50 years @ 10% gets you above $2 million!) that will be added to pensions, SSN and other income. If you go the Roth route, the IRA amounts come out tax free. Roths also have no specific require distribution schedule. Congratulations on evaluating investments at such a tender age. Some folks only start thing about it much later.

If you set up the custodial account and have an automatic monthly withdrawal from a checking account, you will often find very low minimums (like $50 or $100). Another way to address this issue is to wait till next January when you can make both the 2000 and 2001 contributions. So if you can only put in $300 this year due to income limitations but expect to be able to add more next year, you may meet the minimum opening amount of many mutual funds and brokerages. Keep an eye on the upcoming tax changes. Expect higher maximums in the future.

"Trader" can be an occupation. It is distinct from investing which implies long term holds. An old TMI/BNA extract I have says "A trader is engaged primarily in the speculative activity from which he derives most of his income, seeking a profit from the short-term swings in the market". If the bulk of your activity fits the above description of "trader" then you can via a corporation or Schedule C create a structure for taking trader expenses as fully deductable "above the line" components. I have known full time active traders who have elected the corporate structure and with a payroll which enabled them to establish a pension/profit sharing plan. The Schedule C route may enable you to have a Keogh. Both of these options allow for greater overall retirement contributions than IRAs. The folks I have known that have gone this route made 500+ trades a year, often had hold periods <1 week, and showed 1099 statements with multiple millions in transactions... very different from the average "investor". All of the above are complex arrangements and require a lengthy discussion with your accountant. Note, you will also be paying either SSN (2x) or self employment taxes and significant accounting fees.

Establishing a Roth IRA first requires that you select a "custodian" and the primary catagories for custodians include: banks, mutual funds or fund families and stock brokerages. Each custodian will typically offer a range of investment options, levels of service and annual fees. There is a lot of personal choice between the e-investing and walk-up tellers. As a rookie investor, I would suggest that you initially consider "no-load mutual funds", which means funds that do not charge front end commissions. There are 8,000+ to choose from. For the next few years, you just need one or two funds. Why mutual funds? (1) To achieve considerable diversity - most funds own hundreds of stocks. (2) Small initial IRA contributions are difficult to invest in individual stocks, (3) Less time spent on investing decisions. {it makes more sense for you to spend the time you have in learning about investment basics then picking stocks} You may want to read the March issue of Consumer Reports for a condensed list of mutual fund choices. Other sources include the web and magazines like Kiplinger Fincancial, Money, or Worth.

I think the above post helps demonstrate why everyone who thinks of about a conversion should do the math very carefully and get the advice of a tax professional. Your mom should have known that a 300K conversion in 1998 would add $75K (1/4th of the total) for the next four years to her income. She could have converted a smaller amount each year over a longer period of time to avoid tax bracket creep, but that water long ago passed over the dam. Perhaps you should help your mom make the tax payments. She can then pay you back each year she takes some of the tax free income from her Roth. If she dies before the Roth is exhausted, the assets pass (per the beneficiary designations) with potentially favorable tax treatment. You may also want to consider a home equity loan or home refinance

Your covered call strategy has a high transaction cost, both in terms of commissions and time commitment. Yes, the out of pocket cost may be significantly reduced if you are using an internet brokerage. But, if you examine your options carefully, you will see that the "spread" is huge as a percent of total value of the transaction, another negative. Recently, lots of folks that were selling covered calls on stocks such as Intel, Microsoft, and Lucent (to mention a few 40% haircuts) got caught holding the bag, eh, I mean stock. You need lots of 5% gains to overcome one major debacle. Being deep in the money (option strike price is below current stock price) does not help you if the stock is heading south.

Berg, the whole point of a mutual fund is that you buy a system or style of investing. Some of these choices can be broad based index (like the S&P500) or big cap (largest firms), small cap (young/small firms), growth, sector (like health care or telecommunications), etc. You never want to be looking day to day at how a fund is performing or even how a stock is performing. Daily inspection often gets you into thinking daily decisions and that is not good. Investing is a long term activity. Think in terms of years or even decades. Lots of folks forget that every time they are selling, someone else is buying... otherwise no trade would occur. Some of the smartest investors are stepping up to buy when others might be in a panic to sell. Don't get sucked into the day to day drama, the "action" portrayed by the media. And, remember that you should focus in your early years on learning about investing rather than chasing returns.

Covered calls (own the stock, sell the right to buy to someone else for cash) is allowed by many but not all IRA custodians. Legit if your custodian allows. Most mortals will find it impossible to make 5% a month by selling covered calls. I've sold them at times. First, you run the risk that the underlying stock heads south. Second, the premium for a one month option is rarely anywhere near 5% unless you are fooling with very volatile tech stocks. Finally, if you own an outstanding stock (like Dell or Cisco in the 1990s) you will never participate in the upside move. Let's not oversell the technique. Covered calls, when cleverly placed, may boost the annual return a few percentage points. Initial question was an illegal scheme to artificially boost IRA assets. Wrong. Illegal. No custodian would allow it. Think jail time for tax fraud.

Your long term planning is exemplary, but it is clear you need to become more knowledgable about investing. You should consider subscribing to Kiplinger Financial as a basic mag covering investments and lifestyle issues (insurance, mortgages, etc) for younger folks. Specifically, you need to become more familiar with the range of investments. Bank deposits and CDs, while more "secure" or reliable, will give you meager results over the long term. Since you are initially nervous about investing in the stock market, I have a suggestion for you. Call up Vanguard Mutual funds (or find them on the www) and ask for information on the S&P500 index funds. If you place your IRA assets in an S&P500 index fund, you essentially own a very small part of 500 large companies, that is a lot of "diversification". These types of funds have very low expenses and generally do not have a "Load" (front end or back end commission). You will get average market performance. Neat, simple, very little effort to monitor. You may want to look at some of my other comments on this site that have been aimed at initial investors. While the stock market flucuates a lot over short time periods, it is a great place to be for the long haul. Why? Because stock ownership connects you to growth and the future. In the Rx world, you can see how new ideas and new products help society. Well that is true in computer, chemical, telecomm and airline industries too. With CDs you are "renting" your money to someone and expecting a low return but low risk. With stocks you are backing economic activity and growth and taking risk. But for growth, we would all look like Pilgrims and somberly walk around in frocks and discussing witches.... instead of living in a world where three college kids make a hand held movie on witches and become millionaires.

You forward thinking is wise. You have hundreds or even thousands of choices. There are three main catagories or custodians: (1) banks, (2) mutual funds or fund families, and (3) stock brokerages. They vary in terms of what they offer, the convenience, www presence, flexibility and fees. Many brokerages such as ETrade have no annual fees, lots of fund choices and are pretty flexible. Folks in the 20s are ussually comfortable with the internet method of tracking their investments, so you may want to contact Ameritrade, Schwab, etc. Because you have a maximum of $2000 to deploy, I would recommend that you start with a broad based mutual fund, because you get lots of diversification compared to owning just a few shares of one or two companies. All types of custodians may offer mutual fund selections. There are over 8,000 mutual funds... and you only need to pick one. No load funds are very attractive because they have no initial commission or exit commissions. You may want to scan the March 2000 issue of Consumer Reports that suggests some very good funds, provides a good overview of retirement planning, and provides 800 phone numbers. Each brokerage and mutual fund is likely to have a web site, but I don't know of any web site that boils it down for beginners. You should probably get a subscription to either Kiplinger Financial, Money, or Worth magazines which will help you learn the basics. I would also suggest that you call a couple of brokerages or a couple of mutual funds and tell them you are just getting started. Lots of these firms have material directed towards beginners and some of it is very good. Good luck.

Zelly, you have a wide range of investment choices with IRAs. Yes, you can buy CDs, bonds, or mutual funds based upon bonds. The time periods and interest rates will vary just like any other investment choice. For example, you can put IRA assets in a money market account where your interest rate floats with general interest rates. You can put your money in a bank IRA and choose 2, 5 or 10 year maturities. The reason you do not see interest rates cited in most IRA ads is because interest yielding investments are very conservative. Over the long haul, equities (another name for stocks) tend to provide better returns. For example, the annual average return in stocks is between 10 and 15% depending upon your snapshot and definitions. For bonds and cds, the long term average is in the 6-8% range. The bonds/cds are much more predictable and may even be insured (like bank CDs) against loss of principle. But they don't build a nest egg very quickly. Stock returns are more variable. In a given year, a mixed portfolio may go down 45% or up 70%. Thats a lot of variability. But in the past century there has not been a single 20 year period when stocks were down. And, good years outnumber bad years about six to one. So, over the long haul you typically get a very good return. You should never get worried over what the stock market did in one day, one week or even one year. Think long term. At a 10% annual growth rate your assets double every 7 years. If you are five years or less from retirement, AND expect to immediately draw down on your IRA, then safety is a concern. But, if retirement is a couple of decades away then you need to have a significant part of your retirement assets in stocks. One last point. Stock price flucuation is not the only risk you must consider. If you make overly safe investments, your assets may not meet your retirement needs. Inflation is constantly eroding your purchasing power... even in recent years, albeit at a slower rate. Post again if you have additional questions.

Your question is hard to understand. This is my best attempt to answer your Q. Any capital gains you have from an existing mutual fund are a taxable event for you in the year in which they occur. You can't get those capital gains to go away by opening a Roth IRA. You can't switch some asset with imbedded capital gains into a Roth. Anything that happened in 1999 is "history" and you can't shift it around. If you meet the income qualifications, you may open a Roth IRA this year. The maximum you can deposit for this year is $2,000. Early next year you can make a deposit for the year 2001. (Wash DC is swirling with various proposals to increase the Roth maximum amount) Your spouse may also qualify for the same amount in a separate account. If you open the Roth with a mutual fund family or with many brokerages that have mutual fund connections, you can put the Roth assets to work in a fund. Within a Roth, you do not have to think about short or long term gains or dividends, since the fund grows and will be eventually dispersed tax free. If this does not answer your question, add a clarifying post.

"Anybody out there feel the company may have a huge legal problem? ...." I would say yes. The company clearly has assume fiduciary responsibilities from many prospectives. There are still lots of companies that force company stocks. When a company's long term (not 1 or two years) stock performance is horrible, then I would say they have failed their fiduciary duties by restricting choices. But lets look at the big picture. How easy will it be to attract and retain employees when this significant element of compensation is extremely unattractive. I know of a handful of employees that were heavily motivate to change jobs to regain control of their investments. One fellow was an MBA and calculated that he would have an opportunity cost of over 100k if he stayed another three years and his significant 401k continued to stagnate. He was correct about that.

This could be meaningless data. If the average person was making one purchase/sell a year and now makes two, that would mean trading frequency doubles. If portfolio turned over 20% and now turns over 30% that also meets this statistic. Here are some of the key Qs: What is sample size? What comprises the base from which the sample was drawn? Does the analyst have a neutral view or are they affiliated with a group like Nasdac, mutual funds or brokerages where we can assume that they have a "point of view". Are these statistics based upon averages or medians? Over what time period? Are the results skewed by the significant actions of some subset, like young workers, those with internet access, etc. Does this reflect just equity trades or mutual fund exchanges? In this case, the data reflects just internet trading at just two firms.... and if that means someone like Microsoft or HP, just how meaningful do you think that comparison would be? And just 18 months of data... means the newness has not even worn off, so you are capturing the impact of a new gadget. Since the report summary says those that try stick with the web method, one might argue they like the results.... so maybe this is good news not evidence of failure or a problem. When I see the phrases like "doubles" or "50%" increase, my first thought is how valid the analysis. These are the kinds of words used by the media and folks with an ax to grind. I smell hype. Twenty years ago my consulting firm locked horns with some hot shot engineering firm that predicted solar energy would comprise 20% of all industrial energy consumption by the year 2000. Gees, only off more than an order of magnitude. Call me skeptical. And I am not even from Missouri.[Edited by John G on 09-06-2000 at 02:25 PM]

I can answer the 98 conversion Q. That is a done deal as long as you qualified in 1998 and do all the tax stuff correctly. A subsequent status change does not impact the '98 deal.

You are correct about survivorship bias. Unfortunately, I have never seen anyone try to quantify it. There is also a size bias which works the other way. The data I provided was arithmetic averages not asset weighted. Since the most successful funds tend to grow larger, a simple average understates the catagory performance. For example, you have Fidelity Magellan with 22.7% annual return over two decades and it is one of the largest funds. And I suspect that very small funds or funds that are not in a family cluster may be overlooked because of data collection issues. The 11% return for equities (like the 10% figure) that you site is a commonly used benchmark that you can find it lots of magazines and computer models. My conclusion after working with data from various sources is that it understates by a few points what can be achieved with equities. I agree with your comment on lame corporate investment meetings. In one company, I worked one on one with a few clerical staff and getting financial affairs in order which did indeed start with credit card debt problems. It took 2-3 years before they were ready to step into the 401k club. One of the hurtles that had to be overcome was their distrust of senior management which was shrouded in male/female issues of trust.

This is a tough question to give a general answer, there are lots of details that may be important. For example, it was not clear if your plan was based upon pretax or aftertax contributions. The Roth is currently limited to 2K per person while you may be able to do more in the 401K. Roth can have nearly unlimited range of investment options while 401K is likely to offer fewer choices. 401k may be based upon company stock, which can be negative (too many eggs in the same basket: job+investments) or positive (such as if you work for Cisco or Intel with great stock performance) and there are exit options with the 401k company stock. If your married, you may want your spouse to participate which is not a 401k option. There are also some other issues like protection from creditors, loans, experience with investing of the employee, etc. While many folks might be better off with a Roth, I don't think anyone can say that is universally true for every 401K. For some folks, using the company payroll deduction method with a 401k is simple and effective. While you can achieve the same result with a Roth and monthly direct deposits to a mutual fund, some employees may just like the simplicity. "Everyone would be better off" is not the issue that should concern you. Do your own research and make your own conclusions. Note, these message boards have an area for 401(k) issues, which might be useful to you.

Other issues can include: protection against creditors, option to take a loan (not possible with IRA), dispersement of funds rules/options, option for long term capital gain treatment on 401K company stock under some circumstances, and probably some more.... Some of these may never apply. I would say the top three most important issues are: match, corp investment option, and wifes desire to have funds in her name. Good luck.

Nothing hypothetical about the data I reported. The data represent the average annual performance of all mutual funds in the catagory that have existed more than 20 years as reported in August Kiplinger Financial. I choose the 20+ catagory as this does the best job in washing out the unussual last five years and the blossoming number of niche/sector mutual funds. Since these three fund catagories are not likely to include utilities due to the catagory definition, one might argue there is a slight bias towards growth stocks. The number of observations in each catagory is not reported, but the data base included thousands of mutual funds. Clearly, the sample size shrinks when you eliminate anything younger than 20 years. However, the 10 year performance is less than 1% higher for aggressive growth but is surprisingly slightly less than 1% lower for growth/income and long-term grown. I thought 20 years was "historical"! Now if someone wishes to publish a list of 30 and 40 year returns, I will report them. The data on mutual funds in the 40+ range that I possess is very similiar to the averages Kiplinger reported. The often cited "stocks average 10% annual return" is the most poorly documented statistic on Wall Street. It is sort of the emperors new clothes issue. No one wants to stand up and say something is wrong. I traced one reference back to a comparison various common stock indicies, but that analysis left out all the dividends and therefore was wrong. Given the changes in the economy, I have trouble finding a lot of statistical value in data more than 50 years old. Since these funds are what folks can select in retirement accounts, and annual taxation is not an issue, the data seem awfully relevant to me.

There are two separate issues here that are getting confused. The first is how to get employees to particpate. The second is once they are participating how can they get strong/good results. I will address the second. Asset allocation is one of the major determinents of investment results. Assets with uncertain or variable performance such as equities (aka stocks) have for essential the past century outperformed investments with fixed returns such as bonds or CDs when viewed over a long holding period. The reasons for this are complicated and could keep a dozen economists busy for years in debate. For most investors, asset allocation is the division of the total investment pool into equities and bonds. If you assume that both pools are diversified, then the percent allocation that the investor uses between equities and bonds will be one of the most significant determinant of long term results. Lets look at the 20 year average annual returns for broad catagories of mutual funds: Corporate bonds 9.3% Government bonds 8.3% Long term growth 16.9% Growth and Income 15.1% Aggressive growth 16.6% Note, the difference is between equities and bonds then within the asset catagory. Not surprisingly, balanced funds (which include a mix of stocks and bonds) fall in the middle at 13.2%. Stats from Kiplinger, August 2000. Lets look at the impact of a stream on retirement payments equal to $2000 per year over 4 decades. At 9.3% the corp bond rate, this person would amass about $730K. Using a 15.1% equity range, the person would see retirement assets top 3.6 million. That is about a 5X difference. I know which result I would prefer. However, I don't feel my approach to risk/reward should be imposed on anyone. Some folks would be very happy with a lower amount that they were more confident they would achieve. I do think companies should make sure participants understand their options and the significant range of possible results.

I am sure one of the accountants will give you and answer at this site. Readers of the Roth message board should also be aware that this site also has a number of other message boards that are devoted to 401K, 403B and other plans.

Just matching 1% ? I have never seen a single 1% match before. Seems kind of small. Double check that percent again. I will assume that you mean a 1:1 match in the 401k. Since this is a 100% gain, instantly, I recommend you max out on any match. After you pass that funding point, it is less clear which route is superior. For example, do you like the options in the company plan? On the Roth side, you have essentially an unlimited number of investment vehicles. The company route may be more restricted and more/less attractive (company stock?). You might also consider fees if any. When you put more money into your company plan, you may be leaving out your wife. The Roth route allows some "balance" between his and hers which depending upon your relationship and circumstances may be important. You can fund your Roth on Jan 1, if your company plan is funded a year end you might be losing a year of investment. There are probably other issues...