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Subject:  Re: Retirement advice for novice Date:  10/29/1997  3:30 PM
Author:  TMFPixy Number:  549 of 88052

Greetings, Justin, and welcome to Fooldom.

<<In my begining down the Foolish path, I seem to have stumbled and need a little help......I graduating college and have just made aware that I have about $5,000 in bonds that I can cash in. This year I made probably $10,000 however I have accepted a job begining in Jan. in which
I will make $41,500.

Now, I want to put $2,000 into a Roth IRA next month, and another $2,000 on Jan. 1st. Only problem - Roth IRA's aren't available until Jan 1,1998 (my understanding). How do I get the $2k in for this year ? My guess is a deductible IRA this year that will roll over to a Roth in Jan. Only problem, my tax rate is a lot lower this year than what it will be next year (for conversion (rollover)). >>

Your guess is correct. You'll have to use a traditional IRA this year, and then roll that to a Roth on or after January. In essence, you'll probably pay taxes on not much more than your initial $2K because of the short earnings potential over the 60 days before you can roll. If you take the deduction, for tax purposes you'll save 15% of $2K this year, or $300, to pay 28%, or $560 roughly, over the four years beginning in 1998. That will cost you $260 additional in taxes, but that's a small price to pay for the compounding over the years. But you don't have to do that. Just forego the deduction and open an after-tax IRA. You'll pay $300 more in taxes this year, but virtually none when you roll to the Roth next year. Given the option, that may be much better for you.

<<Next, my company (Sonoco Products - SON) has a 401k plan in which you can invest up to 15% of your salary in a choice of 5 mutual funds or Sonoco stock. If you invest in Sonoco stock, they match the first 6% of my salary by 50%. I think its a good idea to put 6% in and get 3% free but beyond that I am not sure whether to put the rest in a regular brokerage acct (w/foolish 4) or put the additional 9% in the 401k. I am not sure if tax break is worth it. Any advice ? >>

No advice, just a comment. Getting the 3% match is the Foolish thing to do. Beyond that, you have to look carefully at the after-tax impacts and returns in all alternatives including the 401k. At your age and using an after-tax approach in the Foolish Four, chances are you'll do far better with the extra $$$ outside the 401k instead of within it. However, if you won't consistently devote those $$$ to the investment, then stay with the 401k. The payroll deduction forces you to stay with the program and will help ensure a comfortable retirement.


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