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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: ROTA IRA, TO FUND OR NOT TO FUND FOR 2001 Date: 2/19/2002 9:09 AM
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If you put $2000 in a Roth and simply buy a series of 5-year CDs with an annualized rate of 5% for 37 years (until you are 65), it will be worth $12, 163. If you bought the same CDs in a taxable account, with a marginal tax rate of 25% throughout that period and a state tax rate of 3%, you'd have $7402. Raise the interest rate and the tax rate (both likely) and the difference is even greater.

You should always fund a Roth, if you have money you can afford to put away for the long term. If you are convinced the stock market is doomed to go nowhere for the next 30 or 40 years, you don't need to invest in the stock market.

A general point on taxes and stock funds, however: look at the tax consequences of different types of funds in looking for what to put in taxable vs. retirement accounts. A low turnover growth fund (i.e., not one of these momentum trading funds that label themselves growth funds because they play games with growth stocks, which are more volatile, mostly because they play games with them) and big cap dominated index funds (S&P 500, Total Stock Market index) are tax efficient and make sense in the taxable portion of your portfolio. Value funds, with higher turnover and higher dividend yields, hence higher taxes, make more sense in the retirement portion of your portfolio. That doesn't mean you should switch now—growth stocks will come back into popularity at some point, if history hold true—but when growth gets hot again, you might want to consider switching to a Vanguard value fund for the long haul.
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