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Author: JeanDavid Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75836  
Subject: Re: 401(k), IRA or Foolish Four? Date: 9/16/1997 6:06 PM
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<I'm a new investor, and definitely want to invest in the Foolish Four. However, should I also invest in an IRA for it's tax benefits and/or should I contribute to my company's 401(k)?

Would it be advisable to invest in all three, or should I just concentrate on the Foolish Four?

If I do invest in a 401(k) and/or an IRA, can I invest use the 401(k) and IRA funds to invest in individual stocks (i.e. Foolish Four) or should I invest in mutual funds (although the 'guide' advises against this).>

There are several aspects to this. I endorse your desire to invest in the Foolish Four: it is a good choice for beginners, and also as part of a larger portfolio for those more experienced (you might consider one of the UV plans instead, such as the UV4+, but for the first year or 18 months it probably does not matter all that much which).

If you have a good IRA, one that lets you direct all your investments and lets you pick individual stocks, by all means use one. Let your poor Uncle Sam lend you the money that would otherwise be used for income tax with no interest and let you invest it in additional shares. He will get you in the end, taxing all the money you take out as ordinary income instead of the cheaper capital gains. But you should still be ahead.

Another reason to put it into a 401(k) type of IRA is that your employer may kick in some free money, too, and you might as well take it.

While you could invest in the Foolish Four outside of an IRA or 401(k), the tax consequences will be unfavorable if you intend, and do, keep the money in there until retirement. OTOH, if there is a chance you will need the money before you are 59 1/2 (to buy a new luxury car, etc.), the penalty for early withdrawal is sufficient that you probably would not wish to take it from a 401(k) or IRA. Thus, it may make sense to keep some of your money in a regular account. Might as well be a margin account in case you wish to short stocks at a later time.

Unless you have little confidence in your ability to follow the discipline of the Foolish Four, the UV*, and so forth, it makes little sense to buy mutual funds. One case where you might wish to do this is if your employer maintains a 401(k) plan, makes contributions himself, and the plan permits only a selection of mutual funds. Then if you can find a good one or two such funds that are good ones, you might well consider going that way. It is hard to turn down free money from your employer, a tax-free loan from the IRS. If they have something like the Vanguard S&P500 index fund,
you might well want to go that way, at least with the money
matched by your employer.
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