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Author: vtaeger Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: DRIP V. IRA Date: 2/13/1998 5:18 PM
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<<I'll try to give some specifics but it still might be a little vague because I'm an IRA greenhorn. What if I were to Drip $50 a month into Campbell's and $50 a month into Johnson and Johnson vs. $100 a month into a high risk IRA since I have a good 35 years until retirement. If this example is still incomprehensible could you give an example of where a DRIP might be more beneficial and one where an IRA would be the better choice. Thanks.>>

Sometimes it's easier to make two or three simple decisions
than one complicated one. Whether to invest in an IRA
and what to invest in are two seperate issues.

Since your an IRA greenhorn I'd suggest you learn
more about IRAs before making the decision.

Instead of comparing the DRIP investment in Cambell's
and Johnson and Johnson with an IRA in investment X,
compare the DRIP in Cambell's etc. to an IRA in a discount
brokerage invested in Cambell's etc. *

This is simpler. The stocks will have the same gross
rate of return in the DRIP and IRA. The difference in
net ROR (what you keep) is from different transaction
costs and tax treatment.

You'll probably find that the IRA is better than the DRIP.
Both Cambell's Soup and Johnson and Johnson pay dividends. These will be taxed as regular income each
year in the DRIP, while compounding tax free in the IRA.
The IRA is also better unless you plan to hold all your
stock for the full 35 years (lethargy beyond sloth, IMHO. **)

If you decide that stocks in an IRA are better than stocks in
a DRIP you can then compare stocks in the IRA with
investment X in an IRA. Again this is simpler than the
original question because there is only a single difference.

If you decide that the stocks in the DRIPs are better,
ask the same question of investment X: "Is it better owned in
an IRA or a taxable account." If X is better owned in a taxable
account, you again have a simpler problem. If X is better in
an IRA and the stocks in the DRIP, well ... fall back on the
total return, but you've learnt a lot about IRAs, DRIPs, taxes
and costs so you're no longer a greenhorn.

* It may be very expensive to invest $100 per month in stocks
at a discount broker, but you can accumulate a lump sum
in a money market fund (or Vanguard S&P 500) for 12-18
months, then invest. Over 35 years a one year delay does
not make much difference, it's smaller than the fee and tax
differences.

** This is a Warren Buffet joke folks, I'm not insulting anyone.
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