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Hi, I opened a ROTH IRA in 1998 with Vanguard. I have contributed the max of $2000 for 98, 99 and 00. I did not contribute in 2001 as I watched my investment of $6,000 over 32 years be reduced to $3,302.46

I invested in Vanguard US Growth thinking I was young and can afford a fund composed of growth stocks. The market took a tumble and I haven't gained one penny since I opened it in 98. The point of the ROTH is to be able to contribute after tax dollars to a government funded tax shelter where it will grow tax free for many years.

Question: Should I have settled for a more conservative gain and invested in an index fund that covers many areas besides stocks?

Question: I have the option to still put in my 2k or 3k for 2001 and also reduce my taxable income saving me another $600 in gains on my return. Should I throw another 3k into the growth fund thinking it's better to fund the losers and hope the market returns a gain over the LONG haul. Am I still in good shape because I never sold my shares and even though I lost money I will gain that much more if it goes up?

Should I switch my ROTH to another fund?

I am 26 and looking for modest growth over the long haul, I have no intention on using the money.

LOST. P8NT
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p8ntbal writes (in part):

Question: I have the option to still put in my 2k or 3k for 2001 and also reduce my taxable income saving me another $600 in gains on my return. Should I throw another 3k into the growth fund thinking it's better to fund the losers and hope the market returns a gain over the LONG haul. Am I still in good shape because I never sold my shares and even though I lost money I will gain that much more if it goes up?

Should I switch my ROTH to another fund?


I reply:

I think I speak for most of us here at the Tax Strategies Board when I answer your questions with a resounding "I don't know." No one knows what the market will do today, tomorrow, next week, or next year. We know what it's done in the past, and to an extent, many of us are willing to bet that it will continue that behavior, at least in the long term, in the foreseeable future. But whether you're willing to take that risk is entirely your decision.

There are, though, a couple of tax-related points that need to be made in light of your discussion. First, the contribution limit for 2001 is only $2,000. If you decide to throw $3,000 into your Roth, be sure to designate at least $1,000 of that money as a 2002 contribution, preferably by writing a second check. Second, Roth contributions are not tax deductible. Not a penny. So placing money in your Roth IRA won't reduce your taxable income at all. --Bob
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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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Lokicious writes (in part):

You should always fund a Roth, if you have money you can afford to put away for the long term.

I reply:

If the choice is between a Roth and nothing at all (or a taxable account or a non-deductible traditional IRA), then I agree with you of course. But your statement, as written, is overbroad. If the choice is between a Roth and a deductible IRA, the decision is definitely not a no-brainer. Especially if you believe that your tax rate now is higher than it will be during your retirement years, the deductible IRA may make more sense. --Bob
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