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| THE ANSWER DESK . .
. ARCHIVES |
Volume 46: To submit a question to MFI's panel of
experts, please write to us.
Meet Our Q&A Panel:
 Richard ChiozziRichard E.
Chiozzi is a founding principal of Successful Financial Solutions, Inc.,
a fee-only financial planning and registered advisory investment firm based in suburban
Chicago. Richard is a Certified Financial Planner (CFP), and a Registered Securities
Principal. He has been in the financial service industry since 1981 and has lectured at
NAPFA and ICFP national and regional conferences. Richard is a frequent author on
financial planning issues in leading financial publications and also hosts a one-on-one
cable television talk show in suburban Chicago. Richard can be reached at his website or call (800) 417-1141. |
 Ron RutherfordRonald K. Rutherford, MS, MBA, CFP,
CIMA, is Chairman & CEO of Rutherford Asset Planning, Inc. and is a
New York City-based fee-only financial advisor. He is registered as an Investment Adviser
with the SEC and a member of NAPFA, ICFP, and IMCA. Ron is the author of The Complete
Guide to Managing a Portfolio of Mutual Funds and has consistently appeared on Worth
magazine's Top U. S. Financial Advisor list. Ron is widely quoted in the financial press
and has appeared on national television to discuss a variety of financial topics. For more
information, visit Ron's website or call
(212) 829-5580 |
Questions and Responses
What are the rules regarding a couple's
joint contribution to a Roth IRA?
from John
Q: I am trying to get a definitive answer on Ira's: My wife
and I make a total of $46,000. Under what conditions can we contribute $4,000. to a Roth
IRA. There seems to be a lot of confusion about this. My wife makes about $3,000 part
time. Shouldn't she qualify under a non-working wife clause?
A (Richard): A married
couple with joint earnings of at least $4,000 in a year may contribute as much as $2,000
to each of their Roth IRAs for that year, even if one of them does not earn income. Even
if you participate in an employer's retirement plan at work, you may still contribute a
full $2,000 to a Roth IRA as long as you meet the Adjusted Gross Income (AGI)guidelines
for married couples.
Eligibility to contribute to a Roth IRA is based on AGI and is
phased out as AGI rises from $150,000 to $160,000 for those filing jointly. Based on
your $46,000 of joint income, it would seem that you would qualify for a 1998 contribution
of $2,000. Your wife, as a part-time worker, making $3,000 would also be eligible for a
$2,000 contribution. Taxpayers receive no up-front deduction for annual contributions (up
to $4,000 for joint filers). If distributions are taken out after the five taxable year
period beginning with the first contribution year, and on distribution, the taxpayer is at
least age 59 1/2, all investment earnings in the Roth IRA are exempt from federal income
tax. There is no tax due on withdrawal. Should you decide not to make contributions to a
deductible IRA or a Roth IRA, you are still eligible to make contributions to a
non-deductible IRA. In no case can contributions to all of an individual's IRAs for a
taxable year exceed $2,000 or the individual's compensation, whichever is less.
Should I put my profits into
"safer" funds?
from Juarez
Q: I really have two questions:
1. My husband and I save approximately$1,700 a month, approx. $1,000
in a 401K through Fidelity (plus company stock as a 6% match) and the rest in 5 other
mutual funds. We also have some stock, variable annuity, SEP Plan, and a small IRA. Before
the market started falling we had accumulated approximately $218,000 since 1991 when we
started saving (not as aggressively then, but for the last 2 years this aggressively).
Before the market started falling, I felt that I should have sold some of that profit and
put it into another aspect such as bonds or a money market fund. The last time I checked
we lost $20,000. (I didn't want to check again!). Should I have done this, or should I now
do this?
2. My husband is 55 and I am 51, next year we should be coming into
a large sum of money, what is our best mix now and should the new money be invested in
blue chips? I think we need help: Where can we go?
A (Ron): It appears that
you have most of your financial assets in a 401(k) or an IRA. That is good because you do
not have to consider the immediate impact of capital gains tax if you sell. Let us assume
that you plan to work until age 65. That gives you another 10 years to accumulate wealth.
In general, I suggest a broad mix of asset categories combined with a long-term investment
view, otherwise known as patience.
In a similar fashion, you may wish to consider a broad array of
asset categories for the upcoming large sum. I assume that you plan to put this money into
a taxable account. That presents an additional issue to consider – current tax. Here
you may wish to select funds that represent in the prospectus a strategy of tax management
for maximum tax efficiency. Depending on your tax bracket, municipal bond funds may make
sense.
Your recognition that you need help is a sign of investor maturity.
You should seek out a professional who is both competent and objective. Here is a list of
the web sites of three professional associations. They provide names of financial advisors
in your area.
National Association of Personal Financial Advisors - www.napfa.org
Institute of Certified Financial Planners – www.icfp.org
International Association for Financial Planning – www.iafp.org
Am I on track for retiring early?
from Jan
Q: I have the following portfolio (name of fund is followed
by dollar amount): Legg Mason Value Trust - 5000.00; Legg Mason Total Return -1500; Legg
Mason Global Equity - 1000; Davis NY Venture - 5000; Davis Financial A - 1000; MFS Mass.
Investors Growth - 1000; Putnam Health & Science - 4000. I also have a 301 plan with
Dreyfus S&P 500 Index - 3000 and Dreyfus Small Cap 2000. I'm 48 and would like to
retire in 10 years. Should I make any changes?
A (Richard): In reviewing
your investment portfolio, it is important for you to understand that your funds' holdings
are invested approximately 94% in stocks, 5% in cash, and 1% in bonds. This is an
aggressive asset allocation. While stocks have historically provided the highest average
annual returns of these asset classes (i.e., an annual return of 10% - 12%, compared to
annual returns of about 6.5% for bonds and 4.5% for cash,) you must be willing to tolerate
the higher volatility of the equity markets. In any one year, a portfolio such as this can
be expected to decline 20% - 25%. If you believe that you cannot tolerate such a drop in
your portfolio's value, you really should consider reducing your investment in stock
mutual funds and purchase one or two solid bond funds.
Assuming that you are comfortable with this large equity position, I
can offer you some observations about the mutual funds that you hold. Most are quite
well-regarded. The Legg Mason U.S. funds, and the Davis funds, are excellent funds that
focus on large, undervalued companies. The MFS fund is a solid fund investing in large,
growing companies. The Putnam fund is a strong health care investment fund. The Dreyfus
small cap index fund has too short a track record to comment on performance, while the
S&P 500 index has been solid. Only the Legg Mason international fund has significantly
underperformed among its peers over a 3-year period. In order to reduce your equity risk,
you might want to reduce your emphasis on large company funds (presently, about 85% of
your equity portfolio) and purchase more medium- and small-capitalization company funds.
What can I do when my fund prevents me
from liquidating?
from Bill
Q: During one of the recent days when the market
took a nosedive, I called CGM to liquidate my holdings. The rep I spoke to told me that
their computer was down and I'd have to call back the following day after their MIS team
came to work and fixed it. I was calling about 3:30 PDT. He refused to take my sell order
because he said there was no way he could accept it because the computer was down.
I took my licks today in the market that day, and wasn't able to
unload until the end of the following day. Shouldn't CGM be responsible for this? I didn't
buy the fund through a 3rd party so I can't sell it through a 3rd party, but the fund just
"closed up shop and went home" on a bad day. What can I do?
A (Ron): From the facts you
presented I would think that the mutual fund company would want to make you whole simply
based on maintaining customer satisfaction. You might have success by simply writing a
businesslike letter to top management. If that fails, you could write a letter of
complaint to the regulatory authorities with jurisdiction in this matter.
Beyond that, it is a legal question. You may wish to consider paying
for an hour of consultation with a securities attorney. Ask the attorney for an opinion.
Here are some questions worth discussing with the attorney during that session.
1. Can you substantiate the dollar amount of your damages?
2. Does the mutual fund company have a duty to you, the shareholder,
to provide fallback or backup systems to fill your sell order in case of failure of their
primary systems?
3. Was there negligence in this case?
4. Does the dollar amount of your damages justify the legal cost to
recover them?
5. Do other shareholders claim that they suffered damages in a
similar fashion?
6. Is there an arbitration clause in your agreement with the mutual
fund company?
Important Disclaimer
Investing in equities involves a serious principal risk,
and no assurance can be given that the techniques described here will be successful.
Returns vary and you may have a gain or loss when you sell your shares. Past performance
is no guarantee of future results. Index returns shown are historical and include the
change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged
and do not reflect the impact of transaction costs. Transaction costs would have reduced
the total returns.
International investments, especially those in emerging
markets, entail greater risks (as well as greater potential rewards) than U.S. investing.
These risks include political and economic uncertainties of foreign countries, as well as
the risk of currency fluctuations. These risks are magnified in countries with emerging
markets, since these countries may have relatively unstable governments and
less-established markets and economies.
Lastly, the questions and responses set forth here are for
general informational purposes only and are not intended to substitute for performing your
own independent research or contacting your financial or legal professional before making
any investment decisions. We make no guarantees as to the performance of any investment
strategy you choose and are not responsible for any losses you might incur.
 Comments? Criticism?
Suggestions? Talk to us.
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