Volume 63: To submit a question to MFI's panel of experts, please write to us.

This week's panel:

Richard Chiozzi Richard 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.

Greg Hilton Gregory Hilton is a Fee-Only® financial planner in the heart of Chicago. He is an attorney with a masters degree in taxation, a CPA, and a certified financial planner (CFP). Although his services are comprehensive he concentrates on the tax and investment issues of retirement and estate planning. His registered investment advisory is Cambridge Consulting, 500 N. Michigan Ave. – suite 1530, Chicago, IL 60611 (312)527-5171 E-mail: cc@cambridge.cnchost.com

Questions and Responses

• Can I convert 3 IRA accounts into 3 separate Roth IRAs?
• Should my husband roll his IRA into a 401k plan? price/book ratios?
• How are stock fund dividends posted to accounts?

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Can I convert 3 IRA accounts into 3 separate Roth IRAs?

from Sam

Q: I currently have 3 IRA accounts. $11,000 is in a SEP IRA with Fidelity.   I also have $3,000 in a deductible IRA and $2,000 in a n0n-deductible IRA.

Can I convert all 3 IRA's into 3 new Roth IRA's? Specifically, does it make sense to convert a SEP into a Roth IRA? All the analysis I've done says it makes sense for me to convert, but it (evaluators) doesn't ask if the IRA is a SEP.

A (Richard): Yes, you can convert all three IRA’s into separate Roth IRA’s as long as you meet specific guidelines.

The guidelines are the same on converting a SEP as if the account was a traditional IRA. Review your annual income to make certain you’re within the income limitations for the year in which you intend to transfer the account. Make certain that your time horizon is long enough to warrant the change and pay all taxes due from funds outside your IRA’s.

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Should my husband roll his IRA into a 401k plan?

from Cathy

Q: My husband has an IRA with a bank that was started when IRA's were first introduced. It has a guaranteed interest rate of 14.3% until March 2002.  It has accumulated approx. $30,000.00 mostly in interest because we were not able to always put in the $2,000.00 Max contribution. His company has just started a 401k program with many good mutual funds to choose from. The investment group has advised him it would be good for him to roll this IRA into his 401k plan.

I think we should wait until the maturity date and then convert. It's a guaranteed rate that's not shabby, with no risk. My husband is 40, I'm 39, and this is the bulk of our retirement savings. I have approximately $5000.00 in mutual funds for retirement. What do you think?

A (Greg): I think you should stay with your guaranteed IRA and enjoy a very nice risk-free return as long as you can. 14.3% may not be as good as you would have got in a market index the last three years but it is still better than historical returns.

I am frankly quite surprised that your 401(k) would allow you to roll your IRA into it. I always thought that 401(k) plans would only accept money that was previously in an old employer's 401(k) and then only when it was segregated from non-retirement plan money. I learn something new every day but I question your new 401(k)'s ability to accept this IRA rollover.

When March of 2002 approaches I would like to see you keep your IRA at a discount brokerage that runs a mutual fund supermarket. You would be able to get high quality funds with professional management, immediate diversification, and very little administrative cost. Where a 401(k) has a few good funds your IRA has unlimited options.

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How are stock fund dividends posted to accounts?

from KK

Q: How are most company stock fund dividends posted to accounts (calculated in the NAV)? For example, a participant owns units of company XYZ stock fund within a 401(k)/ESOP, on ex-dividend date cash is received and additional shares purchased. Under this scenario, is there a benefit to owning units prior to ex-dividend date?

A (Richard): In your example of a tax deferred account, there is no advantage or disadvantage if you purchase a stock fund immediately prior to a dividend distribution since the dividend is not subject to current taxation. In a taxable account, however, it does make a difference.

Dividends are payable to shareholders who own a fund as of the close of business on the record date (set by the corporation’s Board of Directors) not the ex-dividend date (which is the first trading day after the record date.) Dividends are actually credited to shareholder accounts on the dividend distribution date which is usually several weeks after the record date.

Consider the example of ABC Fund announcing it intends to pay a dividend of 15 cent per share to holders of record on December 14. This results in a 15-cent dividend for the prior period being paid to whoever owns the share as of the close of business on December 14, with the actual credit being posted later on the distribution date.

It’s important to understand that the 15 cents in our example is already included in the price of the share once the dividend is announced and that no new wealth is created when the dividend is actually paid. If each share has a NAV of $10.00 immediately prior to the 15 cents being paid to the holder of record, the NAV price will be reduced by the same amount to $9.85. You’ll still have $10 worth of value ($9.85 NAV plus 15 cents that may be in the form of cash or used to purchase additional shares in the fund). Although your value will be the same prior to and after distribution, it is important to realize that in a taxable account the 15 cents per share will be subject to tax within the current year. That is why some individuals decide to sell a fund prior to the ex-dividend date (to avoid the taxable distribution) and why other investors may want to wait to purchase a fund until after the ex-dividend date (to avoid the taxable distribution).

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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.

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