Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday, April 5, 2005

A. Of course. Many people will be getting refunds. Instead of spending themwithout thinking first, why not invest in your future. $3,000 now, at an 8%annual rate, becomes almost $70,000 in 40 years. One year's contributionwill produce more income per year than the original investment and nevertouch the resulting principal!

Q. The power of compounding.

A. And of time! And that is just one year's contribution. Start stacking upa few of them and you get a big pile at the end.

Q. Isn't contributing to an IRA now, just about the only thing left thatpeople can do that will still affect their 2004 tax bill?

A. True, but for only some people. If you have a qualifying labor incomeand are not eligible for a qualified plan at work, you can deduct a 2004IRA contribution of up to $3,000 if you put it in by April 15. Put it in amoney fund if you can't decide that fast, to get the deduction.

Q. What about if you are in a qualified plan at work, though?

A. In that case you can't deduct the contribution, but you can and shouldstill make the contribution. Once April 15 is gone, there is no way toreach back later if you have a pile of cash, since 2004 will be goneforever. Making the contribution and not deducting it is a good thing;don't get hung up on the deduction! Especially if you're young or can'tdeduct, I'd strongly suggest ROTH anyway (tax free for life).

Q. Isn't the IRA limit for last year higher for people over 50?

A. Right: $3,500 for people over 50 ("catch-up" provision).

Q. Are there a lot of funds that allow fairly small starting contributions?

A. Yes and it is easy to find out on their websites or call their toll-freenumbers. Here locally, I saw an ad in the paper saying that Janus islowering its minimums for IRA season. ThatŐs just one example, not aspecific recommendation.

Q. What about if people do not have a chunk of money in hand now?

A. Many funds allow zero or very low starting contributions, especially inIRA and similar accounts, if you sign up for automatic payroll or checkingdeductions monthly. Again, call and ask.

Q. And I guess if you do have a refund coming, that is a potentialopportunity?

A. I'd say so... Having a chunk of money in hand should be a signal to sitback and take an overall financial-planning look. Are you doing enough? Doit now so that "I can't afford it" is not an excuse to not start.

Q. What if people want to make the 2004 contribution but the next 10 daysdo not give them a chance to decide which fund(s) to buy?

A. The key thing is to open the account and put the money in. Put it in amoney-market account until you decide. Choose your fund family, or one ofthe many major funds "supermarkets" with discount brokerages.

Q. Any other ideas for people who have that Washington check in hand?

A. Sure. Think about the children or grandchildren's education! ACoverdell plan can now take $2,000 a year, up from the old $500 limit. And529 contributions for practical purposes are almost unlimited. And I haveanother idea regarding kids that many people overlook...

Q. Probably another clever way to save!

A. Of course! If they had income last year from jobs or lawn mowing orbaby-sitting, you could put that amount into an IRA for them. It does notneed to be provable to be their money. It will set a good example aboutsaving and investing early. And definitely go the Roth route for them,since a deduction will be worth little or no dollars, whereas not deductingbuys tax freedom for life!

Q. Any more thoughts about funds at tax time, Don?

A. Yes and it relates to 2005. If you still have some funds in a taxableaccount that are hurting, like technology (down 70% on average, still), whynot SELL them? If you invested $10,000 and it is now $3,000 you will getnearly $1,900 in tax savings by selling. That gives you almost $5,000 toinvest to try and catch up, a lot better than sticking with the $3,000.Don't let your ego get in the way of taking available money off the table!

Q. Or you could offset gains against that loss...

A. Right. People have two contradictory hang-ups: they don't want to paytaxes on gains, and they don't want to admit (by actually taking them)their losses. Well, if you have some unused losses, you can re-allocateyour portfolio with little or no tax consequences by matching.

Q. And of course a good place to look at fund choices...

A. Is www.LipperLeaders.com... it rates funds against peers on fivedifferent scales, not just performance like some other sources do.

Q. What about next year and taxes?

A. Why not admit some of your losses (like tech funds, which are still down70%) Combined 25% federal/state tax breaks make the $3,000 left on anoriginal $10,000 investment worth almost $4,900 so you have a lot betterchance to catch up sooner.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).