<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (July 22, 1998) -- Yesterday I wrote in this column about the possible drawbacks to 401)k) plans if one's employer doesn't match contributions. I argued that funding a Roth IRA with after-tax dollars still outperforms the pre-tax arrangement in a 401(k) plan if the best one can do is an index fund in such a plan. And I even went so far as to argue that a taxable stock portfolio can be a better investment than an unmatched 401(k) contribution, depending on one's tax bracket and the investment alternatives available in the 401(k).
But several readers wrote to me offering another scenario where even a mediocre 401(k) plan, unmatched by employer contributions, can make good sense. And that's where one's 401(k) plan is fully vested (that is, the money's 100% yours as soon as it enters the account) right from the start and when you're planning to change employers every few years.
When you leave an employer, you have several options for dealing with your 401(k) assets. The one which makes the most sense to me is to roll that 401(k) money into a self-directed Rollover IRA. At that point, you're still getting the tax deferral you had in the 401(k), but now you have the option of managing the assets Foolishly in a stock portfolio. A good deal both ways for retirement money.
So I stand amended. If you're in an industry or a position where you're likely to change employers every few years, by all means load up on your 401(k) contributions, matched or unmatched, and put the money in an index fund. When you change employers, roll that money into an IRA and go to town with the best stock strategies you have available to you.
If you're not likely to be changing jobs, however, I still maintain that your first savings should fund a Roth IRA, and then you have to make the call between funding an unmatched 401(k) and a taxable stock portfolio, based on your ordinary tax bracket and the investment alternative available to you in the 401(k).
Of course, it's too much to ask that our government adopt a plan similar to Great Britain's, where a large percentage of one's income can be invested tax-free before the capital gains taxes even kick in. Or better yet, exemption of capital gains from taxes altogether in order to promote rather than inhibit savings. Ah well, I can dream, can't I?
Current Dow Order | 1998 Dow Returns
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
07/22/98 Close
Stock Change Last -------------------- UK -1 1/2 49.81 IP --- 45.38 MO +1 1/2 41.63 EK +1 1/4 88.00 |
Day Month Year
FOOL-4 +0.41% 6.79% 15.96%
DJIA -0.67% 1.98% 15.44%
S&P 500 -0.08% 2.67% 19.96%
NASDAQ -0.47% 3.96% 25.43%
Rec'd # Security In At Now Change
12/31/97 206 Eastman Ko 60.56 88.00 45.30%
12/31/97 291 Union Carb 42.94 49.81 16.01%
12/31/97 289 Int'l Pape 43.13 45.38 5.22%
12/31/97 276 Philip Mor 45.25 41.63 -8.01%
Rec'd # Security In At Value Change
12/31/97 206 Eastman Ko 12475.88 18128.00 $5652.13
12/31/97 291 Union Carb 12494.81 14495.44 $2000.63
12/31/97 289 Int'l Pape 12463.13 13113.38 $650.25
12/31/97 276 Philip Mor 12489.00 11488.50 -$1000.50
CASH $754.73
TOTAL $57980.04
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