<THE FOOLISH FOUR>

Getting Practical
by Ann Coleman
(TMF AnnC)

Reston, VA. (October 19, 1998) -- On Friday, we discussed how to make your kids millionaires. (Surprisingly, no kids wrote in to thank me. What's this younger generation coming to? I don't care if they can't type yet!) Today, I would like to follow up with a few notes on practical matters.

First, I want to emphasize a point that I made near the end of Friday's column -- even if the market is not as robust in the next 25 years as it has been in the past, the goal of a million dollar legacy is still achievable (given that we avoid global meltdown, naturally).

Of course, it will take longer, but the Miracle of Compounding is so powerful that even if you only equal the average market return since the end of World War II, 12.5% a year, you can still amass a million dollars (after paying the capital gains taxes) well within a lifetime just by saving and investing $100 per month. At 12.5% and paying capital gains taxes of 20%, it takes 47 years.

If you use the Roth option (after 16 years you start shifting $2000 a year to a Roth IRA to eliminate the capital gains tax on returns from that portion of your account), it only takes 40 years -- and that's at market level returns. Even better, if the Foolish Four continues to outperform the market by several percentage points a year, as it has in every 5 year period since 1969-73, you will get there a lot quicker.

The second thing I wanted to discuss is that it isn't very practical to start investing in the Foolish Four with just $600 a year -- Friday's Lunch Money Scenario. There is a simple way around that, however. Just keep your kid's money in with your own investment funds for the first several years. That is not as tax advantageous as setting up a separate account for each child, but it is much more practical than paying commissions on such small trades.

At some point, though, it's a good idea to consider a separate account. Earnings in a separate account get some tax advantages, although if the child is earning more than $1300 a year, the amount over $1300 is taxed at the parents' rate (unless the child's rate is higher, of course!) The child's account can earn up to $650 a year without paying any taxes, and the amount between $650 and $1300 is taxed at the child's rate, so the tax savings will easily offset the commissions by the time the account approaches $3000.

Which brings me to my third point -- The Motley Fool has several wonderful resources for tax information that can make junior's account more profitable by planning for taxes and learning how to minimize them. First, there is our online Tax Q&A, which has several relevant articles, including The Kiddie Tax, a must-read. Second, our Fools and Their Money area has Paying for College and Investing For Your Kids. Finally, our new Investment Tax Guide is a good all-around guide to the ins and outs of the dreaded Schedule D.

Earnings Season Note: Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> reports tomorrow.

Fool on and prosper!

Current Dow Order | 1998 Dow Returns

10/19/98 Close

Stock Change Last -------------------- UK + 1/4 41.63 IP +1 1/8 48.38 MO + 1/4 47.94 EK - 5/8 73.94

Day Month Year FOOL-4 +0.62% -0.20% 10.62% DJIA +0.59% 7.95% 7.06% S&P 500 +0.57% 4.46% 9.48% NASDAQ +1.71% -2.66% 4.99% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 73.94 22.08% 12/31/97 289 Int'l Pape 43.13 48.38 12.17% 12/31/97 276 Philip Mor 45.25 47.94 5.94% 12/31/97 291 Union Carb 42.94 41.63 -3.06% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 15231.13 $2755.25 12/31/97 289 Int'l Pape 12463.13 13980.38 $1517.25 12/31/97 276 Philip Mor 12489.00 13230.75 $741.75 12/31/97 291 Union Carb 12494.81 12112.88 -$381.94 CASH $754.73 TOTAL $55309.86