Investments Tto Retire By

Tax-Deferred Vehicles That Will Last A Lifetime

taking an annuity and rolling over the balance to an IRA,” says Leon Walker, a senior partner with Bert Smith & Co., a CPA and management consulting firm in Washington, D.C. “I generally recommend a rollover IRA because you’ll have continued tax deferral as well as more flexibility and control. With an IRA, you can decide how you want to invest the money in the account.”

Walker says that such a rollover should go directly from your former employer to your IRA. If the distribution goes to you first, 20% of the funds will have to be withheld to cover possible federal income taxes. In that situation, you’ll have to make up this amount with your own money to keep the IRA intact. For example, you would have to put $20,000 in the account on a $100,000 rollover.

Norma McCowin is an example of an investor who discovered the benefits of a rollover IRA. The 30-year-old took the money she had accumulated in her previous job’s 401(k) plan and rolled it over into an IRA, investing $20,000 in five mutual funds: Federated Communications Technology (FCTEX) and Delaware Select Growth (DVEBX) and a unit investment trust, First Trust-Communications Growth Series 4 (, that focuses on such telecoms as Nortel Networks (NYSE:NT), Qualcomm (Nasdaq:QCOM), AT&T (NYSE:T), and MCI WorldCom (Nasdaq:WCOM). “With unit trusts, you know what companies you’ll own going in, and there’s no turnover during the term of the trust,” says Darric Boyd, an associate portfolio manager for Legg Mason in Baltimore. Unit investment trusts are vehicles in which securities are bundled together and then sold in pieces to inves
tors. (See “Putting All Your Eggs in One Sturdy Basket,” Moneywise, July 2000.) The other two funds are Legg Mason Value Trust (LMVTX) and The Investment Trust Co. of America (AIVSX).

Adds Boyd, who serves as McCowin’s financial advisor: “Her emphasis is on stocks because she’s young enough to ride out any short-term corrections. The funds she owns are basically large-cap funds because large companies are generally less risky than small ones, especially in the technology area.”

Roth IRAs. Introduced in 1998, this type of retirement account can be established in two ways. If you are single with an annual income of under $95,000, or married with a combined annual income of $150,000, you can make a nondeductible contribution of up to $2,000 per year. The second way is to convert a regular IRA or a rollover IRA into a Roth IRA by paying any deferred income tax. Regardless of the method, all Roth IRA withdrawals are tax free after five years and, of course, after you reach 591/2 years of age.

McCowin, who has developed a separate investment strategy for her toddler, is currently considering making an IRA swap. “I have advised her to convert her rollover IRA to a Roth IRA,” says Boyd. “She plans to stretch the conversion over four years to spread out the tax bill. Once she converts to a Roth IRA, if she keeps the money in [her account] until

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