Master Your Money - Page 4 of 6

Master Your Money

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Is a Roth IRA better than a traditional IRA?
There are different types of IRAs, and the best one depends on where you are in your financial life. In short, a Roth IRA involves after-tax contributions that compound and can be withdrawn totally tax-free. A traditional IRA involves pre-tax contributions, but you’ll pay tax on the money when you withdraw it later. One distinct advantage that a Roth provides is greater liquidity, because the amount of contributions may be withdrawn at any time, tax-free.

“The Roth is a great opportunity–the younger you are, the lower your income is, and the more time your money has to compound,” says financial adviser Lanta Evans-Motte. “The people it makes the most sense for are those who have just finished professional programs, such as M.B.A., engineering, law or med school, whose income hasn’t yet ballooned.”

If you’re mid-career and in a higher tax bracket, however, the traditional IRA might be a better fit. Because “it makes no sense to pay 30% tax on that money now by contributing to a Roth, if you’re only going to be paying 20% tax on it when you retire,” says Evans-Motte. In fact, the ultimate decision may already be made for you: The Roth has an income ceiling of $114,000 for individuals, and $166,000 for couples filing jointly. If your income exceeds those thresholds, a traditional IRA is your only option.

What does it mean when a company buys back its stock?
Stock buybacks are more popular than ever: S&P 500 buybacks in the third quarter of 2007 reached $172 billion, a new record. That’s up more than 56% compared to the same quarter in 2006, with total buybacks over the past three years amounting to $1.3 trillion.

Common sense would seem to indicate that a buyback is a good thing: It means company executives think the stock is attractively valued. It also has the benefit of boosting earnings by reducing the number of outstanding shares, so earnings are divided between fewer shareholders.

But here’s where it gets tricky: Companies have seen how buybacks can goose stock prices. So if your firm is announcing a big buyback, the question to ask is whether management is doing it because the stock is a bargain or because they just want to temporarily juice the stock price. Might it not go through with the full buyback? Is it just announcing the plan to stimulate investment? Could it be that the management team lacks creativity and could be putting the cash to better use, like making savvy acquisitions?

Indeed, a recent study by Standard & Poor’s shows that you should be wary of buybacks. Of the companies in the S&P 500 that repurchased shares between Jan. 1, 2006, and June 30, 2007, only 24% subsequently outperformed the index average.