Tracey has been Spacey.       

12/19/2003

Now that I am feeling a little better after a bout with the flu, I will continue to advise and inform as well as I can.  Maybe I can even add a little humor.

In my last article I advised that the best way to get a good return on your money is to pay off high interest debt such as credit cards.  You can earn a quick 21% by paying off a department store credit card.  With that task finished, you can proceed to investing since your financial bucket is not leaking out of the bottom.  Why add to the top if the bottom is cracked? 

I promised we would discuss tax deferred and tax free investments, and here we go.
I asked those of you who have jobs to review your 401K plans so that you understand them well. 

If your employer offers you a 401K plan, do not ignore it or feel that you do not have the money to contribute to it.  When you do not contribute and your employer matches your contribution, you are in essence working for less or giving your company money that you could have made.  Do you really want to do that?  Of course not!

Take everything you can from the crooks that work you so hard!.  Once you start eliminating that $4 cup of café latte at Starbucks every day, you will not miss the money at all. Or how about that Pannera bread $6 sandwich every day?  It is tempting, I know.
But in the long run, you will be extremely glad that you saved and took what was rightfully yours.

Many companies add 25% or 50% to your contribution up to the legal limit of 6% of your taxable income. Some match 70% or even dollar for dollar. The company I worked for matched my contributions 70% and if I had not contributed and received their match, believe me, I would not be retired now. 

Most companies allow you to contribute more than 6%.  Your employer will not match your excess contribution. I suggest that you not contribute any more than the 6% that they are allowed to match because most of them have very limited investment choices and if you have extra money, put it in an credit union first (safety money) then an IRA.

But remember this. Your contribution to a 401K is not an option.  You are a smart lady. You read the Tactical Investor. It is a necessity.  You must do it to assure a secure retirement.  If your company matches you even 10% up to 6% of your earned income, do it!!! Where else can you get a guaranteed return of 10%?

OK, now about IRAs. They are your next step in your quest for freedom from the drudgery of forced labor (Your Job).  Please take advantage of the Roth IRA. Contribute the $3,000 a year ($3500 if you are over 50). Just do it!  I did every year I worked and I am very glad I did.   

The money in your IRA is not lost forever as some think.  In fact, if you retire early, you can start withdrawing at 55 with no penalty and NO tax.  IRS.gov on the Internet has all the information you need on IRAs, Roth and regular.   

With a Roth IRA you can take a withdrawal immediately of the money you put in that has been already taxed. (Not the earnings) You can withdraw without penalty for higher education, for a primary residence, and disability.  So don’t ever think it is gone until you are 59 ½.  If you remember this, it may be easier for you to contribute.

Since your 401K contribution is already tax deductible, I would advise anyone to use the Roth IRA option, rather than the regular IRA.  Just think, in 5 or 10 or 20 years, all that you have earned can be withdrawn TAX FREE.  Uncle Sam gives us very few ways to make money and never pay tax on it.

Open an account with Vanguard, which I highly recommend for index funds. Or if you want to trade stocks and ETFs and miscellaneous funds, open an account with Scottrade or Brownco.  If you can find lower commissions on stocks in a US brokerage, use that one. Interactive Brokers is good too IF you want to trade options or futures.  Remember, however, that they are risky and most US brokers won’t allow them in an IRA.

You will be making your own decisions; so don’t even consider using a big brokerage house like Merrill Lynch. If your account is not over $1 million, you can expect a quick look at it each 3 months when it comes up on your broker’s diary.  So forget them.  Wall Street big houses are in business to make money for them, not you.  I’m sorry to sound so cynical, but I have learned from experience.

Another thing NOT to do with your IRA money is to buy an annuity.  That is actually funny.  My sister did it.  A great salesman where her husband works advised that she rollover her IRA money into an annuity. In other words, she is paying substantial fees to put a tax-deferred investment into another tax-deferred investment.  She is in the process now of trying to get her money out of the annuity and there is a substantial early surrender charge.  Don’t even consider an annuity for your IRA.

Here is an easy way to handle your 401K plan. It is what I did when I was busy.  Learn how to chart moving averages. Once a week run up a chart of the Dow Jones Industrial Average. ($INDU) Also run a chart of the Nasdaq composite ($COMPQ) and the Russell 2000 ($RUT).  This will not take long. Once a week you will look at THREE charts, only three. 

You will contribute money in your 401K plan to 3 different funds: a large cap like an S&P500 index fund, a growth/technology fund, and a small cap fund.  If the Dow is above the 200 day moving average, the large cap will get your contribution, if the Nasdaq is above the 200 day moving average, the growth/tech will get 1/3, and if the Russell 2000 is above its 200 day moving average, the small cap index fund will get your money.  If one is below the 200 day, that money goes into the money market fund. (All 401Ks offer one for safety.) 

In your IRA you can put equal amounts of the miscellaneous stocks from our Market Update if and only if the stock’s chart show a price above it’s 200-day moving average.  If one is below, you will not invest in it. Cash will be King.  You can also search Morningstar.com or CBSmarketwatch.com for some 5 star funds and invest in them too if the corresponding index is above it’s 200 day moving average. 
 
With these suggestions I am trying to keep your retirement money safe and available for you when you retire. With money outside of your retirement accounts, we will take a more aggressive stance. 

Nobody likes to gamble more than I do.  But with your retirement money, which is tax deferred (401K plan) and growing tax-free earning for your retirement (Roth IRA) I believe that it’s better to be safe than sorry.  That money is your nest egg, not play money.  We want to see it grow, and it will do that only when the market is in an up trend. 

When we discuss ETFs, options, and stock trading and investing outside of your retirement funds, we will get to some more exciting strategies. 

Until then, make sure you are taking advantage of the tax benefits of your 401K plan and the Roth IRA.  First things first.  .

Until Next Time,

Happy Trading and Happy Holidays,

PS:  If you don't understand any of the terms I have used this week, don't dismay.  Next week I will explain them in more detail.  Or you can always send me questions at tacticaltracey@tacticalinvestor.com.