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Ask MAX: Can I convert my regular IRA to a Roth IRA?

Holly from Santa Fe asks:

Can I convert my regular IRA to a Roth IRA, and should I?"

First, let's tackle the "can you" part of your question, then we'll move on to the "should you".

Can You? The answer to this question is relatively simple to determine. You can convert from a regular to a Roth IRA if your adjusted growth income is below $100,000. That figure applies to both single filers, married couples filing jointly, and heads of household.

If you're married and you're filing separately, you're out of luck. Rules concerning conversions specifically forbid married persons filing separately from converting their IRAs.

That's about all there is to the "can you" part. But now things get a bit more complicated.

The high road and the low road

One aspect that makes investing so frustrating is the unpredictable pattern stocks follows. The market is like a drunk stumbling home from a bar - you can’t expect a straight path, but you can be reasonably sure of the final destination – home.

Ask MAX: Investing $20 a month?

02/24/05 - Ask MAX

Katherine from California asks:

I’m 21 years old and interested in starting to invest $20 a month, what do you recommend?"

Most people don’t start investing until they have more money to invest. However, investing smaller amounts of money for a longer time period can be even more beneficial than investing larger amounts later in life.

It sounds impossible, but $20 invested today could be worth $500 when you hit 70 years old – and that’s using a fairly conservative growth rate below the historical stock market return.

Sadly, it can be difficult to invest small amounts of money. While you can always save in a bank account or even in a money market mutual fund, you’ll get a bigger bang for your buck in a lower fee mutual fund that invests in stocks. Mutual funds allow a small investor to invest in dozens of stocks for a reasonable fee.

Most good mutual funds require investors to fork over $2,500 to get started, although there are many good ones that require $1,000. Better for your situation, some waive the minimum if you agree to invest a small amount of money each month.

January 2005 performance review

The Conservative portfolio lost .46% for the month of January. We were too light on longer term bonds to have a positive return in a month when most categories of funds slipped.

Time to Choose a New Broker? - Part II

Last month we shared the unfortunate news that Scottrade is raising their mutual fund buying fees. This month we will go into greater detail about the alternatives to Scottrade. 

December 2004 performance review

The main drivers were utility and foreign stocks. American Century Utility Income was up a whopping 23.8% in 2004, as this formerly out of favor category finally caught investor’s attention. Forward International Small Company – a high risk fund we have at just 5% now – was up 25.5%.

Time to get a new broker?

For Powerfund Portfolio subscribers, the most efficient way to invest our model portfolios is through a so-called “fund supermarket” at a broker like Scottrade. This way an investor following our model portfolios can trade and track the funds from all the different fund families we recommend, all in one place. Unfortunately, using a brokerage platform usually adds a layer of extra costs. As expenses cut directly into your investment returns, it’s important to pay as little for trades as possible. At some brokerage platforms, these fees can be quite expensive. 

Fool’s Gold

12/30/04 - ETFs

One inalienable rule in the mutual fund business is that funds with hot track records bring in the most money. Like it or not, this is a business of performance chasing. But occasionally this law of past performance does not explain investor excitement over a particularly popular fund.

A good example is when Merrill Lynch brought in over a billion dollars into their new internet fund, which they launched in early 2000 – just in time to destroy investor’s money. There was no hot past performance, just clients of the broker who were hungry for Merrill’s expertise in an area that made other investors rich. In this case, the past performance of other funds in the category was enough to bring in investor money.

This year we are seeing another illogical success story in new fund launches, and this one is not even in a particularly hot category.

November 2004 performance review

No funds in this portfolio are issuing a capital gains distribution that warrants the selling of the fund to avoid a tax hit. We do advise new investors who are just adding a stake to wait until after the record date to purchase this portfolio’s funds in a taxable account.