It’s a timely question. Plans to reinvigorate the IRA, or something like it, are sprouting everywhere. President Bill Clinton wants to let savers use their IRAs, with no tax penalty, to pay for education and a home, The Republicans’ “Contract With America” proposes a similar American Dream Savings Account. Sens. Pete Domenici and Sam Nunn plan to introduce a bill that is even more generous to thrifty families. It would let you trim your yearly tax bill by as much as you save – with no limit on the amount.
All the excitement might suggest that the present-day IRA is worthless. Far from it. Putting $2,000 into an IRA is the single best financial move many people can make – but they’re ignoring it. Why? Because right now you can’t get a tax deduction by investing in an IRA. But even without that gratifying feature, IRAs still offer a huge advantage: anything your money earns in an IRA is untaxed until you take it out. So your savings multiply fasten If you put $2,000 a year in an IRA earning 6 percent, after 15 years your account would be worth $46,552. Outside an IRA, you’d have only $41,013. Here’s what the experts are thee sing for their IRAs this year:
Charles R. Schwab, 57CEO, Charles Schwab & Co.
Though he made his name enabling small investors to buy stocks inexpensively, Schwab is picking funds – SteinRoe Special, Berger 101, Founders Special and Schwab 1000 – for his IRA. “I’ve put the maximum allowable into an IRA since 1982. I hold a fund for at least three years. If its performance is among the worst in a group of similar funds by the end of that period, then I’ll move the money into another fund I already hold, or buy a new one.”
Mario Gabelli, 52Chairman of Gabelli Funds
Gabelli’s nose for bargains led him to Time Warner convertible bonds, maturing in January 2015. “Last year’s decline in bond prices severely damaged convertible securities. This security will provide a total return of 12 percent to 14 percent over the next 12 months.”
Dan Dorfman, 63Money columnist and CNBC correspondent
Blunt-spoken Dorfman opts for two-year Treasury notes yielding 7.56 percent, “I don’t invest in IRAs, but this is where I recently put my retirement money. It’s the first security purchase I’ve made in nearly four years. All around us there are land mines, and the mines are: uncertainty over interest rates, overseas economies and our own economy. The world’s not coming to an end-there won’t be a huge sell-off – but I think it’s a time to be on the sidelines and see what happens.”
Jon Fossel, 53Chairman of Oppenheimer Management
Not surprisingly, Fossel picks among his company’s funds, But his choices, Oppenheimer Time Fund and Oppenheimer Global Emerging Growth Fund, are the result of an interesting strategy. “Small companies and emerging markets got hurt the worst in 1994. Each year I switch all my IRA money, plus my new contributions, into the funds that have done the worst in the previous year. If I had invested equally in all Oppenheimer funds over the last seven years I would have earned a total return of 125 percent. Doing it this way I’ve earned 236 percent.”
John L. Steffens, 53Head of Merrill Lynch’s brokerage unit
Steffens is hedging his bets with a 20-year, zero-coupon corporate bond yielding 8.75 percent, and Select Ten Portfolio, a Merrill stock fund. “With interest rates currently high, buying good-quality corporate bonds makes very good sense. The Select Ten fund is based on an investment theory that calls for buying on Jan. 1 the 10 companies in the Dow Jones industrial average that pay the biggest dividends relative to their stock price. The following Jan. 1, you sell those stocks that are no longer among the top 10 and buy the stocks that are. This approach has beaten the index for 19 out of the last 20 years,”
Jean-Marie Eveillard, 55Manager of SoGen International
His top-rated fund scours the globe for stocks, but Eveillard’s IRA is a three-year certificate of deposit from Citibank. “Almost all my other savings are in my funds, but my wife handles our IRAs. What strikes me is that currently the yields are best in the two-to five-year range. They are high compared to the yields on long-term securities, and they’re high compared to the rate of inflation.”
Jim Rogers, 52Author and investor
Rogers, who turned a motorcycle adventure into “Investment Biker: On the Road With Jim Rogers,” has plucked a staid utility – Tucson Electric Power – for an IRA. “All together I own 50 utility stocks. I expect them to be one of the best-performing industry groups in the stock market this year. There’s a very serious shortage of electrical capacity facing the U.S., and these companies are being deregulated. Utilities are going to be able to make as much profit as they want to.”
Don Phillips, 32Publisher of Morningstar Mutual Funds
A connoisseur of funds, Phillips sticks with Clipper Fund, a small, middle-of-the-road performer. “You can look at IRA money two ways. Because it’s money you won’t need for a long time, you should be willing to take big risks. The other view is that it’s the bedrock of your retirement plan, so it should be invested conservatively. Clipper invests in bonds, but favors equities. James Gipson, who runs it, is a real contrarian. He bets heavily on undervalued companies and industry sectors.”
Daniel Wlener, 38Independent adviser for Vanguard Investors, a newsletter
A student of Vanguard funds, Wiener likes Vanguard/Prime-cap’s industry bet. “This fund invests in fast-growing stocks and has 30 to 40 percent of its portfolio in technology stocks. I think technology is one of the areas where you are going to make money in the future.”
Bill Gross, 50Manages PIMCo Total Return
This top-rated bond fund manager eschews bonds for Vanguard Emerging Markets Index Fund. “Emerging markets have gotten hit hard. But I still think it makes sense over the long haul to invest in the world’s economies that display the strongest growth, the soundest economies and the most stable political systems. One of the best ways to do it is to buy closed-end funds on the New York Stock Exchange. Many of them are selling at a 15 percent discount. Instead of buying the stocks at 100 cents on the dollar, you’re buying them at 85 cents.”
Bill Griffeth, 38CNBC anchor
Griffeth meets fund managers every day, but you’ve never heard of the people who run his IRA choices: General Electric Global Fund, GE U.S. Equity Fund and GE Aggressive Growth. “I’m an all-equity kind of guy and these are no-brainers because they’re so easy to get into through my employer. I don’t put the money in all at once. It’s taken out of each paycheck, so I’m automatically buying more when the price is low.”
Mike Stolper, 49Stolper & Co., an investment adviser
Stolper, whose company picks funds for the wealthy, has a personal relationship with the man who runs Meridian, his IRA choice. “I’m probably the third or fourth largest shareholder in the fund. Rick Aster, who manages the fund, is someone I could give all my money to and leave the country for 20 years and know that it would be OK. He is so incurably responsible.”
