March 17, 2012 - 4 Good Reasons to Consider a 'Do-Over' for Your IRA - by Morningstar Investment Research
At first blush, "recharacterization" might sound like the worst kind of Internal Revenue Service gobbledygook; as I type it, Microsoft Word doesn't even recognize it as a word. (Notice that I chose the much more user-friendly "do-over" for my headline.) But a recharacterization isn't as complicated as it sounds. Essentially, it's a way to undo an IRA that you might have opened or converted, enabling you to change a Roth IRA back to a traditional IRA or vice versa. Like tax-loss selling, recharacterizing can be a valuable maneuver to help some investors lower their tax bills. Morning star director of personal finance Christine Benz addresses several key situations when a recharacterization can make sense.
What Is Your 401(k) Really Costing You?
I have both an IRA and a 401(k) account. I know how to figure out costs associated with the IRA, but how do I determine what my 401(k) plan is costing me?
Morningstar assistant site editor Adam Zoll recently answered this question, stating that figuring out who foots the bill for your 401(k) plan is a noble but, at present, complicated pursuit. Many workers who participate in 401(k)s just assume the plan costs them nothing outside of what their funds charge, but this is often untrue. Finding out what your plan's fees are is a good idea, especially given that funds may be held in a 401(k) for decades, making the imp act of high fees that much greater. In fact, the Department of Labor estimates that an employee with $25,000 in a 401(k) account earning 7% per year and fees and expenses of 0.5% would have $227,000 after 35 years. But in a plan charging 1.5% in fees and expenses that amount drops to $163,000, or 28% less than with the lower-fee plan. You might be wondering why 401(k) plans need to charge non-investment-related fees at all. There are a handful of reasons for that.
Among the other topics we addressed this week:
How Morningstar's Analysts Decide What Mutual Funds to Cover. Big funds for sure, but worthy growing or undiscovered gems also make the list.
Tradewinds Leader Sets Sail. Putnam loses key executive and more.
A Fine Line in the Active Versus Passive Debate. An increasing number of investors are actively using beta in their attempt to create alpha.
How to Invest Like a Contrarian. The value-stock guru David Dreman talks about his new book, lessons learned, and what he sees in today's market.
The Most Leveraged Closed-End Fund Doesn't Acknowledge It's Leveraged. Buyer Beware: This PIMCO CEF has borrowings in excess of its underlying assets, and the fund family's website implies it has no leverage.
Watch Out for Extreme Concentration in Sector Funds. Sometimes just a few stocks dominate these portfolios.
Top 3 Sector Bets of Our Ultimate Stock-Pickers. Technology continues to gain traction on the more traditional sector commitments of our top managers.
Social Responsibility and Fund Performance. Does social screening help or hurt returns?
4 Questions to Ask Before Venturing Into a Self-Directed IRA. Prospective investors must understand the risks, as well as the specific rules, governing these accounts.
WisdomTree Launches First Active Emerging-Markets Corp Debt ETF. IShares draws up plans for human rights ETF, along with actively managed bond funds. Plus, the week's best- and worst-performing ETFs.
What's in Your Retirement Buckets? Readers discuss how many buckets they have as well as what goes where.
Should Greece Remain in the Spotlight? Much of the near-term risks in Greece have diminished, but the country will remain an important preview of what could happen in other heavily indebted countries.
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