Retirement Planning Info Resource

• "Roth IRAs are one of the most powerful tax-free savings accounts created by Congress," says David Campbell, financial planner at Bingham Osborn & Scarborough in San Francisco.
  
  
• A Roth IRA offers three big advantages.
  
  
• Your earnings accumulate tax-free.
  
  
• When you take money out of a Roth at retirement, you pay no taxes on your withdrawal. It's a clean, no-hassle transaction.
  
  
• You can withdraw your principal tax-free at any time, and you can also withdraw $10,000 without penalty for the first-time purchase of a home.

You can put $3,000 into a Roth -- $3,500 if you're 50 or older. If you're filing jointly, your modified adjusted gross income has to be less than $150,000 to make a full contribution.

If you're single, the limit is $95,000.

Your modified adjusted gross income is the amount on line 34 of your tax return, plus a few deductions: student loan interest, tuition and fees, and traditional IRA deduction, to hit the highlights. And if you don't have $3,000, you can contribute less -- as little as $50, in some cases.

Your next decision: Where to invest. You can open an IRA pretty much anywhere: banks, mutual funds, brokerage houses. A large no-load mutual fund company, such as Fidelity, Vanguard or T. Rowe Price, will spare you commissions and calls from brokers.

Avoid the temptation to buy the top-performing funds for the quarter. Short-term performance lists are increasingly littered with goofy funds. For example, the hottest fund of 2003 was the American Heritage fund, which has more than 40% of its assets in one stock: Senetek, a health care technologies company whose stock currently sells for about $1. The fund has a 10% expense ratio and has managed to lose 88% the past 10 years.

Instead, consider an asset allocation fund. Sure, you're probably not comfortable using words like "asset" or "allocation" or "fund." But they're fairly simple. They're an all-in-one investment that mixes stocks, bonds and money market securities, or cash. You have no decisions to make -- the fund makes them for you. You have a choice of three types of asset allocation funds:

• Target funds. These funds base their investments on the amount of time you have before retirement. You pick a fund that's geared toward your retirement date. As that day approaches, the fund's portfolio becomes increasingly more conservative.
  
  
• Flexible portfolio funds. These mix stocks, bonds and cash according to the manager's outlook. As you might expect, stock-heavy funds did best last year, but got smacked harder during the 2000-02 bear market. The top-performing flexible portfolio funds are in the chart.
  
  
• Balanced funds. These stick with a mix of 40% bonds and 60% stocks, and, by and large, hold up well in most investment environments. Oakmark Equity Income (800-625-6275) has the best record the past five years, gaining 92%. Another good choice: Dodge & Cox Balanced (800-621-3979).

Investing aficionados say flexible portfolio funds are only for nitwits who can't stand investing. But you might point out that the average nitwit who bought a flexible portfolio fund five years ago gained 14% vs. an 8% loss for funds that track the Standard & Poor's 500-stock index.

Then see who's covering his ears and singing.

John Waggoner's column appears Fridays

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