A daughter's financial future; sorting through IRAs

Q My daughter has finally reached a salary level where she can begin to think about serious investing. What percentage of savings should be invested in her 401(k) and what percentage in mutual funds?

P.C., via e-mail

A "We can't give you specific percentages, because we don't know your daughter's take home pay or her expenses," says Pat Schipper, a financial consultant with Prism Financial Group, in Overland Park, Kan. "Still, your daughter should maximize her contributions to her 401(k) at least up to the dollar match provided by her employer."

If possible, she should contribute the maximum amount allowed by her company. Beyond that, "she should make certain she has emergency funds set aside for a rainy day," Ms. Schipper says.

Once that is done, she recommends your daughter consider buying disability insurance and then investing in a Roth IRA, up to the $2,000 contribution level.

If she has any disposable income left at this point, then consider taxable mutual funds, Schipper says.

Q Please compare the main differences between a SEP IRA and a Roth IRA. I am self-employed, with an approximate annual income of $60,000.

P.L., Palm Springs, Calif.

A Each form of individual retirement plan has certain advantages.

SEP IRAs are available to self-employed individuals, sole proprietors, persons in a partnership, or owners of a business. Contributions to a SEP can be greater than to a Roth IRA.

The Roth allows maximum annual contributions of $2,000 per individual - regardless of whether they are self-employed. The SEP allows you to salt away as much as 15 percent of your self-employment income, up to $22,500. (In your case, the maximum contribution would be about $8,000.)

Contributions to a SEP reduce your taxable income. Contributions to a Roth are not tax deductible, although earnings grow tax free. Earnings on a SEP are taxed when withdrawn.

Financial adviser Ric Edelman discusses SEPs and both traditional and Roth IRAs in his book "The Truth About Money" (Harper Business).

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com

(c) Copyright 2000. The Christian Science Publishing Society

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