If you don’t have an IRA, get one

Most of us should be funding IRAs (individual retirement accounts) for ourselves. Here’s why.

First, it can get you to a comfy retirement. Pensions these days are getting rarer and ricketier. Social Security isn’t looking like it will support us too well in our golden years, either. It’s increasingly up to us to prepare for our own needs.

An employer-sponsored retirement plan (such as a 401(k), 403(b) or 457 plan) can be as effective or more effective than an IRA, especially if your employer chips in some matching money. If it doesn’t, though, a Roth IRA is likely your best bet.

The beauty of a Roth IRA is that it lets you contribute and invest money for long periods, and then ultimately withdraw that money, tax-free. Assuming you qualify for a Roth IRA, as most of us do, the money you put into it is from your post-tax income — you get no tax deduction for contributing to it, as you do with traditional IRAs. But what you take out at the proper time will not be taxed, no matter how much it grows. If your $30,000 invested over many years eventually becomes worth $150,000, your $120,000 gain is not taxed at all. Nice, eh?

Another benefit of the IRA is that it gives you more control over your investments. Many employer-sponsored retirement plans give you a narrow range of investment options — perhaps a handful of mutual funds to choose from, for example. With an IRA, you can invest in just about any mutual fund you’d like, or any stocks, bonds or certificates of deposit, among other options. You can set up an IRA with your brokerage, and buy and sell whenever you want. (For tips on finding a good brokerage, visit www.broker.fool.com and www.sec.gov/answers/openaccount.htm.)

IRAs are also handy if you’re saving for college. Assets that parents hold in a regular investment account can reduce financial aid awards their children receive. However, most financial aid formulas ignore retirement savings. In some states, IRA assets are shielded from creditors, too. Get IRA and general retirement guidance at www.fool.com/retirement.htm and http://money.cnn.com/retirement.

Ask the Fool

Q: What, precisely, are “tech stocks,” and are they a good buy now? — M.C., Tulsa, Okla.

A: People often use the term “tech stocks” to refer to computer-related companies and software companies. But when you think about it, it’s hard to think of many companies these days that don’t employ plenty of technology.

Think of automobile companies, for instance. Cars are big metal-and-plastic heaps of technology. The retail giant Wal-Mart uses a lot of technology in its operations, from inventory control to restocking and payments. Pretty much any airplane-related enterprise uses technology — from building jets to booking flights. Likewise, United Parcel Service, FedEx and other delivery specialists rely heavily on technology. Of course, some companies do so more than others. Intel, for example, is much more of a technology company than Tootsie Roll.

That said, before you get too excited about any industry that’s heavy on technology, it can be helpful to glance back at history. Automobiles and the airline industry were once the new, exciting thing. They changed our lives and society, and became necessities. Yet in the long run, they haven’t proven to be the best places for investors’ money. Don’t think in terms of “tech stocks.” Instead, evaluate each company and industry on its own merits.

My dumbest investment

A few years ago, a broker advised my friend to buy AT&T stock. She said, “I’ve heard of them” and bought some, without doing any research. The stock was at $90 per share. Today it is around $19. She’s still holding, hoping the stock will go up some day. Another friend works for Delta Airlines. After 9/11, she told me to buy Delta stock, which was around $30 a share. I did some research and decided there was no way I would buy it. Today it’s around $4 per share. All the way down, my friend kept buying more! I’d ask, “Why are you throwing good money after bad?” She kept saying she was averaging down, bringing her cost basis down. If it goes to zero, she will really have a low cost basis! — A.C., Scottsdale, Ariz.

The Fool responds: It’s sometimes hard to view your employer objectively. Your friend with AT&T stock, meanwhile, should ask herself whether it’s one of the best places she can think of to park her money. If she thinks she could do better elsewhere, she should sell. Concentrate your money on your best ideas.