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Q: Last night I came to the realization that I’m not allowed to contribute to my Roth IRA if I have no earned income, which I don’t. All I have is my teacher retirement income. Bummer. This is a kink in my plan.

I wanted to put away about $5,000 a year in the Roth IRA and let it grow tax-free.

Where should I put my money to make the most of it? What are my options? Cut expenses? Tax-exempt fund? Annuity? Get a job?

I really don’t want to work, or cut expenses (I’ve done that). My tax rate is around 15 percent.

A: The tax efficiency of the broad exchange-traded index funds (ETFs) that invest in equities is quite powerful, particularly since dividend yields are so low.

This is also a place where the tax accounting for regular investments comes in handy.

If you were to invest in a tax-deferred annuity, the return on your investment would be the first dollars to come out, so every dime of withdrawal is immediately taxable.

Investing in a taxable stock, on the other hand, allows you to realize only the proportion of appreciation that you experienced on your actual shares sold.

So if you make a $10,000 investment and it doubles in 10 years, you can sell half of it and recoup $10,000. Your taxable gain on that $10,000 sold, however, will be only $5,000.

Q: My husband’s job was eliminated last April. He has a 401(k) worth around $200,000.

We know we need to reinvest it somewhere, but have no idea what to do with it. He is 60 and I am 56. Should we roll it over into an IRA? Or divide it up between various other investments?

A: The best course of action would be to do an IRA rollover from the 401(k) account to a new account at a place like Schwab.

It has quite a few offices, so someone can walk you through the process in person if need be.

You could, for instance, keep it really simple and divide your investments equally between Schwab U.S. Broad Market ETF (ticker: SCHB), which has an expense ratio of 0.04 percent, and Schwab U.S. TIPS ETF (ticker: SCHP), which has an expense ratio of 0.07 percent.

At an average cost of 0.055 percent, your investment expenses would be nominal. You can learn more about these ETFs at

Investment advisers tend to pooh-pooh client concerns about the costs of investing, acting as though high expenses were the only way to achieve superior performance.

Unfortunately, the reality is that expenses have a big impact on performance, and what seems like a minor cost — say 1 to 1.5 percent — will work to reduce both your income and your long-term performance.


Copyright 2013, Universal Press Syndicate