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Friday, December 10, 2004

First Command Investors, Take Note!!!!! 
For some reason, I just got a spate of emails from novice investors who have invested with First Command and are considering just taking their money out.

DON'T!!!!!!!!!!!!!!!!

At least, don't do it until you've taken a bit of time to figure out what else to do with that money, once you've taken it out.

Here's why:

If you opened an IRA with First Command, and you just call up the fund company and tell them to send you your money, they won't send you all of it. They'll withhold 20% of that money to pay the IRS.

What's more, unless you roll it back into an IRA within 60 days, you will be slapped with a federal income tax bill on the entire amount, if it's a traditional IRA. Plus an additional 10% early withdrawal penalty if you're under age 59 1/2, whether it's a Roth or traditional IRA. PLUS you'll have to pay any state or local income taxes due.

The bottom line: you could lose up to half your money in federal, state, and local taxes and penalties.

To add insult to injury, even if they do send you a check for 80% of your balance, and you roll the entire sum into another IRA within 60 days, you may avoid income tax. But you'll STILL be liable for a 10% early withdrawal penalty and income tax on the amount the fund company withholds to pay the tax! That's right--you'll be paying taxes on money you've never seen!!!!

You have a couple of reasonable options.

1.) Stay put. Once the First Command commissions-outrageous as they are-are paid, the ongoing expense ratios in the Fidelity Destiny funds are reasonable for an actively managed (as opposed to an index) fund. Yes, the Destiny Funds have lagged their peers in the past. But who's to say they will continue to do so?

Once you're in the funds, staying in them isn't the end of the world. You'll be ok. Don't panic, and don't react emotionally to what REALLY isn't all that big a deal.

2.) Change funds or fund companies. If you do this, DON'T just withdraw the funds and have them send you a check! That's how you'll wind up getting stuck with a nasty tax bill. Contact another company and ask about a trustee-to-trustee transfer. In a T-to-T transfer, your money is transferred directly from one company to another. You don't get a check. The original fund company doesn't hold back 20%, and you have no tax liability (unless the account was outside of an IRA, in which case you'd have to pay capital gains taxes on any profits.)

What other companies? That's up to you. For beginners, I like American Funds (which charges a sales load) and TIAA-CREF. Expenses are very low, and they have relatively few funds, so a novice investor is unlikely to make a bizaare mistake, like put everything he has into a precious metals fund.

If you want more investment options, then I like Vanguard, Fidelity, and T. Rowe Price - all no-load funds. I also like USAA, which specializes in military people and you can get some good value-added services, like great car insurance and renters' insurance. My quibble with USAA is that their funds are uneven. They just did a bloodletting a couple of years ago and sacked a bunch of fund managers. So you have a lot of funds in that family whose managers don't have much of a track record to judge them by. Not a big deal with their S&P 500 fund, though, which is excellent.

Don't get a 'deer in the headlights' look. You CAN navigate this conundrum. Just don't do anything where you recieve a check, and do some due diligence, or get some professional and unbiased advice from a CFP which is more than worth what you pay for it. Especially for a fee-only CFP, if you have any kind of assets.

(Find one at www.napfa.org).

You'll be fine.

Splash, out

Jason

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