Some tough questions from readers!

 

You’ve been writing in like crazy lately, and asking me some really tough, intelligent questions. So I think it’s only fair that I publish some of the very best ones — along with my answers — for everyone to read.

Let’s start with one that’s based on my recent column about MLPs. Chuck wrote in and asked …

“I’ve read you’re not supposed to hold MLPs in IRAs. But what about Roth IRAs?”

Well, Chuck … it’s pretty much the same deal — MLPs are best left out of your Roth IRA.

The reason is that, just as with traditional IRAs, MLPs held within a Roth account could still be subject to taxation as unrelated business income.

I know this seems counterintuitive since all you typically hear is that Roth IRAs mean you never have to pay any taxes EVER again. But MLPs are a special case.

As I said in my original column … if you’re earning less than $1,000 a year from all the MLPs within your IRA, then you’re going to be okay. Plus, certain MLP funds will keep you in the clear, too.

However, it’s easier to just keep your MLPs in a regular taxable account and avoid the worry. You will also be able to take better advantage of the tax-deferred aspect of some of those distributions.

“In a recent article you indicated that the State of Indiana’s pension is likely to bite the dust within the next two years. As retirees with pensions there, my wife and I have been assured by the state pension office that it is in no way financially troubled. Who are we to believe?”

A: I was citing a study by Joshua D. Rauh, a professor from the Kellogg School of Management at Northwestern. He has written extensively on the subject of state pensions.

According to Rauh, Indiana’s system is one of the most at-risk for failure based on its current assumptions and structure. You can read his full report here.

Obviously, there’s debate about Rauh’s methodology and conclusions. More importantly, Indiana can make changes that will shore up its funds for retirees going forward.

But here’s my take: Always assume that anything can happen!

It’s certainly fine to hope that your promised benefits will continue to be delivered. But also do your best to plan for the chance that they won’t.

This is precisely what I’m telling my own father, who has a state pension in Pennsylvania. And it’s also what I tell anyone who’s counting on a private pension — or even Social Security — to get them through their golden years.

“Assuming a money market is secure and stable, what impacts could be expected to it in an environment of high (and rising) interest rates and commodity prices?”

A: First the short answer: Traditional money market funds are fairly immune to interest rate risk. If anything, you can just expect their yields to move higher as rates rise.

However, once we start talking about rising commodity prices, we are also talking about relative purchasing power and the prospect of inflation. What’s interesting to note is that right now inflation seems more painful to many folks than it did even back in the early 80s.

That’s precisely because this time around interest rates aren’t high enough to allow even someone with a large nest egg to keep pace with rising prices for major categories like food, energy, healthcare or education.

So, unless interest rates do rise sharply, money market funds will clearly not help you deal with higher commodity prices.

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“I own I-bonds now. Should I sell these off and are they in danger of collapse?”

A: I-bonds are U.S. government savings bonds that have a built-in inflation adjustment just like Treasury Inflation-Protected Securities (TIPS).

Therefore, when they’re held to maturity, I-bonds are among the safest investments you can possibly hold. And while I don’t believe that these bond categories represent the bargains they did a year or two ago, I don’t expect them to collapse, either.

However, as I have noted here previously, even U.S. government bonds CAN hand you capital losses when you hold them through mutual funds. That’s because even though you might not be selling your fund, the fund itself is constantly buying and selling bonds — and locking in gains or losses along the way.

“My understanding is that the dividends received from stock holdings should be re-invested. I will not be withdrawing money
for a few years, so do you recommend re-investing in specific stocks in your portfolios and taking the income from others?”

A: If you don’t need the income right away, I certainly think reinvesting dividends is a GREAT strategy for building your wealth at an even faster clip. Plus, it sets you up for even greater income down the line.

However, I leave the decision totally up to each individual reader to make because it really depends on your individual goals, time horizon, and other factors.

That’s it for now … but please keep writing in with your comments and questions, and I’ll do my best to answer more of them in future columns!

Best wishes,

Nilus

P.S. One of the most frequently asked questions I get is, “What investments are you recommending right now?” For the answer to that, just click here.

http://www.moneyandmarkets.com/some-tough-questions-from-readers-44154