A reader writes: Tax time is approaching and I just got a small advance for a "memoir." What shall I do?
Congratulations. In your shoes I'd consider establishing a Roth-IRA. This phrase refers not to a fanciful plot involving Philip Roth and the Irish Republican Army but to a way of investing money tax-free and saving for your future. The initials IRA stand for "individual retirement account." In the Roth variety you do not get a tax write-off in the year you invest the money. But when you make withdrawals after reaching the mandatory age, you pay no tax on any of your profits whether achieved from dividends or capital gains.
Young writers would be wise to invest the maximum amount in a Roth-IRA annually -- to the extent that their finances allow. You may do this once a year, when April 15 comes around, or set aside a fixed amount each month. The latter plan has the added advantages of dollar-cost averaging.
The ideal instrument for such an investment is a conservative, low-cost mutual fund, such as the Vanguard Wellington fund, which has been in business for a long time, boasts an excellent track record and has a relatively low expense ratio. At any given time Wellington holds 60% of its assets in diverse stocks and 40% in bonds and is a good all-weather fund. Other smart choices include an index fund devoted either to the Standard & Poor 500 or to the total stock market. But I see I have introduced terms that I will need to explain ("index fund," "expense ratio," "dollar-cost averaging"), so I will desist for now with the caveat that nothing said here is intended as a specific buy-sell recommendation and that examples are given for instructional purposes only.
Readers are invited to send in queries for future columns.