This week's panel:

Is there an advantage to a SEP over a Roth IRA?

What funds hold defense stocks?

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Is there an advantage to a SEP over a Roth IRA?

from Steve

Q: A friend has a small closely-held business and wants to set up something for his and his wife's retirement. Is there any advantage to a SEP over a Roth IRA, or maybe  over both of them, as business owners. They are are in their late 40's.

They have about $10K to start and another $60K from an inheritance later in the year. They are leaning towards a Roth IRA. I suggested allocating in an index fund or two (Wilshire 5000 and a promising sector), an equity fund and a good bond fund, and to set it up with someone like Vanguard for the low fees.

Their knowledge of investing is low, and I thought it would pay to keep it simple in the beginning.

A: (Rick) The advice you gave your friends is very good. Vanguard is as good a place as any to shop for low cost retirement plans and index mutual funds.

Whether they should open a SEP, Roth IRA, or both, is better answered the couples tax advisor. He or she would know which avenue to pursue that gives your friends the best after tax advantage. Basically, if they open a SEP, they can save money BEFORE federal income tax is withheld, which saves on current taxes. However, SEP money is taxable when it is withdrawn from a retirement account. On the other hand, if they chose a Roth, the money goes into the account AFTER tax, so they do not get any current tax benefit. However, Roth money is withdrawn in retirement, it is tax free.

Again, this questions can be better answered by a tax-advisor who knows your friends situation.

Thanks for writing!

What funds hold defense industry stocks?

from Michael

Q: Can you help me with identifying a fund that carries more than the average number of defense-type stocks, i.e., companies that work with the military, such as Northrop Grumman, Honeywell, United Technologies, Raytheon, etc.

It is very difficult to find such funds because all the fund screeners that I'm aware of don't work with defense or military-oriented stocks. This seems to be a sector to invest in over the next few years but I'd like to find a fund rather than a bundle of individuals stocks to decrease potential risk.

A: (Norm) Fidelity Select Defense & Aerospace (800-544-888) is the perfect fund for you. This mutual fund owns a diversified portfolio of defense/military stocks -- the only pure-play one-stop stock-shop in this sector.

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