The Answer Guy
The Answer Guy on DRIPs and 401(k)s.
George Mannes

(MONEY Magazine) - QUESTION: My youngest children, ages six and nine, each have $1,000 in savings to invest for at least 10 years. Would DRIPs be a good place to start? --Dave Delaria Jr., Henderson, Nev.

ANSWER They're useful for buying stocks when you have little to invest. But let's clarify the terminology first.

DRIPs--short for dividend-reinvestment plans--let stockholders easily and inexpensively purchase shares with their quarterly dividends.

But your kids don't own stocks yet. So they need to start by enrolling in direct stock-purchase programs, which let you buy small slices of stock directly from companies without setting up a brokerage account. Companies allowing direct purchases include household names like ExxonMobil and Wal-Mart; the minimum initial investment is usually $250 or less. Dividend reinvestments are part of the package, and you can typically chip in extra money to buy more shares. "It's a real door-opener for an investor," says Chuck Carlson, editor of the DRIP Investor newsletter. Go to dripinvestor.com for a list of about 375 companies allowing direct purchase.

The plans have some disadvantages: Owning a handful of stocks gives you less diversification than investing the same amount in a typical mutual fund. (The American Funds family, notably, has three MONEY 65 stock funds with 5.75% loads and$250 minimums.) Plus, the fees for small direct stock buys are often high--say, 10% on a $50 purchase.

QUESTION: My husband has been putting 10% of his salary into his 401(k), but his employer matches only up to 4%. Should the extra 6% go into a Roth IRA instead? --Gina Healey, Surprise, Ariz.

ANSWER It's a good idea, but only if you follow through on your plan.

An employer's matching contribution is only one of a 401(k)'s benefits. You don't pay taxes on money you contribute, but you will be taxed on withdrawals. The tax treatment of a Roth IRA is flipped around: Your contributions (currently limited to $4,000 apiece for under-50 spouses earning up to $150,000, and diminishing after that) come out of after-tax dollars, but qualified withdrawals are tax-free. Whether it's better to pay Uncle Sam now or later depends on such unknowns as your future earnings and tax bracket.

That uncertainty is one reason why Ben Jennings, a fee-only financial planner in Lakewood, Wash., likes your Roth idea. It gives you "tax diversification," he says.

But a Roth has a big risk that a 401(k) avoids: you. Once you're in a 401(k), contributions are automatic. "With the Roth IRA," says Jennings, "you have to decide to write the check."

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.