March 29, 1998

Q. In addition to an employer-sponsored tax-deferred savings plan to which I contribute 15 percent of my annual income, my wife and I have a nondeductible IRA account to which we occasionally contribute. This consists of savings rolled over from 401(k) accounts we had with previous employers, and it has a present value of $122,000, now invested in Vanguard's LifeStrategy Growth. This fund, as well as the other LifeStrategy funds are listed as balanced funds. I am 42 and plan on retiring at age 62. Given this time frame, should I invest this IRA money in one of the Vanguard growth funds, for example one of their index funds?

J.T., Bakersfield, Calif.

A. Such a change might be a good idea in the long run, but for right now I think I'd stand pat if I were in your shoes. The Vanguard LifeStrategy funds are designed to give owners a diversified portfolio in one fund, doing this by spreading its portfolio among various Vanguard funds. In your case, more than half your money is in a total US stock market index and 16 percent more is in an international stock index. A little more than a quarter is in Vanguard's Asset Allocation fund, which divides its portfolio evenly between stocks and bonds, and the rest is in a bond index fund.

When you boil all this down, it works out to less than 24 percent in fixed-income holdings. In normal times I would think this was high for a fellow who's 20 years from retirement -- but in the current hyped-up market I am more comfortable with this than with the all-stock position you would get with Vanguard's Index 500 or either of its two offsprings, the Value and Growth Index funds. The time may come to make such a move, but not now.

Also, I think you are probably making a mistake in viewing your IRAs as nondeductible.

Since it appears that most of these funds are the result of rollovers of 401(k) assets -- which were accumulated in those plans on a tax-deferred basis -- most of that money represents traditional IRA savings, and everything that went in on a tax-deferred basis plus the earnings generated from the account will be treated as earned income upon withdrawal.

Provided that you're within income limits, if you plan to make any future ``occasional'' nondeductible additions to your IRA savings, you should open a separate Roth IRA. Since this is all after-tax money, use of a Roth will shelter the earnings on 1998 and future contributions -- and the bookkeeping will be simpler than for an IRA in which both deductible and nondeductible contributions are combined.