September 1, 1997

Q. When I retired in 1993, I had built a 403(b) account, which has grown to a value of $127,350. It's now in an insurance company annuity policy, earning from 5.5 percent to 6 percent. A financial adviser has recommended that the money be rolled over to the Lord Abbett Bond Debenture fund, which could be done without any charge from the insurance company. There are three share types -- Class A, B, and C. Because I will turn 70 in June 1999, Class B would not seem the best option. Class A would give the adviser close to $5,000 for handling the transaction. So it looks like Class C might be the best option. What do you think about this, and, more particularly, what about this fund?

M.C., Allentown, Pa.

A. Morningstar Mutual Funds calls the Lord Abbett Bond Debenture fund ``a good choice for those seeking a cautious high-yield offering,'' and wins Morningstar's five-star rating.

Its yield of 8.6 percent is far from the highest in the junk-bond arena, but that's a function of the fund's portfolio, which is 33 percent highly rated bonds. Its record is long and solid, but that's not to say that this fund doesn't suffer along with other bond investments when interest rates rise. Thus, it lost 7.57 percent in 1990, and 3.86 percent in 1994. Nonetheless, the 10-year record shows average annual total returns of 10.13 percent.

So the fund is solid enough -- provided, of course, that you can sit calmly through those periodic bumps. So the question becomes which class of shares might be best.

Consider: The Class A shares carry a front-end load, beginning at 4.75 percent. The Class B shares have deferred sales charges, starting at 5 percent and declining to nothing after six years. The Class C shares carry a 1 percent sales charge during the first year, but subsequently a charge called a 12b-1 fee is levied at 0.90 percent; this 12b-l fee contrasts with 0.25 percent for the A and B shares.

This all translates directly into your total returns. Over the past 52 weeks, the Class A shares have a 15.2 percent total return, compared with 14.3 percent for Class B and 14.4 percent for Class C.

For a person making a long-term investment, you're probably better off paying the fee upfront and enjoying lower ongoing charges. If you don't think you'll stay with the fund for long, certainly Class C shares are more attractive.

But, as I mentioned above when discussing risk, bond funds can be treacherous over the short run, and if you're contemplating a short-term investment you'd be better off staying with less risky investments.

Q. As is my custom, I funded this year's IRA with a $2,000 contribution in January. Two months later my employer began a 401(k) account for everyone, a godsend we all appreciate. My question is, how do I report this apparent double contribution on my tax return next year?

A.C., Lemon Grove, Calif.

A. There's no problem with making an IRA contribution now that you have become a member of a 401(k) program. But the 401(k) might mean that your IRA contribution is not deductible, or might not be fully deductible.

If you find that little or none of the contribution will be deductible, and for that reason wish you hadn't made it, you are allowed to withdraw the contribution at any time up to the federal tax filing deadline (including extensions).

Such a withdrawal must also include any earnings generated by the funds while they were in the IRA, and those earnings must then be reported as income on your tax return.

The only wrinkle, explained in the latest issue of J.K. Lasser's ``Your Income Tax 1997,'' is that ``if you are under age 59 1/2 years old and not disabled, the 10 percent premature withdrawal penalty applies to the withdrawn earnings.'' But since this is likely to be a small amount, the penalty will be accordingly small -- probably too little to worry about.

Of course, nondeductible contributions to IRAs are a splendid way of boosting retirement savings. While you lose the advantage of tax deductibility, the other big feature -- tax-deferred growth of your principal -- should be enough to convince you of its wisdom.

I have had many correspondents who avoid nondeductible contributions solely because the process of reporting tax liability upon withdrawal is considerably more complex than the process with an IRA containing entirely deductible contributions.

But I don't find the paperwork all that daunting. Moreover, the existence of nondeductible contributions means the ultimate tax bill will be lower.

Q. I'm 70 years old and still working. When I retire, I will not receive a monthly pension, but my contributions to the pension fund will be given to me as a lump sum subject to substantial tax. If I immediately put this money in an IRA, I understand the tax will be deferred. However, I also understand that withdrawals from an IRA must begin by age 70 1/2. Does this mean my lump-sum pension payment cannot be put into an IRA if I retire after age 70 1/2?

G.S., Hyde Park

A. Although people can't contribute to an IRA after age 70 1/2, the rules do allow the rollover of a lump sum such as you will have into an IRA, even if you have passed 70 1/2. But you'll want to be careful about the way the transfer is handled.

If the lump sum is given to you directly, your employer must withhold 20 percent of the amount. To avoid this, select the institution where you want the money to be held, and have the money transferred directly from your employer to the trustee.

Q. My eight grandchildren have been left $58,000. The money is to be invested for them, and the balance cannot be distributed until the youngest is 25 years old. He is now 2. What can you suggest in a growth mutual fund that should be suitable for this?

E.F., Osterville

A. With such a long investment time frame, I suggest you chose a vehicle that can be counted on to do the job without much tracking and without shifting from fund to fund as markets change.

I'm referring to one of the many funds that simply seek to track the results of the Standard & Poor's 500 Index. Some of the largest of these are Fidelity Spartan Market Index and Vanguard Index 500. Both have proved adept at tracking their target, and both charge ultralow fees to manage the funds.

But you'll want to begin by making only a token investment, say $3,000, in the fund of your choice. Put the balance in a money market fund -- either Fidelity Cash Reserves or Vanguard Prime Money Market, if you're using one of the two I suggested.

Then instruct the company to transfer $1,650 a month from the money market account into the index fund account. This will mean that it will take about three years before the money is fully invested, and this strategy, called dollar-cost averaging, gives you some degree of protection against the current high stock market.

Oh yes: The calculator shows that if you achieve average annual returns of 10 percent from this investment, the pool should grow to $519,392 after 23 years.