With so much cash on the sidelines, Certificates of Deposit (CDs) can be alluring in
today’s market. The interest rate is likely better than most savings accounts and CDs
are insured by the FDIC (Federal Insurance Deposit Corporation) up to $250,000.
This combination is attractive to investors looking to reduce the risk of potential
short-term losses in the stock market.

Before you invest in a CD make sure you understand the potential pitfalls. CDs may
lock you in at a low interest rate. The chart shows as of March 31, 2009 the national
average on a six-month CD was about 1%. Additionally, an early withdrawal penalty
is typically charged if you want access to your money before a CD matures. Lastly,
make sure you also understand the “real return” on a CD, which means how taxes
and inflation may erode what you’ll take home. Indeed, the chart shows CD holders
frequently suffered negative real returns over the past decade.

Is there a place for CDs in an investor’s portfolio? Yes, as short-term investments
that act as a base of a diversified portfolio. But you should keep in mind that a
portfolio needs to include other investments as well that have the potential to keep
pace with inflation and taxes to help you achieve your long-term financial goals.

Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Lower rated “junk” bonds are more at risk of default than other bond investments and are subject to liquidity risk. Value investing involves the risk that the market may not recognize that the securities are undervalued and they may not appreciate as anticipated. Foreign investments may be more volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic factors. Growth and technology investments may be especially volatile. Diversification does not guarantee profit or protect against loss.

Source of chart data: Ned Davis Research, 3/31/09. Inflation rates are represented by the change in the Consumer Price Index (CPI) and CD Rates are six-month certificates of deposit rates as tracked by an average of dealer offering rates on nationally traded Certificates of Deposit. Returns are net of 28% federal income tax rate. Real rate of return is equal to (CD rate minus inflation rate) minus (CD Rate x Tax rate). This chart is for illustrative purposes only and does not predict or depict the performance of any particular investment.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting www.oppenheimerfunds.com or calling 1.800.525.7048. Read prospectuses carefully before investing.

As you are painfully aware, the before-tax money you’ve put away for retirement, and which has been growing tax deferred, has a co-owner: Uncle Sam. The tax laws say you must start withdrawing and paying taxes on this money when you reach age 70½. If you fail to take the Required Minimum Distribution (“RMD”) there is a penalty tax of 50% on the amount you should have taken and did not. The reason the government mandated the RMD is to assure they get their share in taxes before you expire. For 2009, the government will not impose a penalty for skipping the RMD, because withdrawing money would compound the market losses suffered by many. But, in 2010 you will again be required to withdraw from your qualified retirement money if you are 70½ or older. What can you do if you don’t want to take withdrawals?

The only solution is to convert some or all of your qualified retirement to a Roth IRA if you can qualify. If you make more than $100,000 in taxable income during 2009, you cannot convert money to a Roth IRA; however, in 2010 this income limit will be suspended and you can qualify. When you convert your retirement money to a Roth IRA, you will pay income taxes on the amount converted, but the converted amount will not be included in the $100,000 income qualification limit. Thereafter, all the principal converted and future earnings will be 100% tax-free to you and whoever inherits the money after your death. What’s more, annual distributions from a Roth IRA are not required. You can let it accumulate tax-free, or you can make tax-free withdrawals: your choice. There is one small drawback: even if you’re over 59½, you cannot withdraw earnings tax-free until after five years. You will still have immediate tax-free access to 100% of the money converted to a Roth, but withdrawn earnings will be taxed during this five-year period. Withdrawals come from converted money first.

If you cannot now qualify for a Roth IRA conversion due to your annual income, you will qualify in 2010. If you convert in 2010, you will get all the benefits discussed above, but you will have to take your RMD for 2010 prior to converting. You can stretch the taxes on the amount converted over the following two tax years. One-half of the taxes will be due with your 2011 return filed in 2012 and the remainder with your 2012 tax return. Best of all, you can change your mind on a Roth conversion up until the time you file your tax return for the year in which you converted, including extensions. This means that if you convert in 2009, you can change your mind, undo the conversion anytime before October 15, 2010, and avoid the taxes. If you think you could benefit from a Roth, you should convert knowing that you can change your mind anytime up to the tax filing deadline for the year of conversion.

Other than avoiding the RMD, why would you want to convert to a Roth IRA? First of all, the IRS now owns a percentage of your qualified retirement money, and the best time to buy them out is when the price, and tax, is the lowest. If you have suffered market losses – and who hasn’t – your tax bite will be less than if you wait until after the market recovers. What’s more, if you expect future tax rates to rise – and that is the consensus forecast – you’ll want to pay now in advance of the tax hike. Additionally, if you move retirement money from the “taxable” category to “tax-free” you will probably pay fewer taxes on your Social Security benefits since Roth IRA income is not counted when computing taxes on SS benefits.

Converting to a Roth IRA is not for everyone, especially if you’ll need to use part of your qualified retirement money to pay the associated taxes. If you have investment losses to offset the taxes associated with Roth conversion, you certainly need to consider converting some retirement money to a Roth IRA. You’ll want to work with your financial advisor to make sure you can benefit. If converting to a Roth makes sense for you, it can be done easily, without delay and at no cost other than the taxes. The Roth IRA conversion is undoubtedly one of the best ways to lower taxes and manage your estate without giving up flexibility. If you haven’t already, you need to investigate this opportunity immediately.

Shelby J. Smith, Ph.D.