Personal Finance Q & A

Shelter From Taxes And Creditors

Q Are my individual retirement and 401(k) accounts safe from creditors?

-C.T., New York

A "Yes, they are usually protected from creditors," in economic difficulties as malpractice lawsuits, personal bankruptcy, or divorce, says Ed Slott, a nationally known tax expert. "401(k) plans are protected under federal law," he says. "IRAs are protected in most states, including New York, under state statutes."

Check with your state attorney general's office or an accountant regarding your IRA. But there's a catch: "Roth IRAs are not yet protected in most states, including New York," says Slott. So if you plan to convert a million-dollar regular IRA to a Roth IRA, you might wait until your state protects the Roth.

Q Now and then I read: "The stock is selling at (so much) next year's earnings." What does this mean, and how does this relate to price/earnings ratios?

- Anon.

A That "so much" is the price-earnings ratio (p/e) and is used to measure the fair value of a stock. Say you want to buy one share of Friendly Gadget Co. Each share costs $40, and Friendly's profits in 1997 worked out to $2 a share. Divide 40 by 2 and you get a p/e of 20.

The main purpose of the p/e is comparison. It shows how well Friendly compares with its competitors. If the average p/e for gadget companies is 15, then Friendly's stock may be overpriced.

But you make money by knowing where a company is headed, not where it's been. Many analysts combine the p/e with predicted earnings. So Friendly may seem pricey at 20 times earnings, but if it will earn $5 a share in '98 ( p/e of 8), it looks like a bargain.

There is no perfect p/e. Companies with fast-growing earnings win higher p/e ratios than slowpokes do. And today's benign, low-inflation economy makes for higher ratios.

Generally, the higher the p/e, the more expensive the stock is relative to its fair value. But a low p/e sometimes stems from risks that are about to affect earnings.

Some newspapers, including The Wall Street Journal and The New York Times, list p/e in stock tables. Value Line (expensive but available in libraries) has more detail. Suggested reading: "The Consumer Reports Money Book" (Consumer Reports, $29.95), and "Making the Most of Your Money," by Jane Bryant Quinn (Simon & Schuster, $30).

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com