Opening a Roth IRA

[Guest Mellow]

Hi,

I am a 22yr student, working full time. I am looking to invest my money. My job has a 401k plan but my employer doesn't match our contributions to the 401k plan. I instead decided to open a Roth IRA outside.

Being that the company doesn't contribute and I will be leaving the company in about a year so I think the Roth IRA is a good way to go.

I have been reading over some Roth IRA basics to get the gist of things.

I understand that I should look for a broker that doesn't charge an annual fee (or charges a low fee).

What company can I go to start open an account or get more information?

What is the index fund?

WHen I open a Roth IRA, how does my money grow? am I investing my money in different stock options and who decides where the money goes? How is this different from a mutual fund?

I read something online about money market. What is that?

Thanks

[John G]

"I understand that I should look for a broker that doesn't charge an annual fee (or charges a low fee). What company can I go to start open an account or get more information?"

The three biggest choices for a Roth account "custodian" are: brokers (online, discount, traditional, etc), mutual funds (or fund families) or banks. There are literally thousands of choices and you need to decide on what services and features are important to you. The annual fee (if any) is one part of this choice, but you should also consider convenience, services and types of investing you plan to make.

"What is the index fund?"

An index fund normally refers to a specific type of mutual fund that invests in stocks that are members of a specific list such as the S&P500 large companies.

When I open a Roth IRA, how does my money grow? am I investing my money in different stock options and who decides where the money goes? "

You money grows when you either loan it out (think CDs, bonds or money market accounts) or invest in equities (aka stocks) where you take a ownership interest in a firm and expect them to grow in size, have profits and at some point pay dividends. Your money, which is also known as "capital", is valuable and invested wisely brings you a return. Many people make their own decisions on investments which requires a little reading and exploring choices. However, some folks want others to make this decision and this second group either chooses a traditional broker (they get paid by fees and commissions) OR a mutual fund.

How is this different from a mutual fund?

A mutual fund is a company that pools the "capital" or "assets" of many and then deploys these funds to buy stocks, bonds, or other investments. A participant in a mutual fund owns a small fraction of the total "portfolio" or collection of assets the fund has purchased. Mutual funds come in dozens of different types. And index fund is one specific type. Each fund will define the type of investments they make. You should understand that funds can be broadly classed into two big catagories. "No Load" funds have no initial or close-out fees. "Loaded" funds are sold by a sales staff and either have a front end fee of 3-7% or a similiar fee when they sell them.

I read something online about money market. What is that?"

A money market is another specific type of mutual fund. Most of these buy relatively short term "paper" or IOUs from governments, industry, banks, etc. The main distinction between a money market and a bond fund (which also holds IOUs from the same sources) is that money market arrangements are very short term, often just a few weeks, while bond fund holdings can be 5-30 years.

Welcome to the club of future thinking investors. Make sure that the funds you setting aside in a Roth are not something you need in the next few years. While the Roth is a great investment, your first priority at the age of 22 should be to nail down that solid education. Education is another type of investment. Good luck with your studies. Post again if you have other questions.