Question

[Guest Mary T]

I'm 25 and am interested in opening a Roth IRA. How does one go about opening one? Is it necessary to shop around for rates? How is a Roth different from a 401(k) (which I don't qualify for currently)?

Also, I'm unclear as to how a Roth can be tax-free unless compensations come out of one's pay check before taxes are withheld.

[Guest Jennifer Reid]

Contributions to a Roth IRA are made with after-tax money, and the earnings accrue tax free. Salary deferral contributions to an employer sponsored 401(k) plan are made with pre-tax money, but the contributions and earnings are taxable when distributed. Most banks and investment brokerage companies offer Roth IRAs, and the fees are probably comparable.

[John G]

Contributions to a Roth IRA come out of your personal funds and are therefore after-tax. You need to have "earned" income to qualify.

Once the money is inside the Roth, it will hopefully grow over time and later (simplifying) you normally can take tax free withdrawals.

You must select a custodian for your Roth IRA. The major three options are: banks, mutual funds and brokerages. Each custodian will have different investment options. Some, but not all, custodians charge an annual fee for IRA accounts.

It sounds like you are new to investing. I am therefore going to recommend that you start your IRA with either a brokerage or mutual fund. Then place you initial contribution into a broadly based index fund. Some examples: Schwab 1000, Vanguard S&P 500. These hold stocks (aka equities) in major companies across different sectors. Since you are 25, you want to think where will you money work the best for you over 4+ decades. I would not recommend using CDs or any fixed interest investment.

Please get a copy of the March issue of Consumer Reports and read about retirement planning. This annual issue always covers in basic English the key issues. Kiplinger and Money magazines are also good sources of info. In addition, most custodians have "introduction to investing" kits along with packages for new IRA accounts.

You might also want to look back to previous comments at this site. Good luck.

[Guest Mary T]

Thanks y'all. That's a lot of information and sounds like it will give me a good start.