Would like to open Roth IRA

[Guest abozny]

I am a complete newbie to IRAs.

About me:

I am a 37 year old male US citizen working abroad in Frankfurt, Germany. I am employed by a German company.

I am married to a 32 year old employee of the US Foreign Service. My wife would also like to open a Roth IRA.

We file a combined US tax return. My wife pays US income taxes while I pay German income taxes. Because I earn less than the legal limit, I am exempt from paying US income taxes.

We have no children and do not plan on having any.

My wife read about the Roth IRA and it sounded great for us.

How can I open a Roth IRA and how can I contribute. I don't believe payroll deduction would be possible.

Thanks for any tips on how I can begin this project. If this is the wrong place to post such a question, please excuse me and direct me (if you would be so kind) to the correct forum.

Al Brandt

[John G]

I am a 37 year old male US citizen working abroad ...I am married to a 32 year old ...We file a combined US tax return. My wife pays US income taxes...

How can I open a Roth IRA and how can I contribute. I don't believe payroll deduction would be possible.

It sounds like both of you will be eligible for an IRA based upon your wife's "earned income" which is reported on her W2. Her income (if more than $6,000) will cover you both for 2002 and allow you the maximum contribution of $3,000 each.

Sounds like you are new to investing as well as IRAs. I would recommend that for the next five+ years you keep things fairly simple and use either a broad based stock fund or an index fund for starting to build your IRA. You probably want to select a Roth for the favorable future tax treatment.

Your very first step is to contact atleast three potential "custodians" who can set up an account for you. Custodians can include banks, mutual funds/families, brokerages, etc. There are about 8,000 mutual funds... but you only need one initially. Examples include: T Rowe Price, Vanguard, Janus, Scudder, etc. They all have web sites.

You could also go the brokerage route. Examples: Schwab, Fidelity, Etrade, Ameritrade, Quick and Reilly. They all have web sites. Each of these would give you access to mutual funds.

Why contact three? Well, some may have a problem with foreign locations. Fees range from none to $40+ per year. The range of investments will vary.

Ask each custodian to send you information for "just getting started" investors. They ussually have good overview materials. Remember that you and your wife will have separate accounts. I highly recommend equity based IRAs given your age since you will keep these funds building for a long time and you don't want to just settle for a safer interest based return.

You can send them a check or wire funds to get started. You may want to snag the March issue of Consumer Reports which ussually covers retirement planning and has a short list of good mutual funds.

This is a good place to post questions. Good luck with your research and investments.

[Guest abozny]

Hello John G,

Thanks for your nice reply. I was able to open account at Ameritrade. I assume that because I went the brokerage route, that I have to select how my money will be invested (i.e. select a Mutual Fund(s))?

I have a question, what is an equity-based IRA?

I will try to keep reading. Do you know of an IRA FAQ or a Roth IRA FAQ URL?

I'll keep looking.

Thanks for your help.

-Al.

[John G]

Equity based IRA: I was refering to any mutual fund that holds equities (stocks), and was directing you more toward investments in stocks rather than interest bearing CDs, money market accounts or bonds. The reason for this bias is that over very long holding periods you expect equities (stocks) to out perform the IOU type investments because of the growth component. IOU = loans/borrowing and ussually have fixed rates of return but lower risk

Yes, with an IRA you have a very large role in choosing your investments. At Ameritrade, the focus is on internet style service rather than face to face meetings and they do not give a lot of advice. I do have an account at Ameritrade from when they bought another firm... but since it has just a one penny balance (for two years now) I don't use their web site for investments! I am sure that they have a list of mutual funds.... look for a broad based No Load (fund with no front or back end commission) or an index fund (such as a S&P 500 index that owns 500 stocks) which often has lower annual expenses than actively managed funds.

General info on IRAs can be found in IRS Pub 590 and at the www.rothira.com web site which has lots of articles. Info on investing can be found in Worth, Kiplinger, Money and Consumer Reports (mostly just the March issue). There are hundreds of web sites for brokerages and mutual funds that have some info as well.