Just a few questions before I enter into a Roth IRA (confussion)

[Guest mds3673]

Hello All,

I am 21, confused about what to invest in, and I need to get some type of investing program started for retirement. So here are my questions:

If I start investing in a Roth IRA this year (2002), (all payments will be made January of every year in full) and invest the maximum amount of money each year, Can I take all the money out at one time when I am 46? If so, what is the penalty I will be charged?

Someone please help me

:confused:

Sincerely,

Marisa

[John G]

Marisa, I sincerely doubt that you can predict the direction that your life, career and financial status will flow over the next 25 years. Most adults have trouble being 50% right about stuff that will happen in the next five years. {if you doubt this, ask some adults to "reset the clock 5 and 10 years" and ask them what changes in their lives came as a surprise..... like car accidents, inheritances, promotions, job transfers, babies, illness, death of a parent, etc.} I would say that you have virtually no chance of getting a 25 year snapshot correct. You probably didn't want to hear this, but it is very true. Now on with the Q.

If you invest 3,000 each year for the next 25 years and achieve an average annual gain of 10% (a reasonable assumption) then at age 46 you will have: $295k in Roth assets , of which $75k were contributions. Using the "Rule of 72", 10% annual rate means assets double about every seven years. Note, the results are future dollars, and do not include the impact of inflation. You could take out your contributions at any time, but the earnings would be taxed if withdrawn and you would also have a 10% premature withdrawal penalty.

Should you start a Roth? The two great long term tax shelters for the average citizen are home ownership and Roth IRAs. If you have funds that you do not need in the next few years and have some cash reserves (in case you lose your job, 6 months spending money of at least 35% of your annual gross income would suffice), then a Roth might be the next step. I would look to a custodian that can offer you a no-load broad based stock mutual fund or index fund to get started. When you have less than 20,000 to invest a broad based mutual fund gets you diversification and you do not need to spend a lot of time watching it. No load means no front or back end commissions are taken out of the investment. Index funds are broad based and because they are set up by mathematical rules have typically much lower annual expenses.

There are a lot of assumptions built into the above recommendation. If you want a more specific answer, you need to tell us more about yourself. Such as: your profession, education status or completion date, marital status, approximate annual income or marginal tax rate, knowledge about investing, risk tolerance, number of hours each year your are willing to research/review your investments, or other special circumstances like health.

The earlier you start a systematic investment program, the better chance you have for long term success. That 295k at age 45 can further grow to $2.1 million by age 65. During your career you will also have other investment opportunities like 401k, 403b, profit/pension, thrift plan, and ESOPs which have various tax shelter benefits associated with them.

I am glad you are thinking about this topic at age 21. It is a lot harder to find great options for adults who wait until they are 45 and are wondering if they somehow "missed the boat". Sadly, they did.

Post again if you have additional concerns.