New to this

[Guest nwcats]

Hey everyone, I just stumbled upon this site and think it is great! I am new to any kind of investing, so please forgive me if I sound too raw! This might not even be the right forum for me to belong to, but I thought I should start somewhere. Basically, I have a 401k at work which I put 10% into every paycheck. I want to start a ROTH IRA, but have the slightest idea what one is or how to do so. I'm not interested in having anyone trolling for my business, I just was wondering who the whole process works and what do I have to do to start one up. Any suggestions or recomendations are appreciated. Thanks!

[John G]

No problem posting investment questions here as they are often intertwinned with Roth/IRA issues.

Sounds like you are going to tuck some extra money into a Roth. The first issue is to make sure you have "earned income" and otherwise meet the filing/income qualifications. I will assume that you are qualified.

Next step is to select a custodian who will hold your assets. Your primary choices for custodian include: brokerages, mutual funds or fund families and banks. Some of these options can be done on the internet, others by 800 numbers. I recommend that you consider either a discount broker like Etrade, Schwab or Ameritrade or a No-load mutual fund family like Vanguard, T Rowe Price, Janus, etc. {No-load is a type of mutual fund that does not charge a front end commission or a commission when you exit} Most brokerages offer access to mutual funds from their system. The best way to make a custodian selection is to contact three potential custodians and ask them what they offer for someone getting started... they usually have some good promo material to explain retirement accounts and investing. Note, that some but not all custodians charge an annual fee for IRA accounts. Zero to $15 is reasonable, anything else you should reject. You can often ask a firm to waive their annual fee and they often do this to get your business.

Making an investment choice: Here, I am going to suggest that for the first few years you keep things very simple and select a broad based stock fund. An S&P 500 index fund would be excellant, but their are many choices. I say stock mutual fund because I am assuming that these IRA assets will be left to grow for many years. Over multiple decades, stocks (aka equities) have traditionally provided better returns. Over a 30 year period you might have 6-7 down years, but the up years more then compensate. [if you are not aware of the different types of asset classes and their long term performance, I can say more in a second post on this]

The maximum that you put into a Roth or IRA this year is $3,000 or if you are over the age of 50 you can contribute $3,500. Keep contributing to the same mutual fund each year until your assets grow to $20,000 of more. Then you may want to consider opening a second mutual fund. I would not consider individual stocks until you were much more familiar with investing and your retirement assets were more than $50,000.

Some good sources of general information on investing, mutual funds and IRAs include: Kiplinger Financial, Worth, Money and Consumer Reports (March issue each year). Your local library will have a wide range of books on investing as well.

[papogi]

John G's post is a great summary of things to look for. The only thing I would add is a clarification concerning IRA's and Roth IRA's that many beginners get confused about. A Roth IRA is simply a title given to a qualified investment. It is nothing in and of itself, and I like to explain it as a plaque on a door. What's in the door (the investment, such as a bank CD or a stock mutual fund) stands alone. For example, one person may go to a mutual fund company and put $2000 into an S&P 500 index fund, and set it up as a regular taxable account (taxes paid yearly on any distributions, taxes paid at time of fund sale), and another person may go in and buy the same fund and decide to set it up as a Roth IRA (no taxes to be paid yearly, no taxes paid at fund sale). Why wouldn't everyone just set it up as a Roth? Because of the restrictions imposed by the Feds (can't get at your money before age 59 1/2 except in special cases, etc.). The Roth IRA concept is an agreement entered into by you with the Feds. They give you tax benefits, and you give up some basic access rights to the money. Sometimes your Roth IRA gains money, sometimes it loses money, it all depends on the underlying investment. Too often, I hear, "Don't get a Roth, my friend lost money in one of those things." That's how you can speak of a financial product, such as a CD, but not a Roth. The performance of your Roth IRA depends on the underlying investment. I know this is basic stuff for some readers here, but I can't tell you the number of times I've seen this confusion.