Starting a Roth or Traditional Ira

[Guest becca]

Hi everyone. i have several ?'s

IM 32 yrs old I contribute to an teacher's retirement. Have been doing so for 9yrs. Iam in Dallas,Texas.

Im wanting to start saving for retirement a little more.

Should I open a traditional or Roth Ira? How do I get started in doing that? I know the max for 2002 & 2003 is 3000.00 for me.

So I want to start putting 250.00 a month into it starting 1-03

So i guess I will be funding it myself. So what do i look for as for as interest rate etc?companies? Im clueless to this....

with a Roth if im contributing 250.00 a month and lets say 1-06

I wanted to get money out could I get the whole 9000.00 without being penalized? Sorry I have so many questions thanks in advance...

[papogi]

In most cases, a Roth IRA makes more sense than a Traditional IRA. The simplicity of tax-free withdrawals is appealling, as well.

Since this money is for retirement, which is a long way off for you, it is usually advisable to take some risk and put your money in a good mutual fund which invests entirely in stocks (equities). Stocks don't yield an interest rate like CD's do. Instead, they pay dividends and their share price goes up over time (at least, that's how things work long-term, even though the past two years have been rough). The potential for growth in stocks outweighs the risk of loss when you take a long-term view. A good place to start is Vanguard. Their website will give you information about their various funds, and a way to order the forms needed to set up the account. Personally, I would recommend a low cost diversified stock fund like the Vanguard Total Stock Market Index Fund. This fund mirrors the entire market, and is less volatile than less diversified funds.

You can take out amounts that represent your annual contributions from a Roth IRA. This is not recommended, however. Most features of Roth IRA's shine when you earmark the money for retirement. If there is an expenditure in your mind that you know you will have to pay in the near future, the Roth IRA is not the way to pay for that. Since you can only take your contributions out with no tax or penalty, you eliminate any chance for growth for those dollars. Money that you know you will need to spend soon should be in short-term CD's or in a money market fund. You can get the money easily, and you can get a little growth in the meantime.

[Guest becca]

Thanks for your reply your info was so helpful to get me started.

Are you talking about the VTSMX mutual fund. I want to make sure I get the correct one. So I purchase that fund and put the max allowed which is 3000 ,250monthly for 2003. How much will I have to pay for fees? Do I have to report earnings on Income tax? Also, I was thinking about getting a Money Market Savings account thru my local bank for other savings. I have to claim that interest on my income tax right? Thanks in advance:)

[papogi]

VTSMX is correct. In view of the turmoil in the markets even over the last week, please remember that this investment will fluctuate. I have every confidence that, taking a long-term view with this investment, you will come out happy years from now.

Be sure to request and fill out the correct form. An individual can buy this or any fund as a regular, taxable account, or as a Roth IRA, or Traditional IRA. Be sure that you are completing the Roth IRA application, if that's what you have decided on.

There is an expense ratio built into the fund, as with all mutual funds. Vanguard skims off a small percentage each year to run the company and pay the people involved. Vanguard's expense ratios are known throughout the industry as being very low. You will also have an annual IRA maintenance fee. Frankly, I forget the amount that Vanguard charges. It's typically $10 to $25 each year, and can be deducted from your account, or, better yet, sent in by you with a separate check. This keeps as much in your account as possible. Incidentally, this annual IRA fee is said to go towards the additional IRS reporting hoops the mutual fund must go through as compared to a regular, taxable account.

With a Roth IRA, there is absolutely nothing you need to do on your taxes as you add to your account and let it grow. Earnings will grow tax-free.

A money market is a great idea. This will be a regular, taxable account, so you will pay income taxes each year based on the amount of dividends earned in the account. Incidentally, Vanguard has a great money market, as well. It's called Vanguard Prime Money Market (not the tax free one, but the regular Prime Money Market). It's currently yielding about 1.8%, which is low like the rest of all money market funds right now, but you will probably find it to be leaps and bounds better than your bank. It's only a bit less convenient to use money markets outside of banks, but the increased return more than compensates. For instance, you could keep a regular checking account for small expenses, and Vanguard Prime as a short term savings vehicle. Your employer (most allow this) can split your paycheck between the two destinations. So, you have some money going into your small checking account, and the bulk go to Vanguard. Vanguard Prime gives you checkbooks, and you can only write checks for amounts greater than $250. So, your small bills can be paid form your checking account, replenished periodically by your paycheck. Big bills can be paid with a Vanguard Prime check (credit card bills or mortgage payment), also being replenished by your paycheck. This is exactly what I do. Post again or Private Message me if you want any details.