IRA, ROTH IRA, 401.....whew lot to swallow

[Guest SprinklerGuy]

HI! I spent a little time browsing and it seems a lot of my concerns, questions have been answered or addressed. This is a great site for the basics.

Not necessarily being a conspiracy theorist...but....I have always been a little concerned with putting my money in other peoples pockets for them to use......even if they pay me to do it. Therefore, that explains why I am 34, respectably intelligent and still NOT in the market at all. I own a rental house and always wanted more of those but ........I also own a business which runs itself more or less and hope to sell it one day also. I have always told myself that was enough, no need for IRA's etc...

That being said, I think it is time to start saving a little. Plus, being a gambler at heart, I think I would enjoy it. So, a Roth may be in order for me. I have investigated a little at Vanguard and like what I see. I like the low fees and etc.

Does anyone see any chance that all of our money, tied up in Mutual Funds etc could be at risk and just vanish into thin air someday? I know that there are millions of people in the market, but what if? I guess maybe I am a conspiracy theorist because I really worry about that. Sorry! Does anyone else worry about that?

If I do decide that I'm not scared, am I on the right track? Do I need a financial advisor for this sort of thing? Also, since I am an employee of my own corporation do I qualify for a ROTH? Thanks

[papogi]

Good points, especially in light of recent VOLATILITY!

I think there is very little risk that mutual fund money will vanish into "thin air." If the market went down to zero, money would probably be worthless, even those under people's mattresses. We would be in a society of bartering at best, and constant theft at worst. It would be a situation of survival. Possible? I suppose. But, again, using that as a reason not to invest isn't good, since raw cash might not be any better in a world such as you eluded to.

You don't really need a financial advisor. A little research in magazines, message boards such as this, and knowledgeable friends (with a grain of salt) will get you through most basics, especially beginning in investing. Vanguard has lots of resources on paper and on-line. Good choice.

Any individual with earned income (subject to limits) will qualify for a Roth IRA, yourself included. Your owning a business has no bearing.

[Guest SprinklerGuy]

i've done a little more research....

it appears that the Roth is funded with AFTER tax dollars and the regular IRA is funded with pre-tax dollars.

The roth isn't taxed upon withdrawal but the regular is

Which is better, pay the tax now or later.?

[Guest dmalcolm]

If you're taxed later, you're supposed to be taxed a t a lower rate since you'll be retired and income drops down.

You may want to check out the Vanguard diehard website, lots of valuable information provided, all you need to to do is ask. Go to Morningstar.com, then Vanguard family, then Vanguard Diehards.

Good luck

[John G]

Into thin air?

When you sell your services to a customer, I assume that you are willing to accept US dollars in payment. Why? You can't eat the stuff. When planted in the earth it will not grow. In the winter, burning it will not do much to keep you warm. Isn't the reason you accept money is because you believe in a free market economy and that good behavior and hard work slowly moves us ahead further then theft and crime? You believe that at some future time, you can exchange money for something useful.

As an entrepenuer you must believe in taking risks, hard work and creative problem solving. Our economy is full of other businesses run by people like yourself that know they will flourish if they "serve" their customers. Home Depot, Microsoft, Intel, Medtronic... I don't think any of these firms was around 50 years ago. The object of capitalism is moving money from sloppy and stoggy businesses (Montgomery Wards, Kmart, Pan American Airways) to businesses that are growing (Walmart, Target, Southwest Airlines) .

The only scenarios that I could imagine would ever topple this system would be global thermonuclear war (not very likely anymore), large meteor impact, or a plague of epic science fiction proportions. I don't worry about these. I suspect that your don't either.

You have much more likely negative scenarios. Sounds like most of your assets are in your business and some real estate. On the business side you have a much higher risk of embezzlement, fraud, malfeasance, environment risk, negligence lawsuit, etc. You may have regional economic market risk, low cost competitors, or technological change to deal with. As you may have seen, not all landscape contractors are likely to survive the this drought period in Colorado, where some small towns have run out of water and many cities have mandatory water restrictions.

While you can clearly build amazing assets by being successful in real estate and running a business**, you would do well to put a third leg on the stool. (**I am a biz advisor for Junior Achievement and do not just believe this, I teach it) A Roth IRA is just one method and for modest amounts of money, it may be the best for you. However, I would also talk to your accountant about other retirement plans you can do because of your business. For example, you can shelter a lot more money each year with a pension/profit sharing plan.

Vanguard because of there extremely low cost structure is a good firm to consider. Grab a copy of the March issue of Consumer Reports which devotes a number of articles to investing, mutual funds, etc. Check out Vanguard's web site. At your age, you should have a significant portion of your assets in stocks which will appreciate more than lower risk CDs or bonds over a very long period.

Post again if you have more questions.

[John G]

Roth vs Regular IRA

I prefer Roth, but that does not mean it is the best for you. Roth has no immediate tax deduction while regular may. However, regular gets taxedas ordinary income when money comes out. Roth has tax free dispursements in retirement. I assume that even if the Roth program were to end by act of Congress that all current participants would be grandfathered.

It is not possible to accurately tell you which is best for you because we would have to have perfect knowledge of future events: future income, future tax rates, etc. If you think that you could amass large assets and that your income in the future might be higher then it is now, or that tax rates may be higher in the future, then the Roth may work better. One of the administrative positives of a Roth is that there are no fixed schedules for withdrawing assets in retirement.

You can choose regular this year and Roth next year, as long as you qualify. The max contribution this year for you is $3,000 if you have at least that much in compensation.

[Guest SprinklerGuy]

john g....I have seen your posts and was hoping you would honor my post with a reply. Thank you for the honor. I think your information is very good, I have read most of the threads you participated in, very good.

As for the SEP, the problem with that plan as far as what my accountant is telling me is this: If My corp. contributes, let's say, 15% to my personal IRA, then doesn't the corp. also have to contribute 15% to the accounts of all the other employees.? That would, in effect, outweigh all the benefits of the shelter would it not? Unless there is a way around that. I have 5-8 employees at any given time with a total payrol of around 150-200k per year. If I had to contribute the same to them, it could really hurt. Maybe I am missing something?

By the way, two side notes:

My business is in Sunny Arizona, where you cannot convince the people with a little money, that water savings is important. IN fact, I think I could make MORE money if they put water restrictions out because there are at least 1 million homes with TOO MUCH GRASS. That is not an immediate concern

Also, with the market making a temporary comeback yesterday I feel like I missed a chance to acquire many shares in a mutual fund and now the price just went up. I felt a little disappointed. Now I realize this is silly and short term thinking, but as a gambler of sorts, that is how I feel. thoughts?

[John G]

I overlooked that gambling comment the first time. It troubles me that you mention it again. Investing is different then gambling in many ways. In gambling, the biggest determining factor is luck. It is house vs the player and slowly but surely the house drains off enough money to pay for the bldg, employees, electricity and the shareholders. When I think of investing, I am talking about long term decisions that back businesses that have vitality and are expected to grow. There is a reason why we don't all look like Pilgrims... over time market economies grow because everyone has an incentive to produce. Investments become more valuable over time because the collection of businesses we call our economy has flourished.

If you think that investing is hoping in and out of stocks because you want to get a short term jump, you are going to be disappointed. I have been investing for 20+ years. I ran a private investment syndicate. I have talked with hedge fund operators, fund managers, non-profit portfolio analysts, brokers, etc. I have never met anyone who has had a successful record of knowing when a stock or market is at a low or at a high. In making perhaps 20,000 investment decisions over 20 years, I can remember only one time buying a stock at the exact moment of a turnaround - and that was for my mom. And I had no idea in advance that it was actually at a three year low. [sort of like the luck of getting a hole in one in golf, if you hit a few thousand balls at par threes, eventually one might go in] A couple of hundred shares at the exact low price for the year.

Part II: There are multiple corporate retirement plans. Some can allow you to fund employees if they have worked at least one year. You can also set up a program that puts money into the corporate fund and employees benefit based upon a multi year "vesting" schedule. Employees who leave would then forfeit unvested amounts back into the system to be re-allocated to remaining employees. This is a complicated issue, so you need to talk with people who have some experience. I am sure there are some good books on the subject and you might see this discussed in some of the business mags for entrepreneurs.

I worked for a consulting firm after college where each year I got not just a 15% contribution to the retirement plan but and additional 10% from forfeitures. About 2/3 of the employees left before they were fully vested and therefore funds originally in their name were reallocated. Mgmt of course did very well under this system. The rules governing these kinds of plans are constantly changing - such as the vesting requirements. It is just too big a topic to cover in a message board post. Perhaps you should take your accountant to lunch and talk about your options.