WANT TO OPEN A ROTH IRA account

[Guest xmanpr]

Where can I go to open a ROTH IRA account between 5-10%return?

Sincerely,

Xavier

[John G]

Answering your question without knowing more about your circumstances could lead to a very misleading response. Please post again and provide a little more backgound. If you are 25 years old and just getting started, the answer would be dramatically different then if you were 75 years old and just establishing a comfortable payout stream.

A Roth investment is generally a very long term arrangement. I sure hope you are not looking for 5% annual for decades, that would be wowfully underperforming almost every kind of investment.

Your choice of custodians included banks, brokerages and mutual funds. If, by your question, you are looking for a guarenteed return you are out of luck. CDs, probably the single worse long term investment you could choose, are yielding under 5% for most maturities. You could choose a bond fund or buy some dividend driven stocks (or similiar funds) that would hold utilities and old blue chip firms. Please provide some additional details about your age, objectives, approximate asset size and investment knowledge so we can give you a better answer.

[Guest xmanpr]

I am 28 yrs old and I'm planning to invest the maximum amount on the ROTH IRA + I want to invest an extra $8,000 a year on something else. I have a house in GA that I still owe approximately $114,000 and the current value is $135k. My main goal is to retire between 45-50. I'll be getting my military retirement at the age of 40 and based on today's cost of living the retirement is around $2,400 a month. In 12 years from now that amount would increase with every pay raise that the military and retirees get every year. I was thinking on opening a ROTH IRA through Vanguard (Vanguard 500 Index Fund) and use some of my money to reduce the principal of my house and buy 2 more rental properties at 15 years each, so by the time I retire I would have my military retirement + 3 properties paid off. Let me know what you suggest.

[John G]

OK, at age 28 you have a lot of years of investment growth and a Roth is a great tax shelter. The maximum you can contribute is $3000 assuming that you meet the qualifications. Just pick a broad based index fund like some of those offered by Vanguard and contribute each year. After 5-10 years you will start to get a decent size nest egg and can think about your choices again. Monitor your IRA about 4 times a year and check after each deposit that it is properly posted, but let the investment ride regardless of what seems to be happening in the stock market. This is a low maintenance approach while the "lump" is relatively small. Over the next decade you will acquire more investment knowledge and later on may consider other decisions.

An index fund or a tax managed fund is a reasonable choice for extra investment. These two types of funds have low turnover of holdings and therefore produce low to zero taxable gains each year. For example, Schwab has had a tax managed "1000" fund that I believe has never had capital gains at the end of the year because they sell a few losers to wipe out the few gains.

Pay down your mortage? This is a common idea that is probably not in your best interest. Money is currently "on sale". The cost of borrowing is discounted because of very low interest rates. Normally, in a store you tend to buy more of what is on sale. Paying off a mortgage early is selling not buying. In a time of cheap money, you want to take advantage of low interest rates. What would you do if borrowing cost 1% or nothing? It is better to have a low interest rate mortgage than any credit card debt so this is the exception - worth paying off early. Paying off early a car loan is a bad idea because most lenders build in higher interest rates on the front end - I think it is called the Rule of 98. Paying off a college loan early may be a bad idea if your interest rate is low. Some people get strange notions about borrowing money... maybe it traces to biblical missives, Shakespeare quotes and family stories about burning the mortgage. But in an era of modern finance, there is nothing wrong with borrowing at low rates if you can afford the payments. Look into refinancing instead.

Owning rental properties can be a solid investment if you have the personality for dealing with renters and are handy at fixing things. Read some books about it before you start. Trial and error learning in real estate gets very expensive so you want to avoid the more common pitfalls. More than a few friends got started in this only to found out that they did not like dealing with "problems" which included strange renters (I am only a little late! and its a friendly dog) and a host of unpredicable equipment problems. I also have some buddies that are doing just what you suggested and are extremely happy with the results. The perfectionists seem to have the worse problems because being a landlord is "messy".

I admire your ambition and your thinking ahead. You are a huge step ahead of most folks your age. Good luck.

[Guest xmanpr]

I really appreciate your reply to my questions. All of it is really good information, but I still have some questions. Why would I want to invest on a tax managed fund that doesn't have no capital gains? Are capital gains the same as earnings?

Also I believe that you suggest to continue paying my mortgage at a low interest rate as well as my car payment and use the rest of my money to invest it on my ROTH and other index funds.

So far I'm doing great renting my property and I really enjoy the real estate business. I think that once I get 2 more properties at 15 years with a low interest rate that would contribute to my retirement.

[John G]

Sorry about not being clear on the mutual fund capital gains issue. At the end of the year, all mutual funds must calculate the interest, dividends and capital gains that occured over the 12 months. In an active growth fund, there might be considerable turnover (purchases and sales of stocks) during the year. The mutual fund passes the tax liability for these to the account holder. If you have an IRA or Roth, there is no impact since you do not have a taxable event.

However, if you are doing a standard taxable investment you can have a tax liability even if you did not make a change in the amount you had invested. For example, if you buy a mutual fund in November, you could have a taxable event the next month. Since index funds have very little turnover (usually only when a company is deleted from the underlying list) and tax managed funds are often manipulated to reduce capital gains, they can reduce the year to year capital gains. However, the account holder should have a long term capital gain when they eventually sell their mutual fund shares.

You are correct that you want capital gains. I should have been more clear that you only want capital gains when you act to change an investment if at all possible. Defering a taxable event keeps more money at work for you. Index funds and tax managed funds can be helpful in that regard.