Detalis On Ira's

[Guest okiechris]

Hi there,

I am 28 yrs old and i wanted to start a ira roth. I am not sure who i should do this through or how i go about doing it can someone please help me?

[John G]

I have updated an older posting on this topic:

Congratulations for thinking ahead! Starting early will very likely put you on the path to a very comfortable future. If you and your spouse (eventual spouse?) each set aside $3000 per year and invest wisely you have excellant prospects for becoming millionaires and then some!

Roth 101: Current maximum is $3000 each for husband and wife as long as the total earned income for either exceeds that amount. It is $500 higher for older workers - the "catch-up provision" which does not apply to you. You must have "earned income" (like a paycheck) and meet a few other qualifications. Most folks in their 20s would have not problem with the basic qualifications, but check IRS publication 590 for the filing status and income limitations.

IRAs (all kinds) are INDIVIDUAL accounts. If you marry, your spouse will have seperate accounts.

Roth IRAs do not provide a initial tax deduction. Regular IRA maybe deductable, depending upon your income. Roth IRA has no set payout schedule, regular IRA does and it can be messy. Both types of IRAs build assets in a tax sheltered environment. Roth assets are not taxed at dispursement. Regular IRA withdrawals are taxed as ordinary income. There are also some inheritance issues that may favor the Roth.... but that is way off in the future.

Given the potential long holding period, I would assume that the Roth will be more advantageous. Note, no one can tell you for sure which type of IRA is best because there are just too many parameters and the regulations can change. I can tell you that in most scenarios that I run the Roth comes out ahead because the initial tax deduction of a standard IRA is overwhelmed by the tax free Roth distributions and other features.

Choice of a custodian: All Roth and regular IRA accounts are held by a custodian. The main choices are banks, mutual funds or fund families and brokerages. You are looking at 30+ years of investing... and perhaps a lot longer since you never take out all the funds in your first retirement year. I would recommend that you consider a broad based stock mutual fund. There are more than 8000 mutual funds, you should look for a NO LOAD (no initial percent commission) fund. You can contact a mutual fund company directly (see the March or April issue of Consumer Reports for a screened list with phone numbers) or deposit your funds at Etrade, Schwab or other brokerage that offers hundreds of mutual fund choices. Contact atleast three potential custodians. Ask them for their "newbie" brochures on investing, IRAs, Roths. Ask them about minimum initial deposits, fees, and various mutual funds. Collect info from three potential custodians and then make your choice.

Why stock? Because over the long haul, stocks traditionally out perform savings accounts, money market accounts, CDs and bonds. The performance of different catagories of investment will bary in any given year, but if you look at any holding period greater than 20 years common stocks are the clear winners. Time is an investors friend. If you go back and look at the performance of long running mutual funds you often will find that up years outnumber down years anywhere from 6:1 to 10:1 and that the best up years typically are more up than the worse busts.

Why mutual fund? You can buy by specified $ amounts. Very diversified. More efficient than purchasing odd lots of stocks. Easier to track. Easy to buy or sell (liquid). Etc.

I would keep things reasonable simple the first few years. Educate yourself about investing. After 5-10 years of building you "nest egg" you may want to re-evaluate your initial investment choice, but initially, just one good broad based mutual fund or index fund will work.

Since you are in the learning mode, I would suggest that you read up on mutual funds in that Consumer Reports issue that focuses on retirement planning, or in Kiplinger Finance, Money or Worth magazines. My personal view is that increasing your knowledge is more important than worrying about returns in the first few years.

Some custodians charge annual fees for maintaining IRA accounts. But many custodians either do not charge fees or will waive the fee upon request. If you set up a monthy deposit plan that connects to your checking account you often will get the fees waived. Fees also are often waived after your assets grow, or if you have other assets/accounts with the custodian.

You did not say anything about retirement/investment options related to you employment. Many of these options include a company match. If your funds for investing are limited, a employee matching account might be superior to the Roth. Generally, you want to look at this decision each year.

Good luck investing.

[John G]

This topic has come up other times with various ages, marital status and income levels. Here is another response:

http://benefitslink.com/boards/index.php?showtopic=16539

You can use one of the options at the bottom of the main page to search for specific topics and to pull up older posts by changing "last days".

If you have specific questions, post again. Be sure to give some of background info on education, marital status, job/income, investment experience, goals, etc.