Not sure which to use?

[Guest SnakPac]

I am 23 and interested in starting to invest into an IRA. I am still going to school so I am not making alot, but would like to start contributing something. I think I can manage around $50 a month right now.

I am having trouble deciding on whether it would be better to go with a Roth or traditional IRA account.

I was thinking about talking to the bank I have a checking account with to see what they offer. Would this be a good idea? If so, what kind of questions should I ask?

[dh003i]

Generally, a Roth IRA is probably the best bet over the long-run. There are many advantages to a RothIRA. If you have significant growth, the growth won't be subject to federal taxes (whether or not it is subject to State taxes varies from state to state. You can always withdraw your principal. Furthermore, especially at this point in time, a Traditional IRA is, I think, a bad idea. The national debt is at very high levels and inflation (increase in monetary supply) is running at 10-15% annually; all this means a likely chance of much higher taxes later on to pay off all of our national debt. Tax-levels right now are relatively "low" <cough>, and are likely to go up no matter what.

I would recommend opening an account with either Fidelity, Vanguard, or T.R. Price. These are companies of solid long-standing reputation. Fidelity offers a huge array of mutual funds; Vanguard, index funds with unbeatably low expense ratios; and T.R. Price, some excellent funds.

This website lists State-treatment of Roth IRA distributions. It also says which States have no income taxes (not too many of them, unfortunately).

PS: You definately do not want to have your Roth IRA invested conservatively, as is your money in your bank. This is money that should be invested for the long-term (retirement); thus, you should be willing to accept more short-term volatility in exchange for greater long-term profits.

[Guest SnakPac]

Dh

Thanks for the advice. Do you know if the companies you mention have a minimum that must be deposited before you can open an account?

[dh003i]

The minimums may vary depending on the type of account and mutual fund. I believe Fidelity now has an option where you can build an account starting from $0 if you use consistent dollar-cost-averaging. Outside of that, minimum initial contribution amounts typically range from $1,000 to $3,000.

[John G]

You can start your IRA or Roth in thousands of places. You can also start saving up those $50 for the rest of this year and then open an IRA or Roth if you can't find a custodian that will accept a very low initial amount. Generally, most custodians relax the rules a little bit if you set up an automatic withdrawal from your checking account.

You can do some searching on the web - try Vanguard, Fidelity, T Rowe Price, Janus, Twentieth Century Funds .... examples of mutual fund families.

Since you are investing for many decades, you want to think in terms of equities (stocks) rather than bank CDs. Over the long haul, you are trying to get something in the neighborhood of a 10% annual return average.

[Guest getaxa]

Don't forget about the Retirement Savings Contributions Credit. You can get a tax credit up to 50% of your contributions. Check out Tax Tip 2004-50 on the IRS website for more info.

[dh003i]

The IRS' web-page on the retirement savings credit can be found here. A slightly better explanation (which explains that the income limits are per AGI) can be found here.

Form 8880, Credit for Qualified Retirement Savings Contributions, is used to figure the amount of the credit, which is then reported on line 48 of Form 1040 or line 32 of Form 1040A. You cannot use Form 1040EZ to claim this credit.