New Member, Starting RothIRA

[Guest EDOUBLE4]

Hello and Happy Holidays!

I have been on this forum off and on for the past couple of months. I am 5 months into my first job out of college and am ready to initiate my Roth IRA account. Right now, my girlfriend and myself are looking at putting in the full $3000 into Roth accounts and count them for this year, 2004, as from my understanding this is possible as long as we declare it by April of next year.

Right now, we are trying to decide on whom to setup the account through. The names that we have been thinking about are Vanguard, Ameritrade and SiebertNet as some options. The problem we are having right now is trying to sift through all of the hidden fees.

To make it short, we are looking to atleast setup a no-load fund (probably index) to start off with for our individual accounts. She just turned 26 and I will be 26 in February. Of course we plan to continue maxing out on contributions for years to come.

Any suggestions on companies to consider as well suggestions to determing fees that will be applied? Any suggestions would be great.

Take care and thanks.

Eric

[ElGuapo]

One question right off the bat. Vanguard is a very different entity from Ameritrade and SiebertNet. Vanguard is a mutual fund company, not a discount brokerage. Are you considering doing some actual stock trading? Most people don't do this, they just use mutual funds. Can you say briefly what you've heard that you like about these custodians?

[John G]

Hidden fees? The SEC works very hard to make fees transparent, you just need to read the materials.

Annual custodian maintenance fee - per IRA or per fund, usually in the $10 to 40 range. Some places are zero. Some are zero if you contribute monthly. Some are waived if you have other business ties or assets above a specific threshold. If I recall, Vanguard is $10, Etrade is zero if you chose electronic notifications.

Commissions - none if you chose a NO LOAD mutual fund. I do not recommend beginning investors owning specific stocks for many reasons.

Annual expenses - low end for index funds is under 0.2% annual, high end for international and sector funds (not recommended for other reasons) can be significantly above 2.5% If all other things are equal, a lower annual expense rate is better... you keep more of your returns.

Other fees - some custodians will charge for closing an account or taking distributions, probably not a factor for you.

My advice, spend more time learning about investing in general. Sketching out your plan and tracking your progress. Initially, I would pick a good general purpose mutual fund or index fund and not sweat the details of performance. It is not possible to optimize ever, not now when you are getting started, not latter when you have years of experience. Pick a fund and just get on with your life. After two years, maybe, just maybe your will be looking for another fund. You don't want to chase last years winners - this is a losing strategy.

[John G]

I should have addressed brokerage vs mutual funds (direct).

You can go either way. If your income is high and you plan to have other investment activities, perhaps that tips the decision in the direction of brokerages. I still would be expecting you to buy mutual funds through the brokerage because stock picking requires more time and experience. Most brokerages (Schwab, Fidelity, Etrade, Scottrade, etc.) offer a large range of mutual funds that can be purchased at either no fee or minimal fee. You will have access to more funds that if you just chose a mutual fund family.

However, if for the next few years the Roth is going to be your primary investment activity, then just selecting a mutual fund family has some advantages. You will probably have the lowest possible fee/expense overhead. While you may not have as many funds to select from, each family has plenty of choices.

There are close to 10,000 mutual funds. You are not going to study them all, not even 1000, not even 100. I suggest that you use a short list, such as provided by Consumer Reports each March, and choose a maximum of 5 funds to examine. Then stick with one for atleast two years.

Some folks want to have 2, 3 or more mutual funds initially. Why? As a beginner you probably do not have the skills to make fine tuning choices. A mutual fund, by its very nature, is a diversified investment. When you own three, there will be a remarkable amoung of overlap in holdings.... a chunk of Microsoft, Johnson and Johnson, Marriott, etc. Overlaping holdings does not improve diversification, it might give you a false sense of "safety". Keep your life simple, chose one fund and you will have less paperwork and can track it more easily.

[jevd]

John G.

It seems these questions come up fairly often in various shapes and sizes.

You always have great information for these newbies.

How about writing a short article on the subject and get Dave to post it for ready reference.

Then you can save a little time and just refer these folks to the article.

Just a thought.

[Guest EDOUBLE4]

Thanks for all of the replies.

In response, we just recently narrowed the custodians down to ScotTrade. But, upon further investigation, it seems as though they might not provide the end of the year information to be used for Schedule D tax form. Does anyone have any information/knowledge regarding this as I will be contacting them to find out more information.

Ameritrade was ruled out due to an experience I had with them in past during their merger with Datek.

We are looking at other custodians as well, but Scottrade is our first option barring the end of year financial information. Do you see this as being a problem?

Our plan is just like John said, get started and pick 1 mutual fund which pretty much already have narrowed down as well.

[GBurns]

Why not just use the mutual fund as the custodian?

What would be the purpose of ScotTrade etc?

What Schedule D info do you think that you will need for a Roth that ScotTrade is not able to provide? There must be a reason why they do not provide it.

[dh003i]

As John said, you won't and can't look at all 10,000 mutual funds. So, you need to narrow down the funds your considering. I suggest using various fund-search tools. Things you should consider include

1. Manager tenure

2. Expense ratio

3. Fund category

4. Fund rating and long-term performance

You may want to use Fidelity's fund evaluator tool to look for mutual funds that are right for you. Click on Advanced for more options. You can also look at Vanguard's Advanced Fund Search. Both are very useful tools.

While discussing Roth IRA maintenance fees, Fidelity has no fee for yearly maintenance.

[John G]

As one of the famous football announcers would say "Whooooaaaa nelie".

Schedule D ? ?

Are we talking about Roths or IRAs? These retirement accounts do not produce any reportable transactions for a schedule D. No custodian gives you a schedule D for any kind of IRA/Roth. Long term, short term capital gains - are a meaningless concept with IRAs/Roths. Schedule D is for your taxable accounts. Normal Roth dispersments are not taxed. Normal IRA dispersements are taxed as ordinary income. (please pardon the simplification of those two sentences)

There is not a lot of differences between custodians in the US. Almost all have websites, lots of investment options, decent reports, and very similar monthly/annual statements. It does not matter much if you choose a brokerage or a mutual fund. Personal tastes are likely to rule - do you need a local office, do you have an existing relationship, etc. If you rule out high fee brokerages and loaded (commission based) mutual funds, and high annual expense funds, you are left with about 1/2 of all investment options where the fees do not vary that much.

[GBurns]

EDOUBLE4

As you can see from the last few posts, you probably need to throw away all that you have and erase all that you think.

If you are going to use a Roth, there should be no need for Schedule D info. To want to exclude Scottrade because they do not provide something that might not needed suggests that you might not yet understand what is needed, which means that you are not yet in a position to be evaluating providers.

If you have, as you stated, narrowed it down and want to pick to 1 Mutual Fund but think that you have to get it from a BD etc and do not realize that you might be able to go direct, suggests that you still need to learn more about Mutual Funds.

If you think that you need to get an IRA from someone so that you can invest in a Mutual Fund and have not realized that you can open the IRA directly with that Mutual Fund, suggests that you still need to learn more about IRAs and Mutual Funds.

There are other things that I would mention but I think that I have pointed out enough to justify suggesting that you need to learn more first and have someone explain and guide you through. So stop whatever you are doing and start the learning before making decisions.

[John G]

Yes, you can go directly to mutual funds or a brokerage. With a mutual fund, your choices normally are just from funds in their "family" and since most fund families have lots of choices that is not much of a restriction. Annual fees may be lower. Almost all funds have website services, but are less likely to have a branch office in your city. Brokerages generally have more branch offices, offer a wider array of fund choices, and anywhere from zero to too high ($50) annual fees.

Remember the "I" in IRA stands for individual. You are going to be opening separate accounts, each in your own name.

As you can tell from many of the "I'm getting started" posts on this message board, it is easy for folks to get confused. New terms, new institutions, first choices.... if you need more info, post again.

I can't say anything about ScotTrade as I have had no prior business relationships with them. Competition drives all brokerages to offer nearly identical services... there is probably 90% overlap. All brokerages/funds have a very low percent of problems.... annoying if you get caught up in one, but in my opinion a much lower error rate than car dealerships, airlines, dry cleaners, schools, etc. Assuming that you have a sufficient number of NO LOAD mutual funds and that there fees are reasonable, go ahead.

[Guest EDOUBLE4]

All,

Thanks again. I do realize that I was confused in some of the details regarding specifics dealing with the Roth. In my last response, I meant to also add that I would be interested in purchasing individual stocks in the future. I would like to do that with a single broker with the Roth as well. On that note I just spoke with Scottrade and it was great. They pretty much answered a lot of questions that I had and didn't have. I will be setting up my account soon and continue to do more research to educate myself on the Roth.

Thanks again for all of the help. GBurns, any specific places that you would recommend to heighten my understanding?

JohnG,

I think that was Brent Musberger I appreciate the info and suggestions as well, any others that you see fit would be great.

Hope you all have a Happy New Year and be safe.

[GBurns]

dh003i gave some good starting places on the other "newbie" thread. Start there but before you do read the other threads on this Forum since not everyone posts to every thread and some good info exists elsewhere. You also get to see questions that you might not yet have thought of along with any rebuttals etc.

Good Luck and Happy New Year!

[John G]

Mushberger? Not!

I go OT (office topic) to clarify that it absolutely was Keith Jackson, who broadcast football games for ABC for 32 years, retired, then came back again.

Q: "Whoa Nellie" and all of your sayings- where did they come from?

A: "Whoa Nellie" is an overrated and overstated thing and one that I almost never use. Bob Griese, my former broadcast partner, would chirp about it until I'd finally say it... It was something the media picked up on. I had a mule, all right, growing up as a kid on a farm, but her name was pearl.

From an interview with Keith Jackson: http://www.americansportscasters.com/jackson5.html

There were some prior uses of the phrase on Sky King, which I know was before your time. I was mimicing Keith Jackson. The comparable phrase today on ESPN is "not so fast, ____"

Back to business - I very strongly recommend two easy reads for folks just getting started. Each March, Consumer Reports, puts together a number of articles on investing designed for those with limited investing experience. Kiplinger Financial magazine has coverage of Roths, IRAs, credit card, debt mgmt, home ownership, careers, etc. that you should find useful. The annual subscription is around $15. (Note, they are a little too cheery about individual stock selections... and those ideas are often outdate by the time you read about it in Kiplinger. )