Newbie: What exactly do I ""do with the money I put in my Roth IRA?

[Guest carrrottt09]

I apologize if this is a stupid question.

I've combed the web and read a book... But no one (that I've found) seems to say what to do with the money that you can place into the Roth IRA.

I'm 24 (so I have a while to go - let's hope) and I already have a litte invested in mutual funds and stocks.

I did a search of the forum here and somone described the IRA as a briefcase (i think) that you put whatever you want into as an investment to avoid it being taxed upon withdrawl (i beleive I am oversimplifying here).

So could I then just invest the 2500 for the last year (2004 before the tax deadline) in an index or mutual fund?

Also, I was looking into Scottrade for my Roth. Is this a good idea, or has anyone heard anything bad about them? I also have a full service broker that I could use, but there are fees involved.

I also appreciate any additional advice anyone here can offer me. I know your time is very valuable and I appreciate your responses.

Thank you,

Kevin

[John G]

Yep, Roth is just a tupperware, you can let others decide on the contents (not recommended by me) or take charge of your financial choices.

Those choices are covered extensively in Consumer Reports (March issue each year), Kiplinger Financial, Money Magazine, etc. Every public library will have general books on investing... and perhaps some specifically on retirement investing.

In very brief - - your choices include: mutual funds, index funds, bonds, stocks, CDs, preferred stocks, and some options. Yes, there are some more obscure choices, these are the most common and easiest to understand.

Since you are young and have DECADES of investing before you retire and a few decades of investing AFTER you retire, I suggest that you go 100% equities (aka stocks) or very very heavy towards equities. For folks just getting started, buying NO LOAD mutual funds is easier then buying individual stocks and gives your a lot of diversification. Index funds are a class of mutual funds that operate off a list like the S&P500 or Wilshire 5000 and have extremely low annual expenses.

Scottrade is one of many brokerages. Brokerages come in full service, semi-discount, and heavy discount. They vary in services. Some are internet based. Some have branch offices. Don't worry too much about the choice. {You can also choose a mutual fund family to be your custodian} Scottrade will do for a brokerage. If you can do some of your own thinking and read some of the financial mags I mentioned above, you can probably make some basic choices on your own. Early on, focus on learning more about investments.

ASK each custodian your are considering to send you their "beginner" kit. Some of these materials are excellant.

Post again if you have other questions.

[John G]

Addendum: Roth investing is very similar to any other kind of investing. However, you don't have to be concerned about long vs short term capital gains. Interest, dividends and cap gains are all treated the same. You keep records based upon what you need for tracking since transactions in a Roth are not reported.

Keys: diversify, make sound picks, keep expenses and fees low, add parsley and onions and wait a few decades. Time is very much an investors friend. Time as in years and decades. Don't sweat the weekly or monthly changes. When everyone is complaining about a bear market or depressed prices, have the courage to stay with your plan and be a buyer. (You want to buy low and sell high. Some rookies get that backwards because they easily panic when their understanding is sketchy.)

[Guest carrrottt09]

Thanks for the quick and thorough reply.

It looks like the end of your respone got cut off though.

So if I already have some stocks purchased, can I move some of those into a Roth?

I purchased a front-load mutual fund (i was just starting investing - though it does quite well). I assume it is better to keep that out of the Roth due to the constant front end fee.

And if I am reading the qualifications correctly, I need to have earned (not via dividends ) equal to or more than what I am going to contribute to the Roth for that year correct?

Here's another stupid question for you. When you refer to the brokerage/bank/insurance company, etc acting as a custodian - I assume they are just "holding on to the money" or keeping the account there.

Thank you so much,

Kevin

[John G]

You fund a Roth with cash. You can not transfer stocks into a Roth.

Yes, earned income does not include dividends or interest. You can contribute $4k if your earned income is at least that high. Note: $4,500 for others who are over age 50.

"Custodian" is the term for the financial institution where you deposit your funds. It is a fiduciary term. The Custodian "holds" the assets... stocks, bonds, mutual funds, etc. The custodian does not normally make your investment decisions, although that would be true for some actively managed brokerage accounts.

[Guest carrrottt09]

How would you recommend going about this? let me clarify that astoundingly broad question.

You mentioned that I should stick with stock mainly. Do you beleive that I would be better off investing a little in several stocks each year, or invest in a stock a year?

It seems that doing the former would make more sense... a bit of averaging over the highs and lows.

Thanks again

[John G]

Actually, since you are beginner in terms of investor knowledge, and your total assets are modest, I DO NOT recommend that you buy individual stocks. You can't efficiently buy stocks when your assets are below 30-50K. It is also hard to own a range of stocks. Most investors talk in terms of a portfolio of stocks and it is commonly thought that you are too narrowly investing with fewer than 8 stocks.

In the middle of the 20th century, mutual funds were created to solve this type of problem. Instead of buying a few stocks, you buy shares in a company that owns anywhere from 20 to 5000 stocks. (Twenty would be a "focused" fund that attempts to put all money on a small number of good ideas. The other end of the spectrum are mostly "total market" funds that might own shares in every fund on an exchange.)

Mutual funds initially we designed to be sold with a commission, aka "load". After a few years, the "no load" or commision free fund was created. About 30 years ago John Bogle and Vanguard created Index funds. These are run by computers instead of stock pickers. The fund owns every stock on whatever list on which they are based. Because there are no "suits", no long distance conference call, not company visits and analyst bonuses the index funds have very low annual expenses. Recently, the "life cycle" funds were evented - to automatically change the mix of stocks/bonds as you age. [a pretty lame idea in my book, but then I am not a beginner investor] The mutual fund industry, like most thriving industries, keeps inventing new products. There are about 10,000 mutual funds - - but initially you only need one.

PS: Mutual funds can also own bonds and preferred stocks. I was recommending that you choose a broad based stock mutual fund - one that is no load.