Roth IRA - Where To Buy?

[Guest bloody hammer]

I've been reading about IRA's for awhile now and have decided that the Roth IRA is the way to go for me.

The one thing I can't seem to find any advice on is WHERE to buy one. Is there much difference between just going through my regular bank/credit union (simply for the convenience) vs somewhere else?

What do you look for when deciding where to setup the account?

[Appleby]

It depends on your investment objectives. John G is the expert on that-You may want to search for some on his responses to similar questions.

The most I can tell you is that if you are looking to diversify your investment, you may want to establish your IRA with a brokerage firm, where you would be able to buy stocks, bonds, mutual funds etc. With mutual fund companies your investments are usually limited to mutual funds. With banks, your investments may be limited to money market, certificate-of-deposits (CDs) and other low-rick investments, unless the bank offers other investments options.

Fees is another point of consideration…

You may want to consult with a financial planner.

[John G]

There are two issues you face when starting a Roth: (1) who will be the custodian, and (2) what kind of investments will I make. There is lots of material on this topic - and you can search on key words or phrases like "mutual fund", "no load", "index", "fees", "performance" and "getting started".

Custodians: main choices are banks/thrifts, brokerages, and mutual funds. Key things you consider in choosing a custodian: convenience, fees, available investment options, reputation/reliability and website features. There are thousands of choices - most people need only one custodian.

Investment choices: stocks, bonds, mutual funds, index funds, CDs and money market accounts are some of the main choices. You don't indicate an age or provide much background on your experience. If you are realtively young and just getting started, then you probably will be investing for many decades and should probably look for a good mutual fund with a slight bias towards growth stocks. Another reasonable choice is an index fund because of the very small operating costs. The reason you want to be in stocks is because you are trying to build a nest egg that will grow faster than the damage or erosion caused by inflation.

Post again if you want to provide more details, or have other questions.

[Guest bloody hammer]

You don't indicate an age or provide much background on your experience.

Ah, that's the somewhat embarrassing part. I am 42 years old and have basically no savings to speak of. In the last several years I have managed to increase my salary. I've grossed around $65k the last two years. No, not great..... but my best so far.

I have around $20,000 in my 401k and $8000 in a 529 plan (as a college fund for my daughter). That's about it as far as savings go.

To say I'm getting started late is an understatament. Honestly, I have very little knowledge/experience with investing. So many people I know ask me "Do you have a Roth?" that I'm starting to think "Wow, I had better get a Roth." I'm actually starting to stress over it a bit. I'm feeling as though I should rush out and get one just to have one.

I do have a specific question. As a general rule, would you say it's wiser to max out your 401k rather than start something else (like a Roth IRA). Or is it wiser to spread it half and half among the two?

Seriously, I'm flying blind here so any advice is appreciated. Thanks.

[John G]

OK, thanks for the clarification. You are correct about a late start... but that is better than no start.

Think "I am in charge".

Pensions, social security and retirement accounts have evolved where YOU are in charge. You need to devote a couple of hours each month to reading about how to plan for your retirement years, and how to invest your funds. Two hours a month devoted to reading articles in Kiplinger Financial, Money, or the March issues of Consumer Reports would be a good start. You may also want to pick up a copy of "The Number" by Lee Eisenberg, a light read about the anxiety people have over planning for retirement.

If your 401K has a matching component, I would fund it to get the match as long as you can have a diversified portfolio. {this is a caution against 401k that mandates company stock which could be a huge problem if your company is the next Enron or Worldcom}

I would put less emphasis on your daughter's college fund. Reasons? First, it counts more heavily against any financial aide. Two, in-state tuition at public universities is still a great bargain and can be managed by student summer jobs, college loans and work study. Finally, if you daughter's grades are strong she can apply to a top private school and have a good chance of securing a major scholarship.... go to Princeton's website and try their financial calculator - with your numbers, the school would probably pick up 85+ percent of the costs of a 4 year degree. This is a high endowment, private school phenomena.

After maxing out the 401k - the next priority is to try to fully fund a Roth. Both you and your wife (you didn't mention being married, so I am guessing and also writing for other late starters) can set aside $4,000 this year. This number may move up in the future, so check IRS publication 590 each year. What will 4K get you? If you add 4k every year between age 42 and 67 and earn a 10% return (investing heavily in stocks, with a slight bias towards growth companies) you might be able to get close to $400,000. Double that if your spouse also contributes. That's about 400k in a Roth, passing out to you tax free. Just the Roth, not including SS or 401K. At an 8% return, you would be approaching 300,000 at age 67.

Where do you put the Roth funds? Since you know little about investing (see last paragraph) I would start with a NO LOAD mutual fund. Perhaps a total market index fund at Vanguard (you can find them on the web, hdq is in Pennsylvania) or a broad based stock fund with low expenses. You would be in a better position to "be in charge" after you learn more about investing.

[Guest bloody hammer]

Thanks John G.... that all sounds like very solid advice. I will read the materials you've suggested and see if I can't get the ball rolling more sooner than later.