Which is best for a YOUNG investor, Roth IRA, or IRA?

[Guest Goodnews]

I can only seem to find information on converting to a ROTH IRA. Is investing in a ROTH IRA the first step a 22 year old, new investor, should take? If so,

which avenue should I take to invest in, Banks? Brokerage Firms? or an individual Mutual Fund Family?

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Goodnews

[John G]

There is no perfect answer to your question. Built into every answer are a series of assumptions about your future lifestyle, income, tax rate, etc. But, what the heck. I will take a whack at your Q.

Most folks in their 20s (excluding web page designers and e-entrepenuers) have an entry job and a relatively low tax rate. They are likely to meet the income qualifications for a Roth. They may plan on keeping this tax shelter (assuming they can resist the urge to tap into a Roth to pay for a first house or grad school) beyond age 62. In your case that means 40 or more years of compound asset growth.

Why start early? Because time is the number one friend of investors. Because your more likely to have extra cash compared to when you own two cars and have two kids in college. Because your smart and you listen to the good advice of older friends who started late that now tell you "start early".

Will Roth IRAs be around for ever? Hard to say. The current formulation is a spectacular tax shelter, especially for a young investor. Note, the rules have already been changed before the first year was completed. It is likely more modifications will be made in future years. I think existing Roths will be grandfathered regardless of future changes because Congress would outrage millions of Roth accountholders if they reneged.

But what investment option to select? You have lots of choices, too many options to review them all here. I would recommend that you keep you investment simple and remember that you should look at the first couple of years as a learning period... don't get crazy about instant results or your annual percent gain. If you are very risk adverse, choose an insured bank CD which will perhaps earn 5-6%. Comparison shop for rates and annual fees. If you want to take a little more risk, start a relationship with one of the no load mutual fund families (Vanguard, T Rowe, Janus, etc.) and pick just one broad based stock fund that has been around for 10 or more years. This fund will typically own 200 to 600 different stocks so you will have a very diversified investment. Another possible option would be to select one of the broad index funds such as the Vanguard 500. The stock fund option might over the long term give you about a 10% annual return. I specifically do NOT recommend a first time investor start with individual stocks because: (1) it is hard to have a diverse portfolio with a small lump, (2) commissions will eat into performance, and (3) researching individual firms takes time and experience.

Both the bank CD and the mutual fund option are very low maintenance. You don't need to track them day to day... perhaps you look over a monthly statement. That is the simple plan for year one. In year two, you get to choose a new option or just double up the first. Regardless of what choice you make, you can change your mind, especially as your assets grow.

$2000 invested every year in an IRA can often grow to more than a million by the time you are in your 60s. Isn't this a great county!

Two important final thoughts. First, get started now. Don't wait for tax season which wastes ten months and puts you into the annual IRA crowds. Second, place an emphasis on educating yourself about investing. Read Kiplinger or Money. Join an investment club. Use the WWW. A good education on investing takes many years of both reading and learning from your own experiences. Good luck. JRG

[This message has been edited by John G (edited 06-18-99).]