basic 'start-up' questions

[Guest Lise Moore]

It has just been suggested to me that I look into investing in a Roth IRA. I know nothing about this sort of thing; I have been relying solely on PERA and savings account for retirement (which is still 30+ years away). Here are few questions: minimum amount to open?; minimum yearly amount?; monthly payroll deductions?; interest rate?

Forgive my novice questions. Thought this would be a good place to start

[John G]

Roth IRAs are custodial accounts. Rules vary somewhat from custodian to custodian. Federal Roth rules include $2000 maximum as long as earned income is $2000, but AGI does not exceed the $150-160K range. Virtually every custodian can give you a brochure that gives you the key details. If you are starting small, you may need to make a few additional phone calls to find a custodian, but a small initial Roth contribution should not be a major hurtle.

Who can be a custodian: banks, brokers and mutual funds are the most common. Some charge annual account fees, but Etrade for example does not. Ask for the fee to be waived. Any annual fee in excess of $20 should encourage you to try a different custodian. Some waive the fee when you assets grow beyond $10k like Schwab.

Minimum amount: depends upon custodian, but rules are more leniant for retirement accounts, even more so if you do a monthly deposit. Monthly deposits are often automatic from a checking account. If you open a Roth with a lump, you may find $500 or $1000 minimums for some custodians, but check around.

Interest rate? Woaa. You said retirement is 30 years away. And since you don't just burn off all your money in the first year, these assets will be invested for perhaps 40+ years. You need to think in terms of a mix of stocks (also called equities) and bonds. Initially, for a modest start a mutual fund is probably the most attractive. There are about 8,000 mutual funds. I suggest a noload fund that is broadly based. Noload means no up front commission charges. Why invest in stocks, because over the long haul they give a better return than "safe" CDs and government bonds. You will need to find your own tolerance for risk and a blend of investments with which you are comfortable.

Target returns: a mostly stock, some bond portfolio typically will double every 7 years, which is about a 10% annual return. So after 40 years, your initial single contribution of $2000 Roth will have grown perhaps to more than $100,000 (not adjusted for inflation) and will be yours in retirement tax free. Some folks do better. But, note that the last five years have been very strong for stocks and a not a good guide for 40 years. Equity (stock) portfolios do not go up every year, but winning years out number bad years.

It sounds like you are very new to retirement planning and investing in general. I recommend that you read the March issue of Consumer Reports for an article on retirement planning. I also suggest that you suscribe to Kiplinger Personal Finance mag which covers this topic in laypersons language. Both of these sources will talk about possible mutual fund choices. Your local library will have many books on this subject. Other magzines include Money and Worth. Brokerages and mutual funds all have web sites that can be a useful source of basic info.

We were all novices. And even "experts" learn new things every year. You are to be commended for thinking ahead and getting an early start. Good luck.

You can email more questions, but for a few weeks I will be distracted taking a daughter to college.