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Need some advice on roth IRA

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Lord_Diedrich
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Need some advice on roth IRA  Reply with quote  

Its came the time where ive realized ive really got to start saving for retirement. I live in a rural area where there arent many options of places to invest. Ive been doing some research online and see a lot people use etrade, scottrade, etc for their roth IRA's. Whats yalls opinions on places like that? We do have an Edward Jones here, so I could go that route. I just really wanna get an IRA started while I have the extra money just dont wanna open it at the wrong place.
Post Tue Jan 13, 2015 4:56 am
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Wino
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Re: Need some advice on roth IRA  Reply with quote  

quote:
Originally posted by Lord_Diedrich
Its came the time where ive realized ive really got to start saving for retirement. I live in a rural area where there arent many options of places to invest. Ive been doing some research online and see a lot people use etrade, scottrade, etc for their roth IRA's. Whats yalls opinions on places like that? We do have an Edward Jones here, so I could go that route. I just really wanna get an IRA started while I have the extra money just dont wanna open it at the wrong place.

Look at Vanguard, Fidelity, and T Rowe Price. Their fees are the lowest.

The S&P 500 index fund, which is the benchmark for pretty much all investments (Do better than it, and you're doing well. Do worse, and you're doing poorly), is offered by each of them. The fees are about 0.28% at T Rowe Price, down to 0.1% at both Vanguard and Fidelity. Once you have more money in the account those fees go down. There is no purchasing fee or redemption fee at any of those investment houses as long as you leave the money for at least 90 days. The Vanguard and Fidelity fees are 0.05% (V) and 0.07% (F) once you have a minimum amount invested.

Each of the three websites I suggested allow you to open an account online through a fairly simple process. Also, all of them allow you to connect your bank to them and automatically purchase funds monthly. This is usually called "dollar cost averaging."

Edward Jones allows you to talk to a person who can help you understand more about investing. You will pay for this service (annually), and there will most likely be other fees associated with the purchase of funds or equities. I am not suggesting you do or do not go to Edward Jones. You could do much worse.

I would suggest you do NOT use a bank or insurance salesman for investment advice. Insurance with "savings" added - whatever they want to call it - is NEVER a good investment.
Post Tue Jan 13, 2015 11:03 am
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Publius
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Re: Need some advice on roth IRA  Reply with quote  

quote:
Originally posted by Lord_Diedrich
Its came the time where ive realized ive really got to start saving for retirement. I live in a rural area where there arent many options of places to invest. Ive been doing some research online and see a lot people use etrade, scottrade, etc for their roth IRA's. Whats yalls opinions on places like that? We do have an Edward Jones here, so I could go that route. I just really wanna get an IRA started while I have the extra money just dont wanna open it at the wrong place.

Your physical location doesn't have any bearing on your investment choices any more. In fact, I would argue that is is better to look at the online brokerages even if you have a great deal of choice in brick and mortar firms nearby. If you have internet, you have access to the same investment firms that the rest of us do. Vanguard and T Rowe Price have very easy websites to navigate and offer help with a phone call and they offer the lowest fees. Fidelity is another, though I haven't used their services, so I can't speak to their ease of use.
Post Tue Jan 13, 2015 2:17 pm
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oldguy
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As the others said - avoid banks & insurance, they are good at what they do but they are poor at investing. And avoid the full-service brokers - etrade, scotttrade. I too recommend (and use) Vanguard & Fidelity.

You are looking at Roth IRA, do you already do a 401k at work? Or a Traditional IRA? (It's a good plan to cover the tax-savings (401k/IRA) plans that are available to you before you buy a Roth account.)
Post Tue Jan 13, 2015 3:28 pm
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Lord_Diedrich
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Guess I'll take a look at vanguard and fidelity. My employer doesnt offer any kind of retirement. Im new to the investment thing so Im just trying to figure it out as I go. Any more advice would be greatly appreciated
Post Wed Jan 14, 2015 4:11 am
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Wino
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quote:
Originally posted by Lord_Diedrich
Guess I'll take a look at vanguard and fidelity. My employer doesnt offer any kind of retirement. Im new to the investment thing so Im just trying to figure it out as I go. Any more advice would be greatly appreciated

First off, we don't offer "advice." You need a financial advisor to do that. We tell you what we would do in a given set of circumstances, and maybe explain some technical details that you need. You can definitely solicit some opinions from the members of this forum.

You could do much worse than Fidelity and Vanguard. Personally, I like Vanguard the most of the three. I have three accounts with Vanguard for various reasons. I also have several funds or equities within the three accounts. My employer also does not offer any retirement plan, so I have to roll my own.

It is not too late to set up and contribute to an IRA for 2014, so I suggest you do it as quickly as possible. Without an employer plan, you're pretty much limited to $5500 or $6500 per year, depending on your age. Your spouse can contribute to the same limits, depending on his/her age, as well.

The best time to start saving for your retirement is now.
Post Wed Jan 14, 2015 4:47 am
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oldguy
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quote:
Guess I'll take a look at vanguard and fidelity. My employer doesnt offer any kind of retirement. Im new to the investment thing so Im just trying to figure it out as I go. Any more advice would be greatly appreciated


One thing about investing - there are 1000's of complicated books about how to beat the market, get the best returns - and all kinds of sales pitches to get you to buy annuities, options, and many other high-fee foolish stuff. But, when reduced to practice, the market is simple.

For over 150 years the US Stock Market has averaged about 11%/yr. So if you buy a US Market Index Fund - and wait many years - you quietly, patiently build wealth.

In your case (no company plan) I would use a Traditional IRA (not a Roth), the max investment is $5500/yr ($6500/yr over age 50). That gets you a tax break, about $1000/yr. So your out-of-pocket cost is about $4500/yr. At 11%/yr, you'd expect about $100,000 in 10 years, $390,000 in 20 yrs, $1,200,000 in 30 yrs.

Call Vanguard or Fidelity, open 2 accounts, a Trad IR Account and a Taxable account. Invest the money inside the accounts in the SP500 Index Fund. The IRA gives you the tax break, but the money is tied up until you are age 59 1/2. The taxable account doesn't have a tax break, but the money is immediately available, you can use it as a Backup EF.
Post Wed Jan 14, 2015 3:31 pm
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Lord_Diedrich
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Thanks again guys. Im only 27 so Ive got a few years of working and investing left before retirement. So why is it that you would do a traditional over a roth? Because of the tax break?
Post Fri Jan 16, 2015 4:01 am
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Lord_Diedrich
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also what exactly is a "taxable account"?
Post Fri Jan 16, 2015 4:04 am
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Wino
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quote:
Originally posted by Lord_Diedrich
Thanks again guys. Im only 27 so Ive got a few years of working and investing left before retirement. So why is it that you would do a traditional over a roth? Because of the tax break?

The amount you have to worry about is how much you have in the retirement account for you to use when your retire, not how big the number is. If the amount you pull out is taxed at 10%, then your money is really only worth 90% of the number. If the amount is tax free, then you have the full 100% of the money.

A traditional IRA uses 100% of your earnings before taxes to be invested. A Roth IRA uses 100% minus your tax rate to be invested. Let's put some real numbers to this to make it a little easier to see the relationships. Before I start, though, you have to realize that the amount you pay in taxes (raw dollars) is NOT part of the equation. The amounts that matter are: How much of my total income is involved in funding the account, and how much I get to spend when I retire.

Assume you currently have a flat 10% tax rate to make the math easier. Also, assume you have $5,000 pre-tax dollars to invest.

In a traditional IRA, you can invest the entire $5,000. Assuming a growth of 8% annually, in 30 years, you would have about $620K in that account. Now, if your tax rate is still 10%, you get to spend just under $560K. If your tax rate is now 20%, you get to spend just under $500K.

In a Roth IRA, to invest the pretax $5000, you have to first pay taxes on it. Your tax rate is 10% today, so you get to invest $4500 per year. In 30 years, this account would have about $560K. In fact, it would have precisely the amount of money at the 10% rate from the previous paragraph. If your tax rate upon withdrawal is 10%, 20%, or even 40%, you would still get to spend the entire $560K, because you paid taxes when you invested it.

The above makes sense if your tax rate upon withdrawal is higher than your tax rate when you deposit the money.

Now, let's change the figures to show a tax rate of 20% now, and a tax rate of 10% after retirement:

Traditional IRA
Amount invested annually for 30 years = $5000
Amount in account at retirement = $620K
Amount you can spend at 10% tax rate = $560K

Roth IRA
Amount invested annually for 30 years = $4000 ($5000 - 20% tax)
Amount in account at retirement = $497K
Amount you can spend at any tax rate = $497K

So, a Traditional IRA makes sense if your tax rate is higher now than it will be when you retire. A Roth IRA makes sense if your tax rate is lower now than it will be when you retire. If the tax rates are the same, both investments give you the same amount of money to spend.

The amount paid in taxes to Uncle Sam are higher in the traditional (you pay on the amount after growth, not the amount at time of investment), but that fact makes absolutely no difference to your actual situation.
quote:
Originally posted by Lord_Diedrich
also what exactly is a "taxable account"?

The Traditional IRA grows tax free, and taxes are paid upon withdrawal. It is "tax deferred." The Roth IRA taxes are paid upon deposit/earning, but all growth is "tax free."

A mutual fund or similar investment that is not a retirement account is taxed annually according to your realized gains. If you invest in a fund that buys and sells stocks regularly every day, then each time it sells a stock to capture the profits earned, your "realized gain" just went up. At the end of the year, you have to pay taxes on that gain, even though you just put your money in the account and never took any out. You realized the gain within the account, and you can pull that money out at any time without penalty, so you actually did receive that money for your own use.

Funds that don't do a lot of trading don't "realize" the gain. It might hold a stock that went up 5%, but since the fund has not sold that stock, that value increase is not "realized," and you don't have to pay taxes on it. The amount of the increase, though, will show on your balance statement. If you withdraw money from the account now, you'll have to pay taxes on that amount of increase, because by you withdrawing that money, you cause the "realization" of that gain.

The fund company actually keeps track of these amounts for you. If you look at your statement, it will have an amount called the basis. This is basically the amount of money you invested in the account, and which has already had its taxes paid. It's a combination of what you have paid out-of-pocket, and the amount you have had reported as capital gains because it was realized. The previous statement assumes you didn't withdraw any money from the account.
Post Fri Jan 16, 2015 6:10 am
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oldguy
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A "taxable fund" is an old-fashioned brokerage account, the kind we used before 401k's and IRA's and Roths were invented. You call your broker, you buy stocks, a mutual funds, an index fund - and when you sell it you pay capital gains tax on your profit. (Capital gains tax is traditionally lower than ordinary income tax.)
Post Fri Jan 16, 2015 1:59 pm
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louiefrias
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RUN, do not walk from that IRA.  Reply with quote  

Government sponsored "retirement programs" aren't designed for you. They're designed for Uncle Sam.

You must parrot what the wealthy do. They have access to better information, which contributes to why they are and remain, wealthy.

Start by buying and reading "Tax free retirement" by Patrick Kelly.
Post Wed Oct 05, 2016 8:54 pm
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