Roth IRA questions

[Csquared]

Hey everyone, I know a firearms forum probably isn't the best place for financial/investing advice but I'd like to ask a few questions regarding a Roth IRA.

Let me start by saying I'm 23 years old and I'm very serious about planning for my future. The way I see it, social security will be LONG gone by the time retirement roles around for me, therefore I have an aggressive attitude towards investing in my retirement because I feel I'll be on my own. I'm currently contributing 12% (not including my employer's 3% match) into a 401(k). I would also like to start up a Roth IRA because I don't want all of my retirement money taxed later in life like a 401 is taxed. I've decided after some thorough research that a Roth IRA would be my second investment vehicle account.

One of my questions is, where should I park my money that I'll be investing in this Roth? I would like to be moderately aggressive right now because I'm still young. I was wondering if anyone had any suggestions on what would be a good investment vehicle. (Again, I realize this isn't a financial/investing forum, I just figured some of you would have some solid ideas.

Another question I have, would it be a good idea to start a Roth IRA to save for a down payment for my next vehicle or possibly a down payment on a house? I have a hard time saving money if it isn't just taken out of my paycheck before I see it. (I like to blow it on things like guns, lol) I'm under the understanding that you cannot be penalized for withdrawing the amount contributed to an IRA, but only money made on the money you've contributed. I figure if the money is set aside in a Roth IRA account as a payroll deduction that I won't be able to spend it because I won't see it before it's put in the account.

Any help/comments are welcome. I'm new to all of this and just trying to get ahead of the game. I've known too many people that say they regret not saving money early in life and having their money work for them.

Any other investment vehicle ideas are welcome as well. I know the market is a risk right now (and always will be) but we all take risks everyday.

 

[MDave]

Let me lead off saying WOW great start man. Let me be completely honest here I have a small 401 and a small IRA right now. Lots of different reasons (mostly market vollatility but I have kept investing every year. I hope you do too.

For me the 401 and IRA seem to be bets on the same race. I am looking to diversify my investments a bit and provide a little more stability for my overall financial picture. Currently I have the 401 and the IRA as well as a small investment in Real Estate. I am considering rolling my IRA into a self investing vehicle where I will move some into metals and some into more real estate.

You are going to run through a lot of opportunities as you explore. I keep telling myself that this market is not the same as the market in 2007. There is a lot more volatility in stock, bond holders are not always given first right of payment anymore and the world is experimenting with other currency, Bit Coin for instance. So, I spend my time primarily in the traditional market but I am dabbling with the others right now.

I mentioned Real Estate earlier, you might have said OMG! I don't want to do that. There are lots of ways to own Real Estate, only a few have to do with you being a landlord. Personally I have small investment properties that I manage. You can do OK with that kind of property. It can earn you money in four ways, it is a tax shelter, it appreciates in value over time, It is a relatively stable shelter for your money and you earn rent. You could consider buying a duplex and living in one side while your renter basically pays your rent for you. There are also REITs Real Estate Investment Trusts where you buy shares in them and they invest and manage properties paying you a dividend. I am not as experienced there yet.

Anyway my point is there are a lot of non-standard investment opportunities out there. If you are not risk averse and willing to do research many of these could prove to be great ways to grow your money.

Hope this was helpful.

 

[ccordray]

Congrats on making a smart decision to save early for your retirement. The Roth IRA is the way to go for future retirement savings given that your withdrawals at retirement are tax free. With regards to where to you park your money, please do yourself a favor and research asset allocation models with mutual funds. Mutual funds are not sexy but unless you are actively managing your account, individual equities can burn you. Sounds like you've already got an idea as to how aggressive you want to be. I can't give a specific recommendation as to what firm you should go with on the open forum (I am in the industry) but I would go with a firm that has a wide variety of mutual fund options that you can trade commission free and have no front/back end loads. If you want, you can PM me and we discuss in greater detail.

 

[Csquared]

Let me lead off saying WOW great start man. Let me be completely honest here I have a small 401 and a small IRA right now. Lots of different reasons (mostly market vollatility but I have kept investing every year. I hope you do too.

For me the 401 and IRA seem to be bets on the same race. I am looking to diversify my investments a bit and provide a little more stability for my overall financial picture. Currently I have the 401 and the IRA as well as a small investment in Real Estate. I am considering rolling my IRA into a self investing vehicle where I will move some into metals and some into more real estate.

You are going to run through a lot of opportunities as you explore. I keep telling myself that this market is not the same as the market in 2007. There is a lot more volatility in stock, bond holders are not always given first right of payment anymore and the world is experimenting with other currency, Bit Coin for instance. So, I spend my time primarily in the traditional market but I am dabbling with the others right now.

I mentioned Real Estate earlier, you might have said OMG! I don't want to do that. There are lots of ways to own Real Estate, only a few have to do with you being a landlord. Personally I have small investment properties that I manage. You can do OK with that kind of property. It can earn you money in four ways, it is a tax shelter, it appreciates in value over time, It is a relatively stable shelter for your money and you earn rent. You could consider buying a duplex and living in one side while your renter basically pays your rent for you. There are also REITs Real Estate Investment Trusts where you buy shares in them and they invest and manage properties paying you a dividend. I am not as experienced there yet.

Anyway my point is there are a lot of non-standard investment opportunities out there. If you are not risk averse and willing to do research many of these could prove to be great ways to grow your money.

Hope this was helpful.

VERY HELPFUL!! No purple intended.. This was exactly the kind of reply I was looking for! I'm just now stepping foot into all of this and it is a bit overwhelming at the moment but hopefully as time passes and I study more I'll get more comfortable with it all.

One reason I'm able to throw so much at this right now, is I'm a single guy who has a good full time job and I live well below my means. I have recently paid my car off and have no debt. I'm only paying $300 in rent at a small house and utilities are (on avg) ~$120/month. I do not have cable/satellite/internet (expect the 4g signal my iPhone gets) and I don't spend very much money on expenses in general. The reason I want to put so much time/effort into this is because I realize that I will not always be debt free with little expenses. Marriage and children are probably somewhere down the line as well as a mortgage, etc etc.. So I'm trying to throw as much money as possible in my investments now while I still have the chance! I will never stop investing but it may just not be realistic to put 10-20% of my annual income into investments like I'm trying to do right now. (Although I hope it is!)


Thank you for your encouraging words and insight, it is immensely appreciated.

 

[rockhopper46038]

Good on you for starting so young! I think you are going about it in a good way, but would give you some thoughts to consider. I'm not an financial professional, but I did start very early too, have a passion for accumulating wealth, and have done all right for my wife and I.

#1 is to capture your full match from your employer (as you are already doing). It's "free" money, after all. There aren't many investments that are going to return better than that match.

#2 I would suggest is to max out a Roth, if you can. Use either Vanguard or Fidelity for the lowest fees and free trading within their own fund and ETF families. The reason I recommend this is that most 401(k) plans have limited and sub-standard choices, and the fees can be quite high. You can invest in just about everything that is market traded through Vanguard and Fidelity; you just pay a bit more for offerings that aren't their own. And even the "house" options from those two companies will give you much more choice than all but the very best 401(k) plans. You've already figured out why the Roth is probably the better move for you.

#3 Go back to the 401(k) and continue to contribute as much as you can, up to the maximum allowable. Even crappy selections in your plan are going to likely be a better long term play than taxable investing (outside of an IRA, Roth or 401(k)) because of the tax deferred growth.

#4 If you still have discretionary income to spend, go have some fun. Even the prospect of retiring early at 45 or 50 shouldn't get in the way of enjoying your 20's a bit. Buy some guns. Take some trips. You're going to need the guns if the government decide to confiscate your 401(k) and Roth accounts.

#5 If you're frugal enough that you've gotten the fun you want and still have some money left over, look at some taxable investments. Retirement accounts have pretty stringent rules about pulling money out, and having some unrestricted taxable accounts will allow you to bridge that gap from your early retirement at 45 or 50 (if you are so inclined) to the 59 1/2 when you can start making penalty free withdrawals from most of your retirement accounts.

I would recommend at your age you stay pretty aggressive. 95%+ equities, with 5% held in liquid accounts for opportunistic buying. A good split might be 50% US equities, 30% Europe/Pacific region and 20% developing nations (Brazil, Russia, India, China primarily). The 50% US equities could be split between the broad market (buy the whole market with an index or ETF), the S&P500 (large cap stocks), NASDAQ (small cap stocks), or a customized basket of something that appeals to you (high dividend, for example. Although at your age if you're going to be looking at dividend stocks you probably ought to look at dividend paying growth companies that have a history of increasing dividends over time). There are a lot of "exotic" investments out there, and as your net worth increases some of these investments may start to fit into your portfolio - but things like REITs, Master Limited Partnerships, private equity deals, and commodity futures investing are best left for awhile until you understand the basics. (I'm in a few REITS, but mostly as a replacement for the bonds that would normally occupy that portion of my portfolio but don't because they suck right now. REITS by law have to throw off a high percentage of their income as dividends, so they can throw of 6-7% annual returns - but they can also exhaust their assets and go bust. Do your research.)

A self directed IRA is a nice way to be able to free up capital for individual stock picking, precious metals, etc., but again it's one of those things that you should probably wait on for awhile. If you want to stock pick or hedge with metals, do it with "fun money" in your taxable accounts until you're certain you're ready to use your retirement funds.

Real estate is interesting though. I bought my first house while I was in college and still have it as a rental. If you can find a duplex you can live in half while renting out the other half, you could find yourself in the clover sooner than you think. But being a landlord isn't for everyone.

I would NOT use a Roth as a vehicle for savings with the intent of pulling out the initial investment for a car, etc. You certainly can, but you cripple the power of the Roth by doing that. You have similar ability to take a loan against your 401(k) balances, which I also don't recommend for most people. There are legitimate reasons and strategies for using 401(k) loans, but they aren't generally for buying a depreciating asset.

Well, that's a lot of typing. Hopefully you'll get lots of suggestions. Hopefully mine may be of some use. As always, it's your money.

 

[Csquared]

Good on you for starting so young! I think you are going about it in a good way, but would give you some thoughts to consider. I'm not an financial professional, but I did start very early too, have a passion for accumulating wealth, and have done all right for my wife and I.

#1 is to capture your full match from your employer (as you are already doing). It's "free" money, after all. There aren't many investments that are going to return better than that match.

#2 I would suggest is to max out a Roth, if you can. Use either Vanguard or Fidelity for the lowest fees and free trading within their own fund and ETF families. The reason I recommend this is that most 401(k) plans have limited and sub-standard choices, and the fees can be quite high. You can invest in just about everything that is market traded through Vanguard and Fidelity; you just pay a bit more for offerings that aren't their own. And even the "house" options from those two companies will give you much more choice than all but the very best 401(k) plans. You've already figured out why the Roth is probably the better move for you.

#3 Go back to the 401(k) and continue to contribute as much as you can, up to the maximum allowable. Even crappy selections in your plan are going to likely be a better long term play than taxable investing (outside of an IRA, Roth or 401(k)) because of the tax deferred growth.

#4 If you still have discretionary income to spend, go have some fun. Even the prospect of retiring early at 45 or 50 shouldn't get in the way of enjoying your 20's a bit. Buy some guns. Take some trips. You're going to need the guns if the government decide to confiscate your 401(k) and Roth accounts.

#5 If you're frugal enough that you've gotten the fun you want and still have some money left over, look at some taxable investments. Retirement accounts have pretty stringent rules about pulling money out, and having some unrestricted taxable accounts will allow you to bridge that gap from your early retirement at 45 or 50 (if you are so inclined) to the 59 1/2 when you can start making penalty free withdrawals from most of your retirement accounts.

I would recommend at your age you stay pretty aggressive. 95%+ equities, with 5% held in liquid accounts for opportunistic buying. A good split might be 50% US equities, 30% Europe/Pacific region and 20% developing nations (Brazil, Russia, India, China primarily). The 50% US equities could be split between the broad market (buy the whole market with an index or ETF), the S&P500 (large cap stocks), NASDAQ (small cap stocks), or a customized basket of something that appeals to you (high dividend, for example. Although at your age if you're going to be looking at dividend stocks you probably ought to look at dividend paying growth companies that have a history of increasing dividends over time). There are a lot of "exotic" investments out there, and as your net worth increases some of these investments may start to fit into your portfolio - but things like REITs, Master Limited Partnerships, private equity deals, and commodity futures investing are best left for awhile until you understand the basics. (I'm in a few REITS, but mostly as a replacement for the bonds that would normally occupy that portion of my portfolio but don't because they suck right now. REITS by law have to throw off a high percentage of their income as dividends, so they can throw of 6-7% annual returns - but they can also exhaust their assets and go bust. Do your research.)

A self directed IRA is a nice way to be able to free up capital for individual stock picking, precious metals, etc., but again it's one of those things that you should probably wait on for awhile. If you want to stock pick or hedge with metals, do it with "fun money" in your taxable accounts until you're certain you're ready to use your retirement funds.

Real estate is interesting though. I bought my first house while I was in college and still have it as a rental. If you can find a duplex you can live in half while renting out the other half, you could find yourself in the clover sooner than you think. But being a landlord isn't for everyone.

I would NOT use a Roth as a vehicle for savings with the intent of pulling out the initial investment for a car, etc. You certainly can, but you cripple the power of the Roth by doing that. You have similar ability to take a loan against your 401(k) balances, which I also don't recommend for most people. There are legitimate reasons and strategies for using 401(k) loans, but they aren't generally for buying a depreciating asset.

Well, that's a lot of typing. Hopefully you'll get lots of suggestions. Hopefully mine may be of some use. As always, it's your money.

Wow, I don't know if I was being pessimistic when I posted this but I never expected to get such in-depth replies! Your suggestions are greatly appreciated! You are the second person (so far in this thread only, heard it from an older friend before) that buying a duplex and living in half and renting the other half would be a wise investment. I think I may look at doing this in the future. It sounds like a fool-proof way to get ahead. I've never really put too much thought into retiring early but I can only hope that it will be a possibility for me.

 

[jim b]

The reason I want to put so much time/effort into this is because I realize that I will not always be debt free with little expenses. Marriage and children are probably somewhere down the line as well as a mortgage, etc etc.. So I'm trying to throw as much money as possible in my investments now while I still have the chance! I will never stop investing but it may just not be realistic to put 10-20% of my annual income into investments like I'm trying to do right now. (Although I hope it is!)

Why not? They way you are living right now and looking at the future it is very realistic that you could (and should) continue to live without debt with the exception of maybe a modest mortgage. You have obviously realized that most debt is not worth it and you have no problem living within your means. I would VERY HIGHLY recommend you look into some of the books and classes that Dave Ramsey does. His show is on 950 AM radio during the middle of the day if you can pick it up. with your lifestyle and thought process, you would probably really connect with his philosophies. Unfortunately most people only look into his processes once they are covered up with debt and have to fight to get back on solid ground. With some good planning right now you could very easily continue to live debt free and use your income to invest with.

 

[PeaShooter]

I agree with what the earlier commenters have said, with a few caveats. First, I would get on an open platform, like Schwab, instead of a specific fund family. The reason is that when you are in a specific fund families plan, you can only buy their products. What are the chances that they have the best in class products in all different investment classes at the same time. Slim to none. You can still invest in those fund families from an open account, but you won't be stuck with only them to choose from.

Until you get a bit of money built up in the Roth, then diversification is really a moot point, as you probably won't have enough to make the minimum initial purchase of several different funds. Look at the Permenant Portfolio PRPFX. It is a blended fund that invests in stocks, bonds, precious metals, and currency products.

You might want to look into talking to the Mutual Fund Store on 82nd, just west of Allisonville. Denny and Andy Smith, the managing partners are VERY knowledgeable and trustworthy. I have been a client for 10 yrs. BTW, Denny and Andy also do a weekly national mutual fund investing show on Saturday afternoons on WIBC @ 1:00 called the Mutual Fund Show. You can also listen to podcasts of their previous shows here Recent Radio Shows | The Mutual Fund Show. I can't say enough good things about Denny and Andy. If you do get help from an advisor, make sure that it is they are a fee-only independant Certified Financial Professional (CFP) with accreditation with the NAPFA (National Association of Personal Finance Advisors). Also make sure that they are a fiduciary for your interests, which means that they are legally bound to put your interests first, ahead of their own, or their companies.

You will not believe how much farther ahead you will be later in life by starting saving early, than by waiting. I remember reading an example several years ago, that showed saving $1k/yr from the time you were 20-30 and then stopping vs. starting at 30 and saving $1k/yr until you retired at 65, you still made almost 25% more return at 65 by starting early.

A duplex can be a great way to cost share the living expenses of a house, just be aware that being a landlord is not easy or simple. If you let them, the tennants will try to walk all over you. Know your personality and decide if it might be a fit for you. If you do go that way, my friend who is a landlord swears by Landlordnet (I think, it has been a while), which is a database of renters and other landlords experiences with them. Getting a good tennant is the key. You might hit up 88GT for advice, she has a lot of rental property.

I have also been through Dave Ramsey, and agree with most of his premises. Great program, but it sounds like you are already doing it, and going to the class would only formalize the process. Just watch out, Dave is an old insurance salesman. He seems to lean toward telling you to buy a lot of insurance.

 

[pudly]

I would NOT use a Roth as a vehicle for savings with the intent of pulling out the initial investment for a car, etc. You certainly can, but you cripple the power of the Roth by doing that. You have similar ability to take a loan against your 401(k) balances, which I also don't recommend for most people.

I'd second this. Generally, retirement account loans are a losing financial proposition. Automatic savings are a great tool, so consider having part of your paycheck go to a separate savings account for larger purchases, like a house or car. Sounds like you are off to a great start, though. Keep it up!

 

[JohnMcClane]

Csquared,
There is a lot of solid advice so far in this thread to consider.
There is one area that needs to be developed a bit more. As a financial professional myself, I often teach my clients to think about the end goal purpose for their savings/investments. Since they have different goals at different points in their lives it makes sense that their funds should be invested differently. Don't bring a knife to a gun fight. For example, if you are saving for that hot item that you saw at the last Indy1500 and plan to buy it this year, you wouldn't put funds aside in a long term investment vehicle that experiences frequent fluctuations. (you don't want a common 10% drop to hit you when you are ready to cash out the funds). A different tool is needed. So for shorter time frame goals, prudence mandates that you are more cautious with your investment choices. You can potentially be more aggressive with longer term goals such as retirement (if you can stomach the day to day swings) because the short term fluctuations don't necessarily devastate you.

Typically I advise that people have their plan include a short-term emergency bucket of funds (rainy day fund) which can be a savings account to help smooth out the bumps, month to month. This is also to help cover expenses in the event of a sudden job loss. Then there is usually a intermediate bucket for goals that are a bit farther off but still before retirement. Buying a home, car, paying for kids expenses (college), etc. And this bucket is invested differently than the first. There is more time to work with (than the rainy day fund) and often a greater ability to deal with more moderate fluctuations in the attempt to get better returns. Lastly, consider having a long term bucket including 401ks, IRAs, and anything else that would fall into the category of a retirement account. These are not to be touched if at all possible and if the other 2 steps are taken, you probably won't have to.
If you have a similar approach then it just comes down to specifically targeting which goals are most important to you, figuring out which bucket they fall into, and then matching that bucket to an appropriate investment option.

The only other advice I would give is to make it all automated. 401ks, IRAs, savings accounts all succeed at greater levels when they are set up to make your contributions automatically, whether you remember to make them or not.

It shows great wisdom to start such an important task so early, Happy investing...

 

[Thegeek]

Hey everyone, I know a firearms forum probably isn't the best place for financial/investing advice but I'd like to ask a few questions regarding a Roth IRA.

Let me start by saying I'm 23 years old and I'm very serious about planning for my future. The way I see it, social security will be LONG gone by the time retirement roles around for me, therefore I have an aggressive attitude towards investing in my retirement because I feel I'll be on my own. I'm currently contributing 12% (not including my employer's 3% match) into a 401(k). I would also like to start up a Roth IRA because I don't want all of my retirement money taxed later in life like a 401 is taxed. I've decided after some thorough research that a Roth IRA would be my second investment vehicle account.

One of my questions is, where should I park my money that I'll be investing in this Roth? I would like to be moderately aggressive right now because I'm still young. I was wondering if anyone had any suggestions on what would be a good investment vehicle. (Again, I realize this isn't a financial/investing forum, I just figured some of you would have some solid ideas.

Another question I have, would it be a good idea to start a Roth IRA to save for a down payment for my next vehicle or possibly a down payment on a house? I have a hard time saving money if it isn't just taken out of my paycheck before I see it. (I like to blow it on things like guns, lol) I'm under the understanding that you cannot be penalized for withdrawing the amount contributed to an IRA, but only money made on the money you've contributed. I figure if the money is set aside in a Roth IRA account as a payroll deduction that I won't be able to spend it because I won't see it before it's put in the account.

Any help/comments are welcome. I'm new to all of this and just trying to get ahead of the game. I've known too many people that say they regret not saving money early in life and having their money work for them.

Any other investment vehicle ideas are welcome as well. I know the market is a risk right now (and always will be) but we all take risks everyday.

I'm a bit older, but still young enough to go aggressive. My adviser is about the same age as I am, and I think that's important for a generational perspective. Investing is always a risk, and a Roth is a great way to go. But there are rules you must follow, and a very dynamic market. A professional adviser doesn't cost much, and the benefit is tremendous. I've earned a very consistent 23% on my Roth over the last 6 years. He calls me and says "I want to move some money, you good with that?". I always tell him yes. He keeps tab on the market all day long. I just can't do that. And he doesn't make money unless I make money. The more I make, the more he makes. That's great incentive! I can give you his contact info if you'd like. He is with a large well respected company.

 

[pudly]

I've earned a very consistent 23% on my Roth over the last 6 years.

Very nice, but don't count on that continuing...

 

[Thegeek]

I'd second this. Generally, retirement account loans are a losing financial proposition. Automatic savings are a great tool, so consider having part of your paycheck go to a separate savings account for larger purchases, like a house or car. Sounds like you are off to a great start, though. Keep it up!

You can play some games with a Roth. Like if you're saving for a purchase, you can dump that into the Roth and let it work for you while your saving. Since it's post-tax, you can then withdraw that years contributions without penalty, but whatever interest it earned stays. There's a limit on how much you can contribute though (iirc, it's $5k). Play the games to let the money work for you. An example is if you're dumping 2k a year into it already and decide you want to buy a car. Start saving my increasing your contribution. Then at the end of the year, say you put 4600 in. You can pull 2600 out for your purchase, and overall be ahead in the Roth because that 2600 was earning you dividends.

 

[pjcalla]

I will tell you that the Feds know how much money is being dumped into Roth IRAs, and I believe they get reports monthly. I will also tell you that they said they would never tax Social Security. With you being young, it is likely that the tax benefit will disappear. Don't get me wrong, the Roth is a great tool, but I wouldn't put all my eggs in one basket. I have a Roth and Traditional IRA for that very reason. If I need the tax benefit one year, I dump money into the traditional, if not, the Roth. Just like diversifying your investments, its also wise to diversify your accounts.

 

[Csquared]

I've read over every post in this thread and I want to thank everyone for their comments/suggestions. I'm not to my 50 quality posts yet so PM's aren't available to me at the moment but I may send some of you questions through PM's once I get 50 quality posts.

Thank you again for your knowledge and commitment to my questions!

 

[PeaShooter]

I've read over every post in this thread and I want to thank everyone for their comments/suggestions. I'm not to my 50 quality posts yet so PM's aren't available to me at the moment but I may send some of you questions through PM's once I get 50 quality posts.

Thank you again for your knowledge and commitment to my questions!

Only one more "quality" post.....