This still doesnt make sense( IRA's & Mutual Funds)?

Question

ok, i asked a question about this topic and it was closed so i couldnt ask follow up questions. But im still not understanding what IRA's and Mutual Funds were. Everyone keeps saying its worth the risk, and thats all fine up until u actually lose the money and then was it really worth it. Like i said i have no financial background, dont anything about investments and stocks, so i feel it would be foolish of me to invest and not know how exactly it works. Is there anything besides those 2 that grow good interest but that is much more to what a savings account is. I dont know how stock flunctuates or what businesses are doing good, so could give some other options, and please remember i dont have a financial backing, so using financial vocab would be just like u are talking to me in japanese

Answer 1

Not a lot of people know about investments so don't feel bad.
Simple investments would be to make sure you don't disburse too much. Every penny counts. Put them aside when you dont have to use them.
But besides the ol'd granma's advise, look into Certificate of Deposits, the rates are usually better than Savings and can go for short of medium or long term. CD's are account you deposit money into, at a certain rate for a certain period of time: 3 months, 5, 12 5 years...it depends on your bank's products. They earn the interest and at the end of the term the bank sends you a notice: do you wanna withdraw it or do you want to sign for a new CD. It's a simple and sure investment account. It is also money you dont have access to at all until it matures, unless you withdraw it. There is a penalty fee for withdrawing it too early.
Also look at bonds for the long term.
IRA is best for retirement plans. No penalties unless you withdraw from them before you retire.

Mutual funds however you start touching on wider and a little more complex investments. Remember it's the same principle and theory, but rules and risks are different that's all.

Answer 2

Mutual Fund:
According to wikipedia (i know it's not the most authoritative site out there, but it does provide good general information) a mutual fund is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. When you invest in a mutual fund you are actually investing in many different stocks, bonds, etc so therefore you are spreading out your risk over a larger area because you're investment is not focused in any one thing. There are many different mutual funds to choose from.

Individual Retirement Account (IRA):
An IRA is a retirement plan account that provides some tax advantages for retirement savings. There are several different types of IRAs out there but I'll cover 2 of the most common; Traditional and Roth IRA. For both Traditional and Roth IRAs, all transactions and earnings WITHIN the IRA are tax-free. This means once your money is in the account, you can buy and sell stocks, bonds, whatever tax-free. You can and should have some mutual funds within you IRA. If you withdraw funds before you are 59.5, you will incur penalties.
In a Traditional IRA, contributions are often tax-deductible (often simplified as "money is deposited before tax" or "contributions are made with pre-tax assets") and withdrawals at retirement are taxed as income.
In a Roth IRA, contributions are made with after-tax assets and withdrawals are usually tax-free.

Investments will fluctuate day to day, but when you invest for the long term (5-10-20+ years) the market always goes up. Speaking with a financial advisor would be advised as they can provide much more tailored information to you than what you'd find on Yahoo Answers and most times the initial visit with them doesn't require a commitment on your part.

Answer 3

mutual funds and IRAs are different things, an IRA is a tax advantaged way to save, like a place or spot that you put different investments in, you may open an ira and use it to invest in mutual funds, or bonds,or others

its hard to say whats worth the risk because we dont know you and it depends on what mutual funds you would be investing in, if you pick a money market fund you will really have no risk except the risk of losing purchasing power due to high inflation, others are higher risk funds with higher potential rewards

if you really dont know anything about investing you can either talk to a financial advisor, or open an account with fidelity,troweprice,or vanguard, (the big no load-low fee companies) and start a target date retirement fund with them, it sets your investments depending on the year you want to retire, if you are 40 years from retirement it is aggressive with maybe 90-95% stocks in it, with international stocks as well,
if you are 2 years from retirement it may be half bond funds and cash and income stock funds, to help you make an income in retirement and to have less fluctuation

Answer 4

I once had the same dilemma as you. But I changed my mind when I realised that if you invest in something for the LONG TERM, then mutual funds and IRAS are definately worth the risk.
Think of it this way....if you were around at the inception of the stock market in the mid 1800s and had invested $1 in it then, today it would be worth Millions.
It all depends on how "long term" you want to be, and how much risk you're willing to take.
But generally, the longer the term, the safer your investment is.
If you're near retirement already, for example, you wouldn't want a high risk, and so you'd be more apt to invest into an interest bearing account that can't deflate during times of a down market.

Answer 5

So as not to cause confusion let me answer the first part of your question. What is an IRA?

An IRA (Individual Retirement Account) is simply an account where you can contribute money for your future retirement needs on a tax advantaged basis. That means you usually get a deduction on your income tax return that lowers your taxable income and thus your tax bill if you make a contribution. You can make Investment inside your IRA. You can choose certificates of deposit (CD's) money market mutual funds, stock or bond mutual funds, individual stocks and bonds, and many other choices. The point is whatever investment you choose for your IRA account grows without taxes, and you can change your investment selections without any tax consequences. You can learn more about IRA accounts here. http://en.wikipedia.org/wiki/Individual_retirement_account

The second part of your question is what is a mutual fund.

A mutual fund is where you and other people like you pool their money to hire someone to manage their money for them. You can choose a manager for a myriad of purposes: to invest in stocks, to invest in bonds, to invest internationally etc. By pooling your money with others you can own a small piece of a large well diversified portfolio. Diversification has been shown to reduce risk. To learn more about mutual funds look here.http://en.wikipedia.org/wiki/Mutual_funds.

You are right to be wary of investments you do not understand. Because money for retirement is so important you should learn more about investment options and the risk associated with them. If you have no desire to educate yourself then you should hire a professional to walk you through the process.

Answer 6

Here is one thing to keep in mind about the Roth IRA account. There is never any tax on it where as there is on your 401k. This becomes important when considering your asset mix. Income producing investments are taxed at the full tax rate as will be your 401k. Hence it makes sense to invest at least some of your 401k in income producing assets--bonds, LPs, REITs. The income from each of those is taxed at the full tax rate anyway. Now since the Roth IRA is never taxed, it also makes sense to put those types of assets into the Roth IRA also. And also equity investments. What you neglected to mention are investments outside of these two vehicles. If you have some, they should be investments that would be taxed at the capital gains rate--equity investments. Actually, unless you are in the highest tax bracket it makes sense to have a portion of your equity investments outside of a 401k. By doing so your total tax bill will be decreased, especially if you are a long term investor. If you have the least hankering to invest some of your money in gold and silver those absolutely should be within a Roth IRA. Both are taxed as collectibles otherwise. Another thing to consider in regard to the 401k is that in future years the tax rate might actually be higher, perhaps much higher, than it currently is. Since you really have no choice of placing non-mutual fund investments within a 401k except for perhaps company stock, it certainly does make sense to invest Roth IRA money in company stocks rather than mutual funds. But be careful. It is very tempting for many to speculate with their Roth IRA account especially short term trading which otherwise would be taxed at the full tax rate. That would be a good way to reduce that value of the Roth account. Be just a little cautious. Invest in the likes of MCD, WMT, JNJ, BDX, KO, etc. Or maybe ETP with its 8% dividend or PAA with its 7.5% dividend. And do not invest it in fewer than 5 different companies.

Answer 7

Putting your retirement money into stock mutual funds is one of the best things you could ever do. That's how people who make ordinary incomes can retire very well. I agree, don't do it until you really understand it. If you want to trade e-mails I can explain more. And no, I'm not a mutual fund salesman.

Answer 8

You are right to question what will happen to your investment. I think you should look into a insurance policy that is whole life. You should know how much you can afford every year and how many payments in that year. Do not buy anymore than you can afford! These policies will allow you to build a cash resorce that will pay more than the banks. Do not worry about how big a policy you can afford, live within your means.

Answer 9

1