Should i invest in a cd or Roth Ira?

Question

I wanted to know how much do i need to start investing and the advantages and disadvantages of a cd or Roth Ira? And what do you think i should invest in? I currently have a savings account but i want to make more money...

Answer 1

Such a complex yet very good question.

I'll go over the basics but (disclaimer alert) please do further research for yourself before committing to an investment plan.

First, the question of CD vs. Roth IRA. The investment goals for these two are diametrically opposed.

A CD is used for mostly short term investments. Similar to the Savings Account you currently have, money is put into a CD which after a predetermined period of time will earn a predetermined amount of interest. Unlike a Savings Account, in which you can withdraw funds as needed, early withdrawals from a CD will result in penalties. At the end of the year, interest earned by the CD and Savings Account is treated as ordinary income when calculating taxes. Looking at it very simply, the amount of interest that you earn is added to wages, the total of which you would look at a tax table to figure out your taxes.

A Roth IRA is used for long term investment with the goal being that the investment will grow until retirement and will not be withdrawn until after retirement. There is a limit on how much can contributed to a Roth IRA up to a maximum of $4000 per year (in 2008 the limit will increase to $5000, then go up $500 each year to allow for inflation). Since a Roth IRA is funded using after-tax funds, withdrawals of the base contributions made after retirement are tax free. Earnings on the contributions are generally tax free (certainly at a lower rate than savings accounts and CDs).

Roth IRAs can be invested in many ways, including stocks and mutual funds. As with all types of investments, there is a certain amount of risk. Invested wisely, however, earnings can exceed those from traditional Savings Accounts. Mutual funds are generally considered to be safer investments than stocks as fund managers invest in groups of stocks with certain goals in mind. As individual stocks decrease in performance, the fund manager will replace it with a better performing stock. Some investors choose to invest in aggressive (more risky) funds which can yield higher earnings early in their career. As they approach retirement, the move is made to more conservative funds which still will yield earnings, but at a lower rate (but are less likely to lose their value). Some funds are set up to automatically achieve the goal of moving from aggressive funds to conservatives based on investment goals. In such a fund, you would continue investing in the same fund and over time the fund manager would transition from aggressive to conservative investing.

How much you invest will depend on your current age, your expected retirement age, and how much you think you will need to live comfortably. Since there is a yearly limit for investing in a Roth IRA, you won't be able to play catch-up later for smaller investments now. If you can afford it, invest in the following order: 1) A 401(K) plan with pre-tax dollars (allows you to invest while lowering your salary amount, resulting in you being taxed at a lower rate) 2) A post-tax retirement plan like a Roth 401(K) or Roth IRA. If your company offers company matching, put as much into the company retirement plan as they will match. Put the excess into the Roth plans. If you still can afford to invest, you can decide whether to contribute more into the 401(K) or a separate taxable investment plan such as stocks, bonds, or mutual funds.

There are calculators on the internet which can be used to determine how much you should invest to meet a future goal. One tool, available at http://finance.yahoo.com/calculator/retirement/ret-02 lets you enter a number of assumptions such as current salary, the percentage of your salary you expect to have at retirement, and the number of years you expect to spend in retirement. The tool will then calculate how much you would need to save each year to meet your goal. Keep in mind that the required savings amount could consist of funds that you contribute to retirement plans and IRAs as well as earnings on those amounts.

This should give you a decent start. There is a lot to investing, but it is never too late to get started. If you are able, it would be a good idea to schedule an appointment with an investment professional to discuss your long term goals.

Happy Investing!

Answer 2

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I would invest your money toward retirement. A Roth IRA is a retirement account. I'm not too clear about situations where people have more money to INITIALLY invest than the contribution limit. Since you have $10,000, the government says you can only put in $4000 for 2007. But if you sign a letter of intent (LOI) on mutual funds, you are allow to put in more than $4000. Most letter of intent minimums are $25,000. That means, within 13 months, you agree to invest a total of $25,000 over the 13 month period. I don't know if this a loophole in the system since IRAs are funded by mutual funds, stocks, and/or bonds. Are LOI an exception to the contribution limit? It would be best to contact a tax advisor on this situation. I've been trying to find the answer in the IRS website and found nothing. Anyway, since you have $10,000. I would invest $300/month into a Roth IRA. Put the rest into a money market account or maybe onto an online savings account such as EmigrantDirect or ING Direct or Citibank E-savings. All earn interest of around 5%. Why should you invest every month instead of making one large deposit every year? Well, stock market tends to fluctuates every month. So, you don't know if you are buying shares when prices are high or when they are low. If you undertand the dollar cost averaging concept, you would invest the same amount on the same day of every month. Whatever contribution you have left over, then you will max out your Roth IRA (which is December or during the first 3 months of the next year).

Answer 3

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RE:
Should i invest in a cd or Roth Ira?
I wanted to know how much do i need to start investing and the advantages and disadvantages of a cd or Roth Ira? And what do you think i should invest in? I currently have a savings account but i want to make more money...

Answer 4

Cd Vs Ira

Answer 5

Do both at the same time and then study about how equity funds work. A CD is a SAVINGS (not investing) instrument. The Roth is a Retirement account. If you need the money that is in the Roth you can always take out what you put in no taxes no penalty. What is at risk of taxes and penalty is the earnings. Keep good records and use this as a training account for when you learn more about INVESTMENTS.

Answer 6

Ira Vs Cd

Answer 7

Alright, first off, you " sound" young...you DO realize that in the IRA, you won't be using the money you make for years and years.... But...it is the best investment you can make...if you can afford to.
As far as " investing" to make money ( as opposed to a CD or a bank)...Yes, it is the way to make your money grow... to get started go on-line to someone like E-trade...read up, fill out application....open an account and probably get into a couple diff ETF's.... ETF info at:
http://www.best-of-etfs.com/family.asp?fam=EXTRADED
Leave some of your money in savings...and try to add to your " investing account" along the way.
I don't know what amount of money you have in savings, but I just know that ETF's are less expensive than mutual funds ( no set amount you must purchase)
When you start making some returns...start "earmarking" some of that money for the IRA you mentioned....(..and it can be invested with the same people in the same kind of funds)

Answer 8

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Answer 9

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Answer 10

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