Is a Roth IRA worth it?

Question

I already have a pension with my employer. However, I was thinking about opening my personal IRA. From everything I've reveiwed, it appears to be a good deal for the middle class. Is there any catches with it? How do I manage it? I'm not sure how to invest in it. Can I do it myself, or is it best to have a professinal do it for me?

Answer 1

I personally own a Roth IRA and I think its a good idea for you to have one too. That's great you have a pension plan because it guarantees you income for life when you retire. The company you work for is one of the few companies that still has it. Many companies have got rid of their pension plans because people are living longer than expected and the companies are paying more than they should be.

But I think you should diversify your sources of income. You do want some more money to use when you retire right? Depending on your income level and your filing status, you may qualify to open a Roth IRA. Here are some things you should know about Roth IRAs:
1) Like all other IRAs, your investments grow tax-deferred.
2) When you first open your Roth IRA and make your first investment into it, you must hold all future earnings and gains in the account for 5 taxable years (Jan 1 - Dec 31). This is a one time event and does not re-occur when you invest more money or open another Roth IRA.
3) You may withdraw your contributions anytime without paying any penalities or taxes on them.
4) After age 59 1/2, all your withdrawals can be tax-free (depending on when you open your first Roth IRA. If you open a Roth IRA at age 60, you have to wait 5 taxable years to withdraw the earnings and gains)
5) Any withdrawals of the gains and earnings before age 59 1/2 will be subjected to 10% penalty tax. Though, there are some exceptions to that rule such as using a maximum withdrawal of up to $10,000 to purchase a first home or pay for higher education (it doesn't necessarily have to be you. It can be your kids or grand kids too).
6) The IRS does not prohibit you from withdrawing money at anytime. They just put these rules to prevent people from using the investments for other purposes other than retirement. If you are willing to pay the price for early withdrawal, that is your own decision.
7) In any given year, there is maximum amount you can contribute to a Roth IRA. In 2006-2007, if you are below the age of 50, you can put in a maximum of $4000 (age 50 and above, its $5000). In 2008, you can put in a maximum of $5000 (age 50 and above, $6000).

Now that you know how a Roth IRA works, you need to find a financial company that offers Roth IRAs. This financial company will give you a list of investments they offer (either CDs, money markets, mutual funds, bonds, and/or stocks). I don't know how old you are or what your investment objectives are, so don't take any advice on the internet or pay attention to headlines. It is best to work with a financial professional who can understand your needs and find the suitable investments.

But if you going to setup your Roth IRA by yourself, you should understand what is a mutual fund. After that, you need to figure out how much risks are you willing to take. If you want higher growth in your portfolio, you need to take higher risks. So you will look for high growth (or aggressive growth) funds. If you want some growth but want some stability as well, You will pick moderate growth funds. If you want little growth but want generation of income (such as interests and dividends), you will pick municipal bonds or government bonds or capital & income funds. You should carefully read the prospectus of each mutual fund before investing into them.

My free advice to you:
1) Don't put stocks into your Roth. They are highly volatile and base on what I see from many clients who have no clue how to invest in stocks, they either had a low rate of return and some lost money as well.
2) Don't put CD's in it either. They have low interest rate between 2-5% and plus they have a maturity date as well, which only give you a small window of withdrawing money from it.
3) Invest your money in the same fund family. For example, if you going to invest in Legg Mason Partners Funds, then pick other mutual funds offer by that same family. Why? As your investments reaches a certain limit, you get sales charge breakpoints.
4) You don't want to put just one mutual fund into your Roth IRA or put many in there. 3-5 mutual funds should be good enough.
5) You want to invest systematically instead of putting one large deposit every year. Investing systematically is where you invest the same amount every month. This will lower the cost per share you own.

Answer 2

Ideally, retirement income will come from three sources: 1) Social Security; 2) an employer-sponsored pension plan; and 3) your personal savings. The government has recognized that part of the income you earn now will not be spent until retirement, and so has generously provided us with a number of special accounts which provide special tax incentives. The Traditional IRA allows you to defer the taxes on income earned now, until you'll use it in retirement. For a Roth IRA, the taxes are paid now, but the earnings are tax-free. As to which is better: if you feel that you will be in a higher tax bracket in retirement, then the Roth is the better deal. If you feel that you'll be in a lower tax bracket in the future, then the Traditional IRA is better.

As for investing it, pick a target fund for the year that you plan on retiring. Vanguard and T.Rowe Price have the highest rated funds. These funds provide one-stop diversification, with much lower minimums than investing in separate funds. They also have the advantage of professional management and near optimal assest allocation.

Answer 3

The ROTH IRA is by far the biggest gift this government ( not known for giving things away) has ever given to the " Average Joe ( or Jane)"...You won't get any tax break right now, but simply by investing $ 4000. now and watching it grow (tax Free)...and when you start withdrawing money, THAT is tax-free !!
After forty years of paying taxes on food, gas, income, any interest from a bank account, on your property, et. etc. etc.....you will think that Tax-Free income is a gift from God...not the gov.
Add one every year...or all year long if you set it up that way...you will never regret it.( and sad to say ...if you die..it belongs to your heirs( also tax free)
Your best bet is with an investment company...not the bank...check E-trade or Fidelity websites....to begin with you just choose one simple conservative "blended" mutual fund....after about 3,4, or 5 years...you start moving money ( contributions PLUS profits) into two. three more funds...and go for little bigger returns.
Find out what funds ( and other investments) are all about:
http://moneycentral.msn.com/investor/home.asp/beginnerguide.asp?page=introduction
Or go to : http://finance.yahoo.com/funds
Then for some entertainment try; http://finishrich.com
Go to the " latte calculator" and see what about $30. or $50. a month will be in 25-30 years....and remember yours is tax-free.
P.S. also see the diff between 5% ( the bank) and 10, 12, or 15%
(mutual funds)

Answer 4

If you put your money in a regular margined brokerage account you may actually come out ahead depending upon where you live and the state tax implications. I live in Florida where there is no state tax.

Imagine that you have $5000 to invest and that you are lucky enough to see a 10% increase. You'll end the year with a $500, tax free gain in the Roth.

On the other hand, in a margined brokerage account, that same $5000 can be used to purchase $10,000 worth of stock. Assuming the same 10% gain, you would double your profits from $500 to $1000. Since your federal tax rate will fall somewhere between 15% and 35%, you'll actually come out ahead in a regular margined brokerage account.

Answer 5

Here's an article from Smart Money that shoudl help you see the difference between all the types of IRA's.
http://www.smartmoney.com/retirement/roth/index.cfm?story=whichira

Furthermore, seriously try to do some research yourself on how to properly diversify your Roth IRA. I cannot stress the importance of this enough. I have had experience with many professionals who try to push mutual funds with large loads and high expenses that eat up your gains. Or even worse, many try to get you to put your money in the hot sectors that probably won't continue to go up in the future.

Index Funds such as ones that are closely tied to the S&P are good long term areas with limited risk to put money a portion of your IRA in. Companies such as vanguard have good index funds. Have a proper mix of Large Cap, Mid Cap, Small Cap funds in the stock portion of your portfolio. In your bond portion have a good mix of government, corporate, and corporate junk bond funds in your portfolio. You don't need municiple bonds because you are tax exempt already. All these things are accessible through mutual funds and etf's.

Remember that your Roth IRA is also for retirement so limited risk is important. You technically can buy individual stocks for your Roth IRA, but I tend to go with the index funds, mutual funds and ETF's to purchase stock. The same thing with bonds. Except with I Bonds, they can be purchased for small denominations and are completely safe and protect you from inflation. They are good for a small portion. lol....There's a lot of options and stuff to think about.

Just remember diversify and explore ways you can do that on the internet.

Answer 6

roth ira's are an excellent way to go. they are tax free and help build your retirement savings. you are allowed to invest at the moment 4,000.00 $ a yr. i would recommend you open an acct with schwab and invest in mutual funds like vanguard. good luck....

Answer 7

Your contributions are taxed. That means your distributions are not taxed - your account can appreciate without incurring any taxes.

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