Investment Question: If I have maxed out my 401k, should I also do a Roth IRA?

[tnitsuj]

I max out my 401k contribution, and have a good amount of cash in the bank. I am considering opening a roth IRA this year with Vanguard putting

1k in Vanguard 500 Index Fund
1k in Vanguard International Stock Index
1k in Vanguard Inflation Protected Securities

A Little about me, 25, no debts at all, don't own a house and won't be able to buy one for at least two years do to circumstances beyond my control.

 

[arcenite]

depending on how much cash you have in the bank, maybe you could invest in real estate? unless that it apart of not being able to buy a house (depending on the reason)

 

[bunker]

Just keep in mind when you do buy a house, it won't be a bad idea to put down 20% so you can avoid PMI. There are other ways to avoid it, but having 20% is the easiest.

Invest some in CD's or Money Market accounts so you have that liquidity when you want to buy.

 

[tnitsuj]

Originally posted by: bunker
Just keep in mind when you do buy a house, it won't be a bad idea to put down 20% so you can avoid PMI. There are other ways to avoid it, but having 20% is the easiest.

Invest some in CD's or Money Market accounts so you have that liquidity when you want to buy.

I will be moving twice in the next two years so buying a house appears unlikely. I have about $40k in an ING Direct Account at 2%, and I figure now is as good a time as any to start a Roth in addition to the 401k. A 1 CD will give me a max of around 2.22% as compared to the 2% I get now in the ING account.

 

[DaveSimmons]

I'd go ahead with the Roth at Vanguard, and for now keep the rest at ING instead of getting locked into a CD paying only slightly more.

The choice of funds looks good, though at 25 in a low-inflation market dropping the inflation-protected fund and shifting the $1K to the other two might make sense. But I'm just going by the name on that one, I haven't looked at its prospectus.

 

[tnitsuj]

Originally posted by: DaveSimmons
I'd go ahead with the Roth at Vanguard, and for now keep the rest at ING instead of getting locked into a CD paying only slightly more.

The choice of funds looks good, though at 25 in a low-inflation market dropping the inflation-protected fund and shifting the $1K to the other two might make sense. But I'm just going by the name on that one, I haven't looked at its prospectus.

I picked those funds because they were Index funds with exceptionally low expenses from .18 to .22. I am also betting that inflation will go up which is why I have the Inflation Protected fund...I will look into that more.

 

[FeathersMcGraw]

Assuming you can do so without hurting your savings (always keep at least three month's expenses in the bank), I would certainly recommend doing so, particularly given the political talk regarding the future (or lack thereof) of Social Security in recent days.

And I concur with DaveSimmons about not bothering to invest in conservative funds a) at a young age and b) in a tax-advantaged account. Assuming you're going to leave that money until retirement and not tap your contributions at all, swallow risk now and consider switching to more conservative investments when you're within a half decade of retirement.

Even if you do believe inflation is going to go up (and where it is now, there really isn't very much place to go but up), a more agressive investment that nets even a conservative 8% over the next three decades is going to beat inflation. Don't be penny wise and pound foolish.

 

[vi edit]

It doesn't hurt to have *some* invested conservative. I've got 15% (and I'm just turning 26) invested into conservative funds. It helps even things out in the slumps. My "conservative" fund earned 8% on average the last 3 years. Not bad when everything else was down 50% for agressive stocks and most conventional conservative ways of saving(savings, cd, market fund, ect) were only netting 1%-2% on return

 

[Pliablemoose]

Alan Greenspan's magic 8 ball says yes

In testimony before the House Budget Committee, Greenspan said the current deficit situation, with a projected record red ink of $521 billion this year, will worsen dramatically once the baby boom generation starts becoming eligible for Social Security benefits in just four years.

He said the prospect of the retirement of 77 million baby boomers will radically change the mix of people working and paying into the Social Security retirement fund and those drawing benefits from the fund.

"This dramatic demographic change is certain to place enormous demands on our nation's resources - demands we will almost surely be unable to meet unless action is taken," Greenspan said. "For a variety of reasons, that action is better taken as soon as possible."

Link

 

[sd]

They say don't do a Roth unless you've maxed your 401k, so I would if I were you.

 

[vi edit]

Originally posted by: sd
They say don't do a Roth unless you've maxed your 401k, so I would if I were you.

I don't know about that. Maybe max your 401k to where your employer isn't contributing anymore, but I don't see why you would want to completely max out your 401k(20% of your income or something like $15k a year) before doing a Roth.

With the Roth you have an tax free withdrawl when you retire. You have more freedom in what you invest in (vs limited offerings by your 401k fund). You could argue that maxing out the 401k is good because it's pretax, well, that's offset buy the tax free withdrawl with the Roth when you cash in.

 

[Jzero]

You can pull from a Roth IRA without penalty for a first-time home purchase.

If you have the cash, I say do it! Mine made 10% last year...

 

[tnitsuj]

The other question is, since I am going to be buying three Vanguard funds, should I open the ROTH from Vanguard or use something like Scottrade.

 

[FeathersMcGraw]

Originally posted by: vi_edit
It doesn't hurt to have *some* invested conservative. I've got 15% (and I'm just turning 26) invested into conservative funds. It helps even things out in the slumps. My "conservative" fund earned 8% on average the last 3 years. Not bad when everything else was down 50% for agressive stocks and most conventional conservative ways of saving(savings, cd, market fund, ect) were only netting 1%-2% on return

I invest regularly using a periodic bank account debit, so I actually welcome periodic corrections, as it allows me to pick up additional shares at depressed prices. My mantra is "I don't care how the market does now, I care how it does in 30 years". While it's true that diversification will smooth out overall portfolio performance in the short term, I'm willing to assume additional market risk for potential better growth in the future.

Of course, it may be that "seven lean years followed by seven fat years" is ultimately the same as "slow and steady wins the race", but then I get the benefit of having a lot less work to do portfolio rebalancing.

 

[GasX]

Originally posted by: tnitsuj
The other question is, since I am going to be buying three Vanguard funds, should I open the ROTH from Vanguard or use something like Scottrade.

Go with the broker - who is to say you won't want to put that money elsewhere someday...

 

[NivekC4]

Originally posted by: tnitsuj
I max out my 401k contribution, and have a good amount of cash in the bank. I am considering opening a roth IRA this year with Vanguard putting

1k in Vanguard 500 Index Fund
1k in Vanguard International Stock Index
1k in Vanguard Inflation Protected Securities

A Little about me, 25, no debts at all, don't own a house and won't be able to buy one for at least two years do to circumstances beyond my control.

When you say "max out my 401k contribution" are you maxing out the YEARLY allowance or the amount your company will match you to? I personally max mine out to what the yearly allowance is ... but as vi_edit says ... there are other ways to go with this.

 

[tnitsuj]

Originally posted by: NivekC4

Originally posted by: tnitsuj
I max out my 401k contribution, and have a good amount of cash in the bank. I am considering opening a roth IRA this year with Vanguard putting

1k in Vanguard 500 Index Fund
1k in Vanguard International Stock Index
1k in Vanguard Inflation Protected Securities

A Little about me, 25, no debts at all, don't own a house and won't be able to buy one for at least two years do to circumstances beyond my control.

When you say "max out my 401k contribution" are you maxing out the YEARLY allowance or the amount your company will match you to? I personally max mine out to what the yearly allowance is ... but as vi_edit says ... there are other ways to go with this.

Yearly allowance. 20% of my income. My employer contribution is independant of mine.

 

[oog]

If you've maxxed out your 401K and you feel comfortable that you will have enough of a downpayment even after contributing to a Roth IRA, then I think what you're choosing is a good idea. The 40K you said you have won't be enough to cover 20% of a downpayment in some areas, depending on what you buy. That being said, the ~3500 that you put into the Roth each year won't make a significant dent in your savings towards a downpayment in two years.

 

[DaveSimmons]

Originally posted by: tnitsuj
The other question is, since I am going to be buying three Vanguard funds, should I open the ROTH from Vanguard or use something like Scottrade.

Vanguard, you save the transaction fees (these are no-load but brokers charge a fee as with stocks), and these are buy-and-hold investments you should let sit until you retire.

 

[tnitsuj]

Originally posted by: DaveSimmons

Originally posted by: tnitsuj
The other question is, since I am going to be buying three Vanguard funds, should I open the ROTH from Vanguard or use something like Scottrade.

Vanguard, you save the transaction fees (these are no-load but brokers charge a fee as with stocks), and these are buy-and-hold investments you should let sit until you retire.

I am pretty sure scottrade does not charge any fees if you buy no load funds online.

 

[DaveSimmons]

Originally posted by: tnitsuj

Originally posted by: DaveSimmons
Vanguard, you save the transaction fees (these are no-load but brokers charge a fee as with stocks), and these are buy-and-hold investments you should let sit until you retire.

I am pretty sure scottrade does not charge any fees if you buy no load funds online.

Check first, one way Vanguard keeps the fund management fee so low for VFINX is by not paying kickbacks to the brokerages.

I know with Schwab most of their no-load funds are free to trade, but VFINX is not.

 

[SuperTool]

My IRA is maxed out (VEXPX), and 401k.

 

[PunDogg]

y open a Roth IRA, how about a tradinatl IRA, cuz you won;t take the money out anyway right?? so why not set up a trad. IRA. and Vanguard is a good company, but did you search around to see who has the lowest fees, and who has the highest return funds. Check out CBS Marketwatch it can show you the funds for 3, 5, 10 and so on years. Also what are you going to put in the IRA, funds, bonds, stocks?? I have Mutual funds in mine, I am 21 yrs old, i have 75% higher than normal risk funds, and 25% normal to lower risk funds, I have a long ways till i can retire. Don;'t know if my gabbering helps, hope it does

Dogg

 

[DaveSimmons]

Originally posted by: PunDogg
y open a Roth IRA, how about a tradinatl IRA, cuz you won;t take the money out anyway right?? so why not set up a trad. IRA. and Vanguard is a good company, but did you search around to see who has the lowest fees, and who has the highest return funds. Check out CBS Marketwatch it can show you the funds for 3, 5, 10 and so on years. Also what are you going to put in the IRA, funds, bonds, stocks?? I have Mutual funds in mine, I am 21 yrs old, i have 75% higher than normal risk funds, and 25% normal to lower risk funds, I have a long ways till i can retire. Don;'t know if my gabbering helps, hope it does

Dogg

He has a 401k so is not eligible for a tax-deductible contribution to a traditional IRA.

VFINX has one of (if not the) the lowest management fees of all S&P 500 index mutual funds.

Past performance is no guarantee of future results for actively-managed funds. Many actively-managed funds have "winning streaks" where they briefly outperform their peers.

 

[LordSnailz]

I agree, there's not need to max your 401k to it's limit; just contribute up to the amount your employer is matching, start a roth IRA and then use a portion of the money for other investment.