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Mutual funds or Roth IRA or stocks or...?

roth ira, seeing as how your marginal rates are probably lower right now than they will ever be for the rest of your life
 
My rule of thumb
-401K (if you have it) up to company match
-Roth IRA up to max
-401K up to max
-Invest in other stuff

I use Vanguard and I like it. They do have a $10 per fund fee if you don't have more than $5000 in the fund though.
 
That vanguard fund has low expenses. Thus I wouldn't exclude it. However, the fund is so new, that there is not enough data to try to estimate if it will do better or worse than average (poorly managed funds can consistantly be worse than average, well managed funds can temporarilly be better than average). Looking at the chart, it appears to have simply tracked the S&P perfectly since its start. So it probably is about average for returns (but the low expenses certainly help make it better than many other average funds).

If you do get it, I would consider adding some other funds in the future. This particular one doesn't have enough foreign stocks, lacks a bit in bonds, and is seriously overweighted to large companies (small and middle sized companies are underweighted). So if in the future you add a fund which focusses more on those underweighted portions, you'll have a better balanced portfolio. It is rare that one fund is balanced well. Thus it is common to have multiple funds.
 
Originally posted by: Psyber
My rule of thumb
-401K (if you have it) up to company match
-Roth IRA up to max
-401K up to max
-Invest in other stuff

I use Vanguard and I like it. They do have a $10 per fund fee if you don't have more than $5000 in the fund though.
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Yes, this is the usual recommendation from investment experts.

At your age, a Roth IRA at Vanguard with their VFINX is probably a better choice than their 2045 fund since the expense ratio is lower (you keep more growth). Just start adding bond funds to the Roth account in 2020 to start shifting your asset allocations as you near retirement.

Once you start making more money you might also consider buying VFINX in a non-retirement account and using the Roth IRA for a worldwide index (VEURX, VEIEX) or small-cap, since those funds generate more taxable capital gains than VFINX. Also think about that when rolling over a 401k into a trad IRA.
 
Originally posted by: DaveSimmons
Originally posted by: Psyber
My rule of thumb
-401K (if you have it) up to company match
-Roth IRA up to max
-401K up to max
-Invest in other stuff

I use Vanguard and I like it. They do have a $10 per fund fee if you don't have more than $5000 in the fund though.
Click to expand...
Yes, this is the usual recommendation from investment experts.

At your age, a Roth IRA at Vanguard with their VFINX is probably a better choice than their 2045 fund since the expense ratio is lower (you keep more growth). Just start adding bond funds to the Roth account in 2020 to start shifting your asset allocations as you near retirement.

Once you start making more money you might also consider buying VFINX in a non-retirement account and using the Roth IRA for a worldwide index (VEURX, VEIEX) or small-cap, since those funds generate more taxable capital gains than VFINX. Also think about that when rolling over a 401k into a trad IRA.
Click to expand...

Good point.
 
Can someone explain why a Roth is better than a Traditional IRA?

If I put money into the traditional IRA, each year I can write it off, and get a bigger tax-return. And by the age 65, when I'll be in a lower-tax bracket (not working or working part-time), I'll only end up paying ~15% of the whole amount in taxes, instead of current ~30%.

edit: not to mention, since I'll be putting more money in, I'll get bigger tax-deferred growth
 
Originally posted by: Nimloth
Can someone explain why a Roth is better than a Traditional IRA?

If I put money into the traditional IRA, each year I can write it off, and get a bigger tax-return. And by the age 65, when I'll be in a lower-tax bracket (not working or working part-time), I'll only end up paying ~15% of the whole amount in taxes, instead of current ~30%.

edit: not to mention, since I'll be putting more money in, I'll get bigger tax-deferred growth
Click to expand...
Contribution limits are the same for Roth and Trad, the difference is Roth is after-tax / tax-free withdrawal while Trad is pre-tax / taxed withdrawal.

You pay 30% on $4K now, nothing at retirement with Roth.

You pay -30% on $4K now, 15% of the decades-compounded total amount with Trad. So if that $4K is $32K after 30 years you save $1,200 now but pay $4,800 at retirement even in a 15% tax bracket.

How about investing? Real Estate yields twice the dividends of traditional slow growth accounts.
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Buy into the bubble now before it's too late? I've never heard REITs recommended as a primary investment for retirement, where you're looking at a timeline of decades.
 
Originally posted by: DaveSimmons

You pay -30% on $4K now, 15% of the decades-compounded total amount with Trad. So if that $4K is $32K after 30 years you save $1,200 now but pay $4,800 at retirement even in a 15% tax bracket.
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that's assuming it actually appreciates... what if it depreciates?? hehehe

anyway. as it stands right now I have ~$2500 in Traditional IRA with Vanguard (I owed a lot in taxes because half of the previous year I worked with no taxes withheld, so at the end of the year when it was time to pay up I was low on cash and decided to help the situation by opening an IRA and writing it off).

Do you think I should switch this money into a Roth (sure there'll be fees involved, but hey..). Or should I leave that money alone and open a separate Roth for this year?
 
Originally posted by: DaveSimmons
Originally posted by: Nimloth
Can someone explain why a Roth is better than a Traditional IRA?

If I put money into the traditional IRA, each year I can write it off, and get a bigger tax-return. And by the age 65, when I'll be in a lower-tax bracket (not working or working part-time), I'll only end up paying ~15% of the whole amount in taxes, instead of current ~30%.

edit: not to mention, since I'll be putting more money in, I'll get bigger tax-deferred growth
Click to expand...
Contribution limits are the same for Roth and Trad, the difference is Roth is after-tax / tax-free withdrawal while Trad is pre-tax / taxed withdrawal.

You pay 30% on $4K now, nothing at retirement with Roth.

You pay -30% on $4K now, 15% of the decades-compounded total amount with Trad. So if that $4K is $32K after 30 years you save $1,200 now but pay $4,800 at retirement even in a 15% tax bracket.
Click to expand...

You missed half the equation. If you have 4k to invest in a Roth IRA, you have 5.2k to invest in the traditional IRA. That 5.2k over the 30 years (at the 7% interest you assumed) gives you about 42k. Even after paying your 15% in taxes, you end up with more in the traditional.
 
Originally posted by: DaveSimmons
You pay 30% on $4K now, nothing at retirement with Roth.

You pay -30% on $4K now, 15% of the decades-compounded total amount with Trad. So if that $4K is $32K after 30 years you save $1,200 now but pay $4,800 at retirement even in a 15% tax bracket.
Click to expand...
It really isn't that simple. Don't fret, its a common mistake that people make. Lets keep it as simple as possible. Lets assume a 7% gain each year (note this number has NO impact on the final conclusion). Lets assume you have $1000 total to invest now. To keep things simple, assume you make no other investments (note this also has no impact on the final conclusion).

Traditional IRA:
Day 1: $1000.00.
End of year 1: $1070.00.
Year 2: $1144.90.
Year 3: $1225.04.
...
Year 40: $14974.46.
Remove 15% tax and you get $12728.29.
Total tax paid: $2246.17.

Roth IRA:
Day 1: $700 (remember you invest less since you must pay $300 in tax).
End of year 1: $749.
Year 2: $801.43.
Year 3: $857.53.
...
Year 40: $10482.12
Total tax paid: $300.

See how you are thousands of dollars better off by paying tax at the end, EVEN THOUGH YOU PAY MORE TAX TOTAL! That is, since your tax savings also get to grow and multiply.

So in the simple cases, traditional is usually better.

 
In complex cases, the Roth can be better. This happens when (a) you don't qualify for the tax deduction of the traditional or (b) you hit the contribution limits most years.
 
Originally posted by: dullard
In complex cases, the Roth can be better. This happens when (a) you don't qualify for the tax deduction of the traditional or (b) you hit the contribution limits most years.
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with my current gross income I doubt that I'll hit the contribution limits, especially now that they are going up
 
Originally posted by: sciencewhiz
Originally posted by: DaveSimmons
Contribution limits are the same for Roth and Trad, the difference is Roth is after-tax / tax-free withdrawal while Trad is pre-tax / taxed withdrawal.
Click to expand...

You missed half the equation. If you have 4k to invest in a Roth IRA, you have 5.2k to invest in the traditional IRA.
Click to expand...
You can't invest the extra into a Trad once you reach the contribution limits. Your point is covered well in Dullard's post above, but it only holds if you can't invest enough to reach the limits.

Last I checked, you also can't deduct Trad if you are eligible to contribute into a 401k, unless your income is really low.

So if you are following the "do 401k up to employee match" advice, your choice is often already made to go with Roth.
 
Something to consider if you can afford it...

when looking at dulards example above, he shows an example assuming you have $1000.

If you can really max out your contribution on either -- pick the Roth. (but first fund your 401k up to whatever level your employer matches)
Let's say the max contribution is $1000, but you have lot's more disposable income than that.
You could then max the Roth contribution and pay the $300 in taxes out of your pocket.
So, at a 'today' cost of $300, you'd have the $14,974 vs. $12,728 as you would in the Trad. IRA.

Another thing is that we are making pretty huge assumptions on future tax brackets.
The more I think about it, the more I think it's an unsafe bet that the low-end of the federal tax rate will only be 15% 20-40 years from now. I am becoming increasingly convinced that taxes must change upwards.
There's also no guarantee that dramatic changes won't occur regarding Roth rules. We can only hope that too much of a change would cause so much uproar that it won't happen. Just mentioning that there is no guarantee -- even though it's 'almost' guaranteed.
 
is there a certain company i should go with for a IRA roth? My dad uses Principal so I was going to go that way. Any opinions?

Sorry to thread jack OP, my opinion the roth will probably pay off in the end....

 
Originally posted by: serialkiller
is there a certain company i should go with for a IRA roth? My dad uses Principal so I was going to go that way. Any opinions?

Sorry to thread jack OP, my opinion the roth will probably pay off in the end....
Click to expand...

Well, if you're going to go with a company just because your dad uses them, then obviously your opinion is irrelevant, since you haven't done ANY research.
 
Originally posted by: ThaPerculator
Originally posted by: serialkiller
is there a certain company i should go with for a IRA roth? My dad uses Principal so I was going to go that way. Any opinions?

Sorry to thread jack OP, my opinion the roth will probably pay off in the end....
Click to expand...

Well, if you're going to go with a company just because your dad uses them, then obviously your opinion is irrelevant, since you haven't done ANY research.
Click to expand...

well thats why I'm doing it right now. I trust my dads judgement since he's been in that business for decades.... but then again, I am not my dad so there might be things that are more beneficial for me then to my dad. If you dont have anythign constructive to say please keep your mouth shut. I asked for opinions, not useless remarks.

Oh yea, the opinion to choose roth over traditional that I offered to the OP is after talking to couple of colleagues of mine that are in the accounting and finance department.
 
The single best investment you can make in your retirement!!!!!!


I have day-trader buddies who laugh at my long-term thinking. They claim that they're making a killing in the market and make money every day. I just nod my head & tell 'em, "Great! Keep going!"

They never report their losses. You only hear about the "gains". Same holds true for ANY fund that claims it can beat the market.

John Bogle was(is) a genius.

Peter Lynch was(is) a diamond in the rough.

I've got reservations at Trump Plaza for my retirement party in about 2035 for all my day-trader buddies. They'll still be invited............even when they show up w/ headgear on still trying to make trades!

😉
 
Originally posted by: serialkiller
is there a certain company i should go with for a IRA roth? My dad uses Principal so I was going to go that way. Any opinions?

Sorry to thread jack OP, my opinion the roth will probably pay off in the end....
Click to expand...
vanguard.com and VFINX.

S&P 500 index mutual funds are the benchmark that almost every other investment compares themselves to trying to convince you they are better, while using some carefully selected time period and/or ignoring their much higher risk.

An S&P 500 fund is a great long-term, low-risk investment and a great first investment before diversifying into worldwide and small-cap funds.

PS - nice link redgtxdi, I should get that for my brother who currently has his IRA funds invested in bank CDs(!)
 
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