Questions about Roth IRA

Unless you already have one specific fund picked out that you want to put all your Roth money into, I'd open an account at one of the "supermarkets" like E-Trade instead.

You might head over to morningstar.com and do some research.

Vanguard Target Retirement Funds are mutual funds. Roth IRAs are *not* mutual funds, but rather an account type which can hold mutual funds as well as other investments (money market account, stocks, bonds, real estate investments, etc). You might head over to morningstar.com and do some research. ;-) Seriously, look at their tutorials that explain investing basics, as well as their fund summaries.

It's a possibility, but I'd say the chances of it happening get smaller every year, as more people put more money into Roth IRAs and the constituency who would be adversely affected by such a tax law change grows ever-larger. Congresscritters especially like to avoid ticking off older folks because they're more likely to show up on election day and vote than younger folks.

-Sandra the cynic

snip

The government changes the tax code all the time. If a public official/congressperson votes out the tax exempt status of the Roth withdraws, I'd think they wouldn't get reelected next time around (they would lose my vote).

The "promise" of the Roth (being tax free withdraws in retirement) is

**probably** better than most alternatives. In the mean time you get tax free compounding (this part of IRA is not likely to change, it's the whole point of tax defferral).

As far as mutual funds... I would look at Vanguard, Fidelity, T Rowe Price and possibly a few others (Dodge and Cox is another one I hear about from time to time).

A T Rowe, here are my costs $10 fee for any IRA under $5000 (meaning if you have less than 5k each August, in any mutual fund IRA, T Rowe charges you $10). Unless combined balance is more than 10k (so if you had 3 mutual funds with

3500 each, the fee can be waived, if you ask).

T Rowe Price funds are no load. Expense ratios for the managed funds I own is around .60%. Avoid loads from anywhere (if you are willing to do research yourself), avoid 12b1 fees as much as possible, and IMO expense ratios (for domestic funds) should be less than 1% (and possibly MUCH lower). I do own a couple of funds with expense ratios higher than 1%, they are international mutual funds and small cap mutual funds.

I do not know costs for Vanguard or Fidelity IRAs. The fund expense ratios at Fidelity for managed mutual funds might be more, I'd think at Vanguard the fees might be less.

The goal should not be to minimize costs, but maximize return. You have 30+ years to retirement, the goal the next 15-20 years should be to maximize return. Target Date retirement funds are appropriate, as are equity index funds and/or equity managed funds. I'd think in terms of an 8% return going forward, and be pleasently surprised when it's higher.

Look for a fund house which has several mutual funds, and choices which allow you to expand as you learn. T Rowe, Fidelity and Vanguard meet this criteria. I like T Rowe Price- easy to use web site, excellent customer service and a wide variety of offerings.

Fidelity has more offerings, Vanguard is cheaper... and I am sure others here will comment postively on these companies. The company you choose is not a religion or political view point. Make an informed decision, and try not to second guess yourself.

Others in the group may have experience with both companies, but I have experience only at Vanguard. I suspect either fund company would have funds suitable for your retirement investing and both have low expenses.

I am not a fan of the many Target Retirement Funds in the industry. These funds decide for you about your risk tolerance, and also seem to assume you have no other monies invested. As you get older, and probably a bit more knowledgeable, you will want to feel more in control than these funds allow. Instead, you might prefer to choose an Index Fund of some sort, one that your 401k might not offer, thereby enabling a broader diversification.

Good luck, and congratulations for looking to your retirement needs at such a young age.

Elizabeth Richardson

"jIM" wrote

Though I would add the caveat that studies point towards low cost funds tending to maximize returns.

My view: I would not think in terms of any numbers, since currently there is some debate by some noted authorities about whether stocks will continue their historic high rates of return.

I would have faith in the world's consumers tending to cause stock prices to rise at least as much as inflation, for the long run. But that's just myself

For historical returns on stocks for different time periods, I urge the OP to experiment with

, bearing in mind that history does not necessarily repeat, even for long time periods.

This might be so, but more importantly IMO is that Vanguard has more index funds than Fidelity, and Vanguard's index fund expense ratios are competitive. IOW, for index funds, Vanguard tends to be the place to be.

I've been looking at the Vanguard funds more closely. Would you recommend that I go for the 500 Index Fund or Total Stock Market Index Fund instead of Vanguard's Target Retirement or LifeStrategy Funds due to my age? It appears that Vanguard's retirement specific funds have a certain percentage of bonds mixed with the stocks. From what I've read, having these bonds might be a bit conservative from the amount of time I have to invest. Is this correct?

Thanks

It all depends on 2-3 factors

1) How much risk can you take? 2) do you think the US market is a good place to invest? 3) Do you understand what it is you are investing in?

1) Risk- the S&P 500 index has yearly returns ranging from -30% to

+30% over the last 10 years aproximates). The long term return tends to average out at 10% for most 30 year periods.

2) S&P 500 invests in 500 US companies... which are large and represent a significant portion of the overall US market.

3) The mutual fund will give you the results of the index- you will do "no better" than the average of the 500 companies. You will also do "no worse" than the overall market (minus expenses).

4) the "total market index" would have "less risk" because it measures the average of 5000 companies... some thought might be given to this if you are only going to choose one single fund.

Do you have enough to meet the fund minimums for either?

Josh, There is no "correct" answer. Asset allocation not only depends upon the goal and time horizion for the investment but also on you stomach for volitality. Try using the asset allocation model at Vanguard or Fidelity. Also in deciding the asset allocation for your Roth, I would include in the analysis the asset allocation of your 401ks. This will give you a picture (asset allocation pie chart) of you total retirement funds. You may also want to include your non-retirement assets in this analysis so that you have a total portfolio picture. Regards, BeachBum

I think each person needs to find the right balance for his/her own individual needs and risk tolerance and I wouldn't like to say definitely, absolutely, positively, that you, at age 26, shouldn't have any bonds in your portfolio. Having said that, you are just beginning and I do believe that at this time you can realistically have only one fund in your Roth - time to expand later as your account grows. You have chosen your options wisely and either would make a good choice for your core fund.

Elizabeth Richardson

"jIM" wrote

... has tended to average out at 10% for most 30 year periods in the past.

Some authorities do not expect this high a return in the future.

When I get my 06 tax return, I'll have enough to meet the minimums for both funds together if I want. I wasn't sure if it's better to make investments into two seperate funds or just put the entire investment into one.

Here is my current 401k allocation if that helps give a better idea of my overall portfolio. Obviously I have no bond fund right now so perhaps that should point me in the direction of a fund that does have bonds.

AMERICAN FUNDS EUROPACIFIC A 20% AMERICAN FUNDS BOND FD AM A 0% AMERICAN FUNDS FDMNTL INVS A 25% AMERICAN FUNDS NEW ECONOMY A 10% AMERICAN FUNDS NEW PRSPCTV A 0% AMERICAN FUNDS INV CO AMER A 10% AMERICAN FUNDS AM BALANCED A 15% AMERICAN FUNDS GROWTH FUND A 20%

I know that ultimately I have to decide for myself how much exposure to risk that I am willing to take. The main purpose that I have is to try to invest enough so I'm not caught off guard 45 years from now. So I suppose in that regard, probably any of these funds I'm looking at would be sufficient, but I'm all for making my dollar go as far as it can assuming that the risk is reasonable.

Thanks again for your help!

Allocation is something quite subjective... I believe earlier in thread you mentioned the need to avoid bonds... That was a good line of thinking for being 30+ years to retirement (IMO).

You need to know your ideal allocation. Vanguard has calculators which can help you with this.

My allocation (age 34) is 100% stock, 75% domestic, 25% international. 45% large cap, 15% mid cap, 15% small cap, 15% international large cap and 10% international small cap.

Your will be similar or different. Once you know that, look at the funds like this:

You are currently

which is really 55% large cap, 25% international and 15% tilting towards more large cap (see a theme?).

New Perpsective would increase "International" I don't see small cap, emerging markets mid caps etc...

I researched this at yahoo finance while posting.

Here's some tips

100% stock is aggressive. You can reduce risk by choosing funds in 3-6 different categories (large,mid,small, domestic, international). S&P 500 is large cap. There is a fund at Vanguard called extended market index (VEXMX) which might compliment some of this well. Research and see which categories the different Vanguard funds fill in. The profile page on yahoo finance for each fund helps see this quickly.

100% stock is aggressive, you could mitigate the risk by choosing bonds.

Time reduces risk... if you have 30 years to retirement, you can take risks

100% stock might give returns of around 8-10%/year over 30 years 80% stock/20% bond reduces the return (because it reduces your risk)... this might be more of 7-8% returns over 30years. This is still moderately aggressive.

The returns I am comment on is based on past, no guarantee future will be similar. The point is as you add bonds, the expected return goes down, and the risks you are taking goes down.