Just opened a Roth IRA, not sure what to invest in

[ocimad2152]

Hi, my name is Tony. I'm a college student and decided to get a head start on investing/saving for retirement.

I opened my Roth with Schwab about a month ago. I put in the minimum $2000 to start, it's all I could really afford at this point.

I knew it probably wasn't gonna give me the best bang for my buck, but I just wanted to get it open and get started right away, so I picked their standard 2040 retirement fund. It's about 85% stocks, but it's also bonds and some stuff that makes no sense for me to be invested in right now. I figure I could do a lot better with an index fund.

So my questions

- Will I pay more being with Schwab than I would with something like Scottrade? Even if I didn't have a dime invested in Schwabs funds, would there still be significant management fees? If I could save more by switching to Scottrade, would I be able to transfer my Roth to them?

- Say I do stay with Schwab, can I still just sell off all my shares of their "Schwab 1000" and put everything in the Vanguard 500? If I do that, will the management fees be really low like everyone says they are with index funds?

Those questions are a little more relevant right now, but since I'm curious:

What do you think about investing in the vanguard 500 from october-april, when it seems historically the market has done very well, and then selling it off every april and staying out of the market from may to september when the market supposedly stagnates from what I've read, then reinvesting come october.

Thanks for any help you can give me. I'm not going into a career where I will be making tons of money, but I would like to be able to live comfortably and retire someday. I know that investing early will be the key for me.

[Journal Writer]

I think you should stay invested all of the time. Don't try to time the market, especially with $2k. Starting off your Roth while in college is great! You'll be way ahead of your piers in no time.

I'd go with an ETF or index fund that covers the broad market. We just had this discussion on another thread. Check it out:
http://www.falkininvesting.com/forum...questions.html

The fees won't make a big difference for a few years. It's just good that you are starting already.

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[aquaswim47]

If you don't trade that often than there's not much difference in the costs between Schwab and Scottrade. However, if you're a consistent trader of ETFs, you want Zecco since that has no trading costs (if it exceeds $30 per year) as your account will be charged if its a RothIRA as there is no profit center when it comes to margin like they have with individual accounts.

If you invested in their 2040 fund, I like VTI. Also, if you use Zecco, I would like a product like TLT or AGG (for your fixed income part).

I like market-timing, but there's different strokes for different folks. If you don't market time, you'll will have near market performance if you own VTI. However, if you do market time, you could perform less well or better. According to statistics, only 18% of people time the market well; by the time you acknowledge what caused the market to fall, it has already fallen (or risen). Only if you believe the market is overvalued shall you market time; it shouldn't be based on the time of year. That's a foolish strategy that's already known and is unlikely to be successful.

I wish you well.

[WallStGolfer31]

Tony, I suggest you invest in a broad based index. We decided to use VTI for the portion we indexed with the university student fund. It's fees are one basis point lower than SPY and has more diverse holdings.

A IRA is a passive investment, which requires a passive strategy. I think fully indexing (100% of your capital) at this age is worth your while. I wouldn't even touch bonds until you start to get very sore after a game of touch football (after age 35).

With that kind of capital ($2000) at your age, the tax-free compounding over your investment time horizon looks better than a the new Miss Bolivia (far left wow). Ok maybe it isn't that appealing, but you get the point lol.

[Journal Writer]

Originally Posted by WallStGolfer31

A IRA is a passive investment, which requires a passive strategy.

I disagree with an IRA being passive. IRAs are a great place to trade (after you figure out the game in a taxable account). No taxes on gains is up there with Miss Bolivia and her friends.

With that kind of capital ($2000) at your age, the tax-free compounding over your investment time horizon looks better...

I certainly agree with this part. I wish everyone was forced to start as young as Tony is starting. My sister-in-law is an accountant and I had to practically force her to start her 401k when she was 24.
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[aquaswim47]

I was joking with my grandmother the other day that it would be funny to have the accountant that wasn't obsessed about money; that should be a misnomer. I try to save 20% of my income each year (am not always successful at that goal, however). I would use both a Roth account and a 401k account. Since I expect to be in the 15% tax bracket, I really love the Roth account. I like the Roth 401k plan if I know whatever I contribute I won't need until I'm 59 1/2 since the withdrawal penalties on a Roth 401k are harsher (since you don't get the deduction) than with a Traditional 401k plan. A traditional 401k plan, I would have total taxes of 25% (in the 15% bracket) and 35% (in the 25% bracket) on the entire amount which was deducted at 15% (thus effectively both the principal and interest received the deduction) as your principal contribution was larger by the amount of the tax deduction. However, a Roth 401k plan has a 25% tax on the earnings if you're in the 15% tax bracket and a 35% tax on the earnings if I was in the 25% tax bracket, however, I never received the 15% tax benefit on the earnings and thus was worse off. Lets assume we live in a state with no income taxes.

Math:

$10,000 is contributed to a 401k and $20,000 is earned = $30,000
$8,500 is contributed to a Roth 401k plan and $17,000 is earned = $25,500

Withdrawal of $10,000 from 401k plan at a 28% federal tax bracket = .62*$10,000 = $6,200 leftover and $3,800 of taxes (28% tax + 10% penalty). If you take out the $20,000 when you retire, you might pay 25% tax on the proceeds. In that case, you are left with $15,000 in cash + $6,200 = $21,200.

Withdrawal of $10,000 from Roth 401k plan = $3,333 in principal and $6,667 in earnings
$3,333 + .62 * 6,667 = 7,466.54 + 15,500 = $22,966.54

So because of the increase in the tax bracket, the Roth 401k remained the better buy.

Withdrawal of $10,000 from 401k plan at a 28% federal tax bracket = .62*$10,000 = $6,200 leftover and $3,800 of taxes (28% tax + 10% penalty). If you take out the $20,000 when you retire, you might pay 15% tax on the proceeds. In that case, you are left with $17,000 in cash + $6,200 = $23,200.

Withdrawal of $10,000 from Roth 401k plan = $3,333 in principal and $6,667 in earnings
$3,333 + .62 * 6,667 = 7,466.54 + 15,500 = $22,966.54

In this case, the Traditional 401k was better. Other conditions such as moving to a higher or lower state tax could affect the amount you end up paying on your Traditional 401k plan. As long as you don't plan on taking withdrawals from your Roth 401k plan, it is likely the better choice. However, it is a pretty terrible piggy-bank in comparison with the Roth IRA and thus carries significant liquidity risk.

[jukebox9988]

I agree with WallStGolfer. You shouldn't be in bonds until you're 40 or so. Plus, that 100% in stocks only makes up your equity investments. You will have a nice cash holdings if you continue to responsibly fund your savings accounts over time.

When I opened my Roth, I bought FFFHX, and recently sold the fund for a decent profit. But it was too heavily weighted in bonds. I'm young like you, and need something more aggressive. Index funds are cheap and reliable. Most fund managers don't beat the index anyways. Something like 80%.

[jukebox9988]

Originally Posted by Journal Writer

I disagree with an IRA being passive. IRAs are a great place to trade (after you figure out the game in a taxable account). No taxes on gains is up there with Miss Bolivia and her friends.

Tax advantages are present with IRAs, but they serve as retirement savings. It's not a good idea to lose money on trading in your IRAs. Why not trade with your other holdings? Since the IRA is long-term, it should be invested for the long-term. That means no unnecessary trading. Only investments with horizons of at least 3 years.

It would be a shame to decrease your IRA balances because you made some short term mistakes. Just my 2 cents.