ArellaNova

I have known for awhile that social security will never live to see me. I want to open an IRA. I could only afford maybe 500 per year as an initial investment for the first two years. Any suggestions?

amonkie

ArellaNova,

I started doing some IRA research myself when I was having to deal with a small 401k payout. What I have found is that $500 seems to be about the minimum investment in order to be serious about opening the account. There are both the Simple and the Roth IRA, and they each have different rules about rate of return, the type of transferring of funds you can do, and the length of time you have to leave the money sitting. I would stop by your bank and have them explain the different options to you, or read up on it yourself. If you have the means to start it though, by all means go for it - money that you've "forgotten" about but that is still growing can never hurt.

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Cimarron29414

ArellaNova,

Wow! I am impressed! An IRA would be a great way for you to spread out your nest egg. Here is the layman's difference between a conventional and Roth IRA. First of all, Roth is the congressman that introduced this IRA type as a bill, hence the name. With a conventional IRA, the amount that you put in is tax free at the time you put it in. It is taxed when you take it out - hopefully that will be when you retire. With a Roth IRA, you are taxed as you put the money in. You are not taxed when you take it out. Now, some may think that the conventional IRA sounds like a good deal because it is a tax deferment. However, there is a MAJOR flaw in the logic. Let's do the math:

Let's say you put a lump sum of $8000 in a Roth IRA. You are taxed at your lowly "just starting out in life" rate of about 21%. So you end up putting in $6320 after paying $1680 in taxes.

Now, suppose you put the same lump sum if $8000 in a Conventional IRA. You are taxed 0% and end up putting in $8000.

Now, that amount grows at 7% for 40 years.

The Conventional grows to $130,000.
The Roth grows to only $103,000.

Now, you have to pay the piper for the Conventional at a brand new "I'm a rich mo-fo" tax bracket of 29%. So you take $37,700 from your $130K and are left with $92,300. Whereas with the Roth, you don't have to pay taxes (you already did) and you are left with $103,000. So, you have made $10,700 on the deal AND instead of giving the crooks in your government $37,700, you have only given them $1680.

Someone correct me if I am wrong...

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ArellaNova

*is still laughing over your location status*

awseome.

okay, so as far as I can understand the Roth is the way to go if I can afford to pay the taxes in my present budget. (which I think is doable)

What is the minimum yearly (or monthly) contribution? Any idea?

Cimarron29414

Well, that is typically up to the firm with whom you invest. $500 sounds about right. It isn't a question of *whether you can afford to pay the taxes now*, you can't afford NOT to pay them now. Does the government deserve your $37,700 or you? Do you want to make an extra $10K or not? Frankly, it's a no brainer, simply a smaller initial investment. Taxes on $500 is lunch money. Ask yourself if two weeks of bologna sandwiches is worth $10,000 or not?


Now, let me tell you about the glories of early investment....

Lets suppose, at 21, you put $5000 a year in a Roth IRA for 8 years and then quit. Your buddy starts at 29 and puts $5000 a year in a Roth IRA every year for 32 years.

You put in $40,000 and he put in $160,000. When the 40 years is up, you will have more money than him!

Obviously, $5000 is a lot of money, but I use it to illustrate the point. So, invest as much as you can when you are young. It might hurt for 8 years, but it is the difference between being a Thousandaire and a Millionaire!

21. I wish I knew then what I know now.... ~mumbles about 21-year-olds and their damn rap music~

__________________
Gives a man a halo, does mead.

"Here lies The_Jazz: Killed by an ambitious, sparkly, pink butterfly."

Willravel

Are there any firms that you have good/bad personal experiences with? I've been thingking of investing myself. Thanks for the great info, btw.

Cimarron29414

In my limited experience, there is no investment firm that is great or terrible. It has everything to do with the chemistry between you and your professional financial advisor. Personally, I start by speaking with the older,more affluent people that I know. I ask them who they use. Secondly, I typically seek out a (professional) advisor that is older - mid 40's. No offense to the young ones, but I don't want my advisor pushing me so he can get his commission and make his car payment. An older advisor is, typically, financially stable enough to make decisions that are best for you, rather than his immediate cashflow situation. Because he doesn't have to think short term for himself, he can think long term for you!

Having said that, there are certainly young advisors that are more than capable. It's all about chemistry and trust. Feel free to schedule interviews with several and go with the one that gives you the fuzzies.

__________________
Gives a man a halo, does mead.

"Here lies The_Jazz: Killed by an ambitious, sparkly, pink butterfly."

Astrocloud

Well, my experience is that even the older financial advisors have to make car payments. The commission they make is from Placing the Business and the whole fear of "churning" routine is over with because it is illegal. (For those of you not in the Know -churning is the illegal practice of making extra trades on behalf of a client -in order to receive a commission.)

The whole of the industry is moving towards self-help because Americans for the most part:

1) Think they know everything already -or- would prefer to learn finance from a book. (Which is very unlikely anyways)
2) Are fearful of getting ripped off. (Which is why you are seeking out your 40 year old broker)
3) Would rather not pay broker's fees. (Tightwads we are!)

Also I worked for a VERY established company. I was making a living at it. I would just rather die than work in that way any more. Yes, I really hated that job. Plus, the old established company that I was working for didn't really seem up to date when it came to customer trends. Customers would like to do business through email -which due to regulations and company policy -is forbidden. Customers don't know this and don't see the big deal of it.

"Just give me a quote". Shit, I still have nightmares about this job.

Astrocloud

For your 500 a year -I'd just keep it in a fixed account until you get a large enough sum to avoid broker's fees.

barenakedladies

ive been doing a roth IRA since i was 18, im 29 now... ive been putting in 2k a year.

i think the max just went up to 3 or 5 though

its the way to go, because the taxes come off your income for the year as well for tax purposes.

eribrav

Honestly, don't waste your time and money with an advisor at this point.

Look up Vanguard on the Web. They have extremely low management fees. Start a Roth and choose some type of index account . S&P 500 or Russell 2000 would be the most obvious choices.

yotta

My aunt works for vanguard. I've opened a roth ira (minimum to open was $1000) and have put in another $1000 since. I've got my money in the target retiremnet 2045 index fund, which is doing well.

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debra462

eribrav is correct. Buy a mutual fund that follows an index such as the S&P.
AT YOUR AGE. A Roth IRA is the ONLY way to go. It's a no brainer in that respect

Plummie

Pretty good advice, but keep in mind that the Conventional IRA has a higher compounding interest rate than a Roth IRA. So you would end up earning more per year with a Conventional, even if you are taxed more in the end. It all seems to balance out in the end.

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Kim

tooth

Assuming that you know what the tax rates will be in 40 years.

nitelyfe

An IRA at 21 is a great idea. I only wish I thought about it more seriously when I was that age. Even if you can only contribute a small amount each year, it is better than nothing. Especially since it will build upon itself every year and give you a good base, so that when you are ready to really get into investments, you can do a lot. Congrats on your forward-thinking!

Spanxxx

For you people who have teens, here is a great way to help them out down the road. Of course, it depends on your kids and how mature they are ... I know had my parents done this for me, I would now be overly grateful. But, alas.. they did not. It also depends on your own financial situation.

There is no minimum age requirement to contribute to a Roth IRA. The child must have taxable compensation income. Even if the child makes so little that they don't even have to file a tax return, they still can contribute to an IRA up to the amount of earned income they had. This means, you could contribute to an IRA for them up to the amount of their income, or the IRA maximum contribution ($4000 for 2005 and 2006), whichever is greater.

Now, the one harsh side to this as a parent is that this money is THEIR money. It is in THEIR IRA and as soon as they have come to the age of majority (18 or 21, depending on your state), they legally can do what they want with their IRA. So, hopefully in the 5 or so years since you started this, you have placed a strong sense of savings into your child and they will be wise and continue to contribute to their IRA, or at least not touch it until they can continue contributing to it.

The benefit of this is phenomenal down the road. A very minimal investment now will reap amazing rewards down the road in even the most modest return scenario. Considering the amount of time they have to spread out their risk and the ability to take on higher yield/higher risk investment opportunities and you increase the rewards by large multiplication factors. If they contributed nothing else for the rest of the time till retirement, it would still be difficult to match their returns if they start somewhere after 25. However, if they were to start again at say, 25, and pick up, their nest egg at retirement would be nothing short of astonishing.

Starting early is the key. I'm glad I did. I only wish I had started even earlier than I did with more money than I had at the time . I'm upset that I had a lapse of several years in there where I didn't really contribute nearly enough. Setting up an IRA is not difficult, and if you have an amount drafted from your bank once a month, it is extremely easy to manage and doesn't feel nearly as burdensome. I enjoy going each month and updating my portfolio and seeing how my savings have grown - or shrunk as the case sometimes is. As it stands, I'm 29, and am glad I at least still have many years to contribute and take advantage of the good 'ole wonders of compouding interest.

I personally use Principal (Princor Financial - principal.com) and find them very friendly and helpful. I don't know their minimums, but I suspect around $1000 is probably their minimum for opening an IRA account. Look around and do your research on the net. Start with something you are comfortable with, and if your investments go down, just look the other way and forget about it for a year. If you are earning a steady income, consider doing an automatic monthly investment of as little as $100 a month. You'll be amazed what this will do for you down the road. This also gives you the benefit of dollar-cost-averaging which is extremely important for balancing out your risk in the market and leveling the playing field so to speak on your returns. You might get lucky every time you go to put in $1000, but you might not just as well. If the market is doing really well when you make that 1k investment, you are going to get a lot less bang for your buck in the long run.

Alright, I'll shut up... good night

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