kbrisson
Joined: 23 Mar 2005
Posts: 5
Location: USA
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Wed Jul 19, 2006 12:32 am Post subject:
Should I invest in a Roth IRA ? |
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I am 38 years old and am trying to decide if there is any advantage to investing in a Roth IRA given my current portfolio of investments. I participate in my company sponsored 401k which is invested agressively in mutual funds available through our program. I also have a Schwab brokerage account with about $43K invested in a moderately aggressive mutual fund portfolio, and about $17K in cash available to invest. I also have a savings account yielding about 4.5% interest which is holding funds from incentive stock options I have cashed in this year. I plan on taking some cash and investing in some new mutual funds and adding to some of the existing funds in my portfolio. I think I'm doing pretty well at saving & investing, but my question: Should I consider adding a Roth IRA to the mix ?
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TwoCents43
Joined: 27 Nov 2006
Posts: 6
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Mon Nov 27, 2006 3:13 am Post subject:
Re: Should I invest in a Roth IRA ? |
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| kbrisson wrote: | | I am 38 years old and am trying to decide if there is any advantage to investing in a Roth IRA given my current portfolio of investments. I participate in my company sponsored 401k which is invested agressively in mutual funds available through our program. I also have a Schwab brokerage account with about $43K invested in a moderately aggressive mutual fund portfolio, and about $17K in cash available to invest. I also have a savings account yielding about 4.5% interest which is holding funds from incentive stock options I have cashed in this year. I plan on taking some cash and investing in some new mutual funds and adding to some of the existing funds in my portfolio. I think I'm doing pretty well at saving & investing, but my question: Should I consider adding a Roth IRA to the mix ? |
Yes. The batting order is typically...
1. Company 401K up to at least the amount the company matches.
After that...you have to do the math to know where to put the next dollar.
Before we compare any options, let's remind ourselves that a Roth IRA is just a "wrapper". It's the term used to describe tax treatment...it is not an investment option in and of itself. The funds INSIDE the Roth IRA is the investment option. Make sense?
So, forget the investment options for a second and let's talk about the wrappers.
Your company 401(k) is the wrapper - it collects money pre-tax, gets some matching funds from the company, and then is deposited into your investment options (sounds like mutual funds of some sort). You can't touch it until retirement and then you are taxed on the gains, but not while it is growing all those years.
The Roth IRA wrapper - regardless of the investment option...takes after-tax money that you plop into an investment option (probably a mutual fund of some kind again). Again, you can't touch it until you retire and again it grows but no taxes are due until you pull it out. And at that time you don't pay taxes either!
So, you need your calculator now. Is the next $1 in your 401(k) going to earn more, less the tax at the end...or will the next $1 in a Roth IRA earn more with no taxes in the end. If all things mutual funds were equal, then I'd say the Roth IRA is no-brainer.
Of course, not all mutual funds are equal, but if you pause and consider that the "rate of return" for the taxes could be 15% to 33% (tax rates), then it will pretty tough for any mutual fund anywhere to outperform that "fee" when you withdraw your money.
So, now we have a general order for investing:
1. Company 401(k) up to the point of matching
2. Max the Roth IRA next ($333.34 cents per month right now)
3. Deferred tax funds next (probably back to your 401(k))
4. Then standard old mutual funds
5. CD's, bonds, and other "guarantees"
5. Bank accounts - NEVER!
Hope this helps. |
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cstark
Joined: 21 Aug 2007
Posts: 6
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Tue Aug 21, 2007 8:03 pm Post subject:
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Yo Kbrisson,
This is an easy question - YES YES YES! The beauty of Roth IRAs (make sure you don't make too much money to contribute) is that you don't pay taxes on any of the money when you take it out. So if you put money into your Schwab brokerage account, you'll be paying long-term capital gains tax when you start spending the money, whereas if you put it into a Roth, there's no tax hit.
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