Starting an IRA or Mutual Fund

[avx]

Hey guys,
I've been thinking about doing some investing, but I don't have the extra cash, nor do I like the risk involved with the standard stock market. I want to do some long term investing, with a Mutual Fund or IRA or maybe even a CD. I have been doing lots of reading on them, and I think I would definetly like to open the IRA first, then maybe the CD or Mutual Fund at a later time.

Do any of you have any experience with this? This is going to be my first venture into investing so I want to make sure its a wise one.

Also, is there any difference in which bank or investment firm you open them with? I was thinking of just using my bank, Washington Mutual, but would it be in my interest to look into an institution that has a stronger base in these things?

Ay info you have will be greatly appreciated, thank guys.

[doctorgonzo]

Opening an IRA is a pretty easy thing to do. Keep in mind that an IRA is pretty much a vehicle for other investments; your IRA can hold investments like mutual funds, stocks, or bonds. So opening an IRA and putting money into a mutual fund are things you can do at the same time.

The most important question when opening an IRA is what type to get: a regular IRA or a Roth IRA. With a regular IRA, you don't pay taxes now on your contributions but you pay taxes on the money you withdraw in the future. With a Roth IRA, it's the opposite: you pay taxes now on your contributions, but any money you make is tax-free for retirement. For most people, a Roth IRA is a better bet. There are income limitations for Roth IRAs, though.

Deciding where to open your IRA is a matter of personal preference and what you plan on doing with it. Pay attention to any fees they charge you. Also, make sure that you will be able to get the investments you want from the institution that has your IRA. If you want to buy mutual funds, for example, then pay special attention to institutions that may have no-load funds available to their customers, for example.

The Motley Fool is great for information about investments; they have info on IRAs here (http://www.fool.com/ira/ira.htm?source=LN).

[mbossman2]

Lets establish some common terms and definitions:

an IRA is an investment account with the long term goal of providing income for one's retirement. They consist of 2 main types:

a traditional IRA, which you contribute pre-tax dollars into an account but get taxed when you withdraw the money after 59 1/2.

Roth IRA which you contribute post-tax dollars into the account and pay no tax upon withdrawl after 59 1/2.

Both have annual limits on how much you can contribute based upon your age and income.

The Roth, especially at your age, makes a lot more sense.

Now, an IRA (either type) can include many different types on investments:
Individual stocks, stock market mutual funds, bond mutual funds, blended mutual funds (a mix of stocks and bonds, these are referred to as lifestyle funds), CDs, money market accounts.

each of these types of investments have various risks and rewards, and you want to look into them before you invest.

There is an "order" in which you should invest:
1) pay off all of your unhealthy debt, especially revolving debt.
2) if your employer offers a 401k plan with an employer matching contribution put your money there 1st. the match is like an instant return.
3) Then open an IRA.

you also ask the lament of most young people: how do I save for my future if I don't have the $500-$1000-$2000 (or whatever)?

you have a few choices:
1) put the $$$ in a savings account until you hit the minimum. You need to avoid the temptation to take out the money tho.
2) look for companies that offer low (or no) minimums to open an account (this is my personal choice - it forces you to look, read and learn stuff along the way...hint: T Rowe Price)

Washington Mutual is a pretty good bacnk. don't knock them. But banks love to sell annuities. I am not a big fan of them, the returns just aren't there.

My final advice here is to read:

www.fool.com
clarkhoward.com
"Investing for Dummies"

are all good sources.

Take your time, learn as much as you can, then make the move.

My personal opinion (and this should be taken with a grain of salt - like any investment advice from the web):

Index mutual funds - based upon big broad indices (Wilshire 5000 is always a favorite)- they have low costs and good solid historical returns.
or, if you want a low user maintenance account:
a lifestyle fund - look them up.

have fun.


2 final thoughts:

read:
http://clarkhoward.com/library/tips/investing.html
and
"The Millionaire Next Door"

[David M]

With a self-directed IRA, you are not limited to what the instution that holds your IRA has to offer. This includes stocks, bonds, REIT's and a number of other financial instruments. A self-directed IRA is only limited by what types of financial instruments the law says you can have in your IRA. Banks generally have very little selection. You can always transfer your IRA to another institution if you are not happy with your current one. Personally, I don't trust banks for investing. Their fees tend to be higher and their returns lower..in general. Let banks be for your banking and let investment firms be for your investments. The same goes for insurance. Don't invest through insurance companies.

Over time, and I mean since the great depression, the market has historically returned 10% per year which is far better than any other type of investments, including real estate. The real estate boom is a relatively recent phenomena by comparison. So don't be frightened of the stock market and do not try to time the stock market. Invest in a sector that is healthy and in leaders within that sector. Be sure to diversify as well, choose multiple sectors as well as a number of different instruments. The younger you are, the more agressive you can be, and should be. At 20 you don't want to lock your money into something with a guaranteed 3%. At 60 you dont want to invest in junk bonds.

Many institutions now allow you to contribute a relatively small amount each month to your IRA. This way, you do not need to worry about having $1000-2000 in order to start an IRA. You can get a zero minimum amount to start an IRA now so long as you set up a method for contributing. A relatively small amount can be set up to be debited from your checking or savings account each month. Contributions to you IRA can only come from earned income and not money from a trust, or a gift or any other sources I believe Schwab still has this zero minimum option as well as many others.

I agree that it is important to pay down debt with high interest first but it is also important to start getting in the habit of contributing to your retirement as soon as possible. So you may want to consider doing both.

If you have a 401k at work and your employer matches, then max out your 401k...you can't beat free untaxed money from your boss.