A question about Roth IRA's

Discussion in 'Archived Threads 2001-2004' started by Ted Lee, Apr 8, 2002.

  1. Ted Lee

    Ted Lee Lead Actor

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    hi all -

    hopefully there's some financially savvy folks out there!

    here's my situation...

    it turns out i opened a roth ira that does NOT allow me to add money on a yearly basis. (this is not my fault...i clearly told them that was my intent.) anyway, it's a 5 year ira earning about 5%.

    i always thought it would be better to have an ira that i could add money to because that way the money "compounds" (is that the correct term?) to me, that's the single best benefit of an ira.

    so, the bank is willing to convert my existing ira to the other format where i can add money. it's a 1 year earning about 2.5%. the caveat is that my earnings would be retro-calculated with the 2.5% interest...in essence i would lose money. however, i don't think it's a lot. i only opened the ira with 2K and with interest, i think i made like 50 bucks.

    my goal here is to have an account where i can add money. obviously, i could just open another ira (they're running a promo right now on an ira format where i CAN add money) but then i feel like my money isn't being compounded. is having three ira's with 2k the same as one ira with 6k?

    so, it sounds like i'll just have to sit on my original ira. i'm actually okay with that, but i just feel like i'm somehow not getting the most bang-for-my-buck.

    any ideas or suggestions on what i should do?

    thanks in advance!

    ted
     
  2. Denward

    Denward Supporting Actor

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    Hey Ted,

    The short answer is that from a pure financial standpoint, having 50 IRAs with $2,000 each is the same as having one IRA with $100,000. The only differences are the number of investment options you would have available to you and the number of account statements you want to see.

    Let me also clear up what seems to be a little of your confusion. An IRA is just a type of account. The investments in that account could be stocks, bonds, mutual funds, or in your case CDs. A Roth IRA is funded by post-tax dollars so that when you take your money out, the only part that's taxable is the earnings on your account. Normal IRAs are funded by pre-tax dollars so when you take your money out, all of it is taxable. For most people, normal IRAs make more sense because presumably they will be in a lower tax bracket when they retire than when they're working. It also delays tax payments for many years which is always a good thing.

    Compounding refers to earning interest on your interest. If you put in $1000 earning 5% compounded, at the end of one year you would have $1050. At the end of 2 years you would have 1050 * 1.05 = 1102.50. If the interest were not compounded, at the end of 2 years you would only have $1100 because you would only get interest on your deposit of $1000. This may seem like a trivial difference but if you extend the example out for 10 years, the difference is $1629 vs. $1500.


    [edited to strike-out erroneous information. sorry folks.]
     
  3. Scott Merryfield

    Scott Merryfield Executive Producer
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    One word of advice -- do not setup your IRAs through a bank. Your investment options will quite often be limited. It sounds like this is your situation, Ted. I would recommend looking into Schwab or some other discount investment firm. We have all our IRAs with Schwab. You can invest your funds in whatever type of security you desire -- mutual funds, bonds, individual stocks, money market funds, etc.

    If your bank provides some other benefits to you for having an IRA with them, you may want to leave your existing $2,000 there and setup a new account with a brokerage company. I have left my old IRA from the mid-1980's with NBD (now Bank One) to provide me with no-fee banking. There's not much money in the account, and it has not been contributed to for almost 15 years.

    BTW, this contribution maximum for 2002 has been increased to $3,000 per person for a Roth IRA.
     
  4. ken thompson

    ken thompson Second Unit

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    All the advice above is correct. You should be a lot more agressive with your investments than CDs at this point. An IRA is a long term investment and being too conservative with it is a big mistake. Also The earnings on Roth IRAs are tax free not tax deferred thats why they are a better way to go. Likely you are dealing with some woman behind the desk out by the entrance to your bank branch. These people are clueless. Go get some professional advice.
     
  5. Ted Lee

    Ted Lee Lead Actor

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    hey denward! howz life? [​IMG]
    thanks for all the advice guys.
    although i'm relatively happy with my credit union (they were willing to redo my IRA, but at the shorter term and lower interest rate), i feel that my options are too limited. i don't mind leaving the 2k where it is...it won't hurt me any so it's not that big a deal.
    i think going with some professionals may be a better move, so...
     
  6. Denward

    Denward Supporting Actor

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    Brokerage companies are good if you want to pick stocks, build your own portfolio, etc. Make sure you buy enough different stocks to get reasonable diversification. For the low effort/high diversification approach, you can also open an IRA with a mutual fund company such as Fidelity, Vanguard, and many others.
     
  7. Todd Hochard

    Todd Hochard Cinematographer

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  8. Ted Lee

    Ted Lee Lead Actor

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    oh no doubt...for me a mutual fund or some other type of investment with wide diversification will be a *must*. i'm definitely not stock savvy, so i won't even try that route. [​IMG]
    i also have a 401k that i'm pumping 15% into, so it's helping, but i'm hoping for some more long term investment opportunities.
    oh yeah, i'm also signing up for that program i saw on the infomercial...the one where the guy dressed in a money suit is just throwing money around...that one looked really promising! [​IMG]
     

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