IRA help

[jenn_1022]

My husband and I were looking into IRA's. I guess we are pretty clueless when it comes to this part of finances. We finally found a budget that works for us and now we would like to save for our future. We have a MM savings account that isnt earning very much interest and some small bonds. I have read some information on IRA's but I am not sure the right type. Any info on them would help greatly! Thanks

[disneysteve]

There are 2 types of IRAs, traditional and Roth. Both are funded with after-tax dollars but contributions to a trad. may be tax deductible if you meet certain income guidelines. Contributions to a Roth are not deductible. There are also income guidelines for contributing to a Roth. Money in either grows tax-free. In retirement, withdrawals from a trad. are taxed while those from a Roth are not. Contribution limits are the same for both, $5,000/year or $6,000 if you are 50 or older.

There are some other differences and nuances but that is the quick summary.

[noppenbd]

There are many IRA providers out there that will be happy to help you set up your IRA. I personally have my IRA through Vanguard (www.vanguard.com), because they offer very low cost mutual funds. Fidelity and T Rowe Price are two other favorites around here. Before you set up your account you will want to decide where to invest. This gets into the area of asset allocation, which is basically how your money is divided up into US stocks (volatile), bonds (relatively safe), international stocks (even more volatile). You can even invest in plain old money market funds or CDs in your IRA, which carry very little to no risk. Volatility is the measure of how drastically your returns will vary from year to year. Highly volatile investments(like stocks) can swing 30-40% up or down on a yearly basis but tend to have higher returns on average, over long periods of time. Low volatility investments (like bonds) will not swing as much year to year but the long term return will be lower.

All 3 mutual fund companies I listed have "target retirement" funds, which hold a mixture of stocks & bonds. The funds are tied to your expected retirement date and will automatically adjust your mix from mostly stocks to mostly bonds as you age. These are generally good choices if you don't want to get into picking your mix by hand, and adjusting it every few years. Even still, you should be aware of the mix for the fund you choose and be comfortable with the volatility you will experience.

[jIM_Ohio]

Do you want a tax deduction? If you are in 25% bracket, I'd take deduction (if you file married and have taxable income over 70k, you are 25% bracket). The exact limit is probably 67900 or something similar for 2008.

I would decide on a projected retirement year (guess within 5 years). Probably when you turn close to 65 unless you plan to work a lot longer or retire much earlier.

Then go to T Rowe Price, Fidelity or Vanguard and choose the fund which matches the year.

[WrenC]

IRAs are great savings tools--good job for looking into them. If you're fairly young, I'd recommend a Roth IRA and that you max out your contribution if you can--it'll gain you a whole lot more in the long run to pile it up now.