Roth IRA vs a Taxable brokerage acount

[MKKShah]

I disagree, but it takes all kinds to make the investment world turn. I'm a fan of this gentleman: John C Bogle.

Best of luck with your investing future.

Thanks for the pointer. I will add his works to my reading list as well. Looks like, may be I need Mr. Bogle's advice first, since I will be relying on MFs well before I will be investing in stocks myself.

[disneysteve]

Will this Roth IRA be a joint account?
My wife did not earn last year, and will not be earning anything this year either. So can I still put 10K for her in a Roth IRA?

IRA stands for INDIVIDUAL retirement account so no, it would not be a joint account. You would each have your own.

So I don't think you can contribute for your wife. So you will only be able to start a Roth for yourself.

This is incorrect and is very important to note. It is one of the great features of IRAs. There is a provision in the tax code for a spousal IRA. As long as you have earned income, you can fund a Roth for yourself AND for your spouse up to the contribution limit or your total earned income is it is less than the contribution limit.

My wife was a SAHM for 10 years and I funded an IRA for her every year. She now works part time and I still fully fund her Roth every year.

[BuckyBadger]

This is incorrect and is very important to note. It is one of the great features of IRAs. There is a provision in the tax code for a spousal IRA. As long as you have earned income, you can fund a Roth for yourself AND for your spouse up to the contribution limit or your total earned income is it is less than the contribution limit.

My wife was a SAHM for 10 years and I funded an IRA for her every year. She now works part time and I still fully fund her Roth every year.

Good, I'm glad I was wrong! I'm going to edit my other post so that I don't have inaccurate information.

[MKKShah]

IRA stands for INDIVIDUAL retirement account so no, it would not be a joint account. You would each have your own.



This is incorrect and is very important to note. It is one of the great features of IRAs. There is a provision in the tax code for a spousal IRA. As long as you have earned income, you can fund a Roth for yourself AND for your spouse up to the contribution limit or your total earned income is it is less than the contribution limit.

My wife was a SAHM for 10 years and I funded an IRA for her every year. She now works part time and I still fully fund her Roth every year.

Thanks for the clarification.

So the next question will be where do I open an IRA?

I have a brokerage account with E-TRADE. My 401(k) is with Fidelity.

I would like to open the IRA with someone else. Based on my research, it boils down to either TD Ameritrade or Vanguard. The question is, should I even consider Vangaurd, given that I can only invest with their MFs? I don't want all my MFs with one company. Does this mean I can zero in on TDAmeritrade?

Any other Borkerage suggestions? I am not planning to trade frequently. So the cost of trading is immaterial. I am interested in features of the account. i.e, good bookkeeping, decent interface and research etc. In this regard, I feel, Fidelity's 401(k) netbenefits account is pathetic.

[disneysteve]

Based on my research, it boils down to either TD Ameritrade or Vanguard. The question is, should I even consider Vangaurd, given that I can only invest with their MFs? I don't want all my MFs with one company. Does this mean I can zero in on TDAmeritrade?

Any other Borkerage suggestions?

Why don't you want to stick with one company? Not criticizing, just asking. I have money in 6 or 7 companies but the bulk of it is with Vanguard.

One thing to consider is that some companies, including Vanguard, Schwab and others, now offer commission-free ETFs. That can be a really good way to go. So take a look at Schwab. I also have an account with Scottrade. I'm not sure if they offer commission-free ETFs, though.

[MKKShah]

Why don't you want to stick with one company? Not criticizing, just asking. I have money in 6 or 7 companies but the bulk of it is with Vanguard.

The primary reason is "just to be safe". What if the website is down. What if they get hacked? What if some kind of fraud happens? If having a separate account is just a matter of a new account and a password, why not?

[disneysteve]

The primary reason is "just to be safe". What if the website is down. What if they get hacked? What if some kind of fraud happens? If having a separate account is just a matter of a new account and a password, why not?

In that case, I'd say the more places you spread yourself out, the more likely one of those things is to happen. If all of your money is with one company, what are the chances that the one site will be down or the one site will get hacked? If you have accounts in 6 different places, you're multiplied your chances of something going wrong 6-fold.

[kv968]

One thing to consider is that some companies, including Vanguard, Schwab and others, now offer commission-free ETFs. That can be a really good way to go. So take a look at Schwab. I also have an account with Scottrade. I'm not sure if they offer commission-free ETFs, though.

Scottrade does offer about 15 commission-free ETFs but as of now their volume is enemic at best. I wouldn't use them.

[jpg7n16]

I am trying to understand the tax implications of a complete withdrawal from the Roth IRA and see how that fares had I invested the same money through a regular taxable brokerage account.

...

In a Roth IRA:
- Start with $1000
- Cash in account after the 3 trades = 1000 X 1.1 X 1.1 X 1.1 = $1331

Here again, I have my original $1000. And a pre-tax gain of $331.

A 10% early withdrawal fee costs me $33.1. So I am left with $297.9.

If my marginal tax rate is 25%, what kind of taxes will I be paying on $297.9? Regular income tax? or Capital gains tax?

Just a point of clarification, so you have all the correct info - the 10% early withdrawal penalty is NOT a fee from the brokerage firm. It is a tax from the IRS.

As to your other question, the gains from an early distribution are taxed as ordinary income (plus penalty).

For the example above, you would take the $1,331 - 1,000 = 331 * (25% + 10%) = 115.85 taxes owed

Leaves you with $1,215.15 after tax. (not 1,253)

Also for you to consider, if you didn't sell your investment each year in the brokerage, you would defer taxes until sold in year 3.

$1,331 - 1000 = 331 * 15% = 49.65 taxes owed

Leaves you with 1281.35 after tax.

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Also, consider a down year - if you lose money in the taxable, you can deduct the loss against your income. In the Roth, no such luck.

Is it right to conclude that a Roth IRA will be generally disadvantageous for my purposes?

IMO there isn't really enough benefit to warrant it on a short term investment.

I realize others will disagree with me but oh well. That's what I believe.


I also believe that if you don't have a definite purpose for the funds, you should likely consider splitting it between taxable and the Roth. You know you're going to retire, but you don't really know if you're going to use it for some other expense. Using both gives you a well rounded option (tax wise)

[MKKShah]

I also believe that if you don't have a definite purpose for the funds, you should likely consider splitting it between taxable and the Roth. You know you're going to retire, but you don't really know if you're going to use it for some other expense. Using both gives you a well rounded option (tax wise)

Jpg, Thanks for taking the time. That's a great point. This is exactly where I am at. I don't have a definite purpose for these funds at the moment. So as a compromise I will put in $10,000 in the Roth and the remaining in a regular taxable brokerage account.

[MKKShah]

After some research, I am leaning towards Vanguard IRA account. I will be investing primarily in MFs until I come upto speed on stocks. Whether or not right now is a good time to invest in stocks remains to be seen.

I will now start looking at the exact funds, and initiating a transfer to the new account.

[disneysteve]

After some research, I am leaning towards Vanguard IRA account. I will be investing primarily in MFs until I come upto speed on stocks. Whether or not right now is a good time to invest in stocks remains to be seen.

I think Vanguard is an excellent choice for MFs. If you decide later that you want to buy individual stocks, open an account with a discount online broker. Don't trade through Vanguard's brokerage service.

It is always a good time to invest in stocks if you are investing for the long term. I'm assuming that when you say mutual funds, you are referring to stock mutual funds (as opposed to bond funds or commodities funds or other) so if you think it is okay to buy mutual funds, you obviously think it is okay to buy stocks, and it is.

[BuckyBadger]

I think Vanguard is an excellent choice for MFs. If you decide later that you want to buy individual stocks, open an account with a discount online broker. Don't trade through Vanguard's brokerage service.

It is always a good time to invest in stocks if you are investing for the long term. I'm assuming that when you say mutual funds, you are referring to stock mutual funds (as opposed to bond funds or commodities funds or other) so if you think it is okay to buy mutual funds, you obviously think it is okay to buy stocks, and it is.

Yup.

Just to try and change your mind against trading stocks one more time: Unless you want to do day trading, which is a job in itself and doesn't work out 99% of the time, even your stocks are going to "buy and hold" for a while and go up and down. Chasing the market is a dangerous thing because you're always behind it -- unless you're psychic.

Your comment about being a "good time to invest in stocks" still makes me thing that you might not really know what you're going to be getting yourself into. But I'll stop commenting on this point and keep my own investing predilections to myself. Good luck!

[disneysteve]

Your comment about being a "good time to invest in stocks" still makes me thing that you might not really know what you're going to be getting yourself into.

It seems to me that the average person has a similar mindset. Stocks look appealing when they have had a great run and are at record high prices. That's when people buy in. When the market is depressed and prices are off 30 or 40 or 60% from their highs, people look and say, "I'm not going anywhere near that until things turn around." The problem, of course, is that by the time things turn around, you've missed the recovery. You end up buying high and selling low, just the opposite of what you are supposed to do.

I've been investing regularly, month after month after month, since August 1992, coming up on 20 years. I began with $0 and $50/month going in. I now have $500,000 and at least $1,600/month going in. Nobody is going to convince me that investing in stocks and stock funds hasn't been a good thing all of those years. The best advice I can give someone starting out today is to do exactly the same thing that I did 20 years ago - get started investing and keep at it for the rest of your life.

[MKKShah]

I'm assuming that when you say mutual funds, you are referring to stock mutual funds (as opposed to bond funds or commodities funds or other) so if you think it is okay to buy mutual funds, you obviously think it is okay to buy stocks, and it is.

I was referring all types of funds. Stocks, Bonds, MM. I think a fully diversified portfolio is what is needed for me right now.

Stocks have recovered, and have done well. I don't think the market will tank substantially from now. But, I am not sure about the long term prospects of the US economy, or for that matter that of any industrialized nation. Emerging markets are not a sure shot either. We also don't know if we are in for long term inflation (with all the QE's), or possible deflation (due to decreasing asset values), or a Japan style "Stagflation". Budgetary deficit in the US, and other unfunded liabilities and their impact is scary. We are also in an uncertain interest rate scenario (what if the Fed decides to combat inflation with interest rate hike?). Given that I don't have the answer to all these, I am not going to predict anything in particular.I will put some thought into each of these areas and arrive at a portfolio that includes:

- Money market funds
- Bond funds
- Government income funds
- Currency basket
- Stocks
- US / large cap aka blue chip
- US / Growth
- US / Value
- International / Emerging markets - Growth
- International / large cap
- Commodity fund
- Precious metals
- Real Estate

Did I miss anything?

One thing that is certain is that Stocks are not a "sure thing". Not anymore.