Confused....

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ok so, recently ive really been looking into investing my money to make it grow etc etc....but im not getting the overall picture...for example

Ok, a Roth IRA allows you to deposit a max of 4000 per year. Then you can invest the money you have in your Roth IRA to lets say mutual funds, stocks, bonds, etc and whatever revenue you get from those investments is yours to keep without being taxed? Is that right? Another thing im confused about is do you HAVE to invest the money you put into your Rorth IRA? As in, if the money is just sitting in the roth, does it earn interest? And if you invest the money, there is a chance for you to lose money depending on where you invest correct?

So the only real advantage of the Roth is the tax exemption on the growth of your money but is only limited to you putting in 4000$ a yr.

On the other hand, if you want to invest more, it would be smart to have a Roth IRA account and then invest the rest into other mutual funds as well...

So if i want to open up a Roth IRA and also some other mutual funds where should i start? Where can i get information on mutual funds and what type of mutual fund i should invest in...vanguard seems to have good standing with people on this forum.

Ill post more as i think of more

thanks

[34saving]

Re: Confused....

Roth accounts have a million different options depending on where you open it. Some offer FDIC insured CDs. These would guarentee the principle and provide some interest without much "investing". However, especially if you're young, most people say that your more agressive investing should be done in your tax sheltered Roth. (The idea is that since your growth is tax free you should maximize your growth -- the only down side is that maximizing your growth also increases your risk, and yes, you can lose everything.) Roths are commonly used to invest in the stock/bond markets either with mutual funds or individual stocks. However, the options are almost endless . . .I guess you can even buy real estate. (I'm not quite sure how that works though . . . .

[Fern]

Re: Confused....

First, consider that the words Roth IRA are just a label used to describe the type of tax status it gets. So, yes, you have to invest it in some kind of investment, whether it's a mutual fund, stock, bond, CD or bank account.

If you have more money to invest after you do the Roth, you should also invest at least the minimum needed to get your company's match on your company 401k, if they offer one. Ideally, invest the maximum 15% of your pay since this is also tax-advantaged; in this case, it's tax-deferred, not tax-exempt, but still valuable as it's assumed most people are in a higher tax bracket in their working years compared to their retirement years, so since wtit the 401k you pay taxes when you withdraw and use the $$, you're paying less in taxes.

Check out www.troweprice.com.

The important thing is to get started; don't let indecision keep you from taking action, after researching your options, as youre doing. T Rowe Price or Vanguard would both be a good place to start, with a moderately aggressive stock fund. They both will have a list of offerings ranging from ultra-conservative to super aggressive; you'll likely feel most comfortable somewhere in between.

[sweeps]

Re: Confused....

34 and Fern are right. The Roth is just a label to protect whatever investment you want from taxes. However, I recommend putting money first in your 401k to maximize your company's match. That's a guaranteed return on your money. Then go ahead and throw some money in your Roth IRA.

[lrjohnson]

Re: Confused....

I'm taking advantage of this thread to expose my confusion too.

So, Sweeps, I don't have a 401k. I work for the County, I am CalPERS in California, and that is a contribution that I can neither increase nor decrease. Thankfully, I have heard that this particular pension is doing well.

I have a 457 Deferred Compensation plan available, but there is zero match, it is pure me. In that case, is it better to fund a Roth first, then put any extra available above the annual limit into my 457 plan?

Thanks so much for you patience and info.

[sweeps]

Re: Confused....

lrjohnson, no problem.. this is the place to ask. If you don't have a match on your 457 plan, then contributing first to a Roth is probably your best choice.

However, as always, there are some exceptions.
1. Ineligibility. Some people are not eligible to contribute to a Roth, period (for example because they make too much). This makes the decision easy.
2. Future change in income. If you believe you're earning the most income that you will ever earn, it's best to contribute to your retirement on a pre-tax basis. For example, let's say you're a manager earning $100k a year. But next year you plan on changing careers to be a kindergarten teacher earning $30k. That would make your 457 the best bet this year (then Roth starting next year).
3. Eligibility for tax breaks or other programs. Since most tax breaks phase out at certain income levels, you may be getting free money from the IRS by contributing pre-tax to the 457 rather than post-tax to the Roth IRA. Also if you have college-age children, there may also be a better chance they will get financial aid if your reported income is lower.
4. Access to closed funds. Some 457 (and 401 and 403) plans have very good funds that are closed to new investors. If you opened a Roth and tried to contribute to one of these funds you couldn't because the fund is closed. Going through your employer's plan gets you around that problem.
5. Psychological reasons. Contributing to your employer's retirement plan is usually easier than contributing to a Roth. For some people it's easier to let the money be pulled from their paycheck so they never see it, rather than writing a big check or seeing that chunk of money pulled out of their checking account after the fact. If you will ultimately put more towards your retirement by going the 457 way than you would the Roth way, then you should go the 457 way. For example, if you'll contribute $8000 pretax to your 457, but you'll only contribute $2000 post-tax to your Roth, then go for the 457.

Hope this was helpful?

[lrjohnson]

Re: Confused....

Sweeps:

Yes, incredibly helpful.

Ineligibility No problem here.
Future change in income I don't think so, but am not positive. Civil service is pretty safe, but at 35 I don't know that I won't change carrers a few more times.
Eligibility for tax breaks or other programs I don't think I'd lose any breaks as I don't have any breaks. I do the 1040EZ. One job that entails no expenses, no kids, no school, no mortgage, no excessive medical, etc.
Access to closed funds Unknown for me here; I basically blindly pointed based on the sign ip person's recommendations when I started my 457 contributions. I had a tiny bit of 401k money to roll over, that's essentially why I signed up. I am intimidated by any form of investing; on this board I'm trying to work through these issues. I'm not sure I'm at the level to check.
Psychological reasons I can see where for many people this would be a significant problem. Me, I have no problem savings, or writing a check to savings, or being more active. I'm of the mind that doing a deduction monthly to savings isn't enough, I minimize spending to maximize savings. If I automatically save 10%, I might think I've done enough, when I haven't. As I've said above, my real hurdle is knowing where to put it, not having the money to put there.

I think I have a small regular IRA now. I had a CD that matured, and now it's in an IRA that I don't think is Roth. Not sure if I can switch it.

I think I will pursue the Roth IRA now. My goal will be to have a plan (IRA, 457, where emergency savings should be, CD's, etc.) by the end of May.

I appreciate the excellent direction and information I get on this board.

[CRFSaver]

Re: Confused....

Just as an FYI, one of the advantages of a 457 versus a 401k is you are not required to wait till 59 1/2 to start withdrawing money. As many municipal employees tend to retire earlier (especially police and fire) the 457 program was set up for them as many retire in their 50's.

Only thing I didnt like about the 457's I saw in California were the crap offerings by NACO, Nationwide, VALIC, and Hartford that pushed people into their general fund products or higher fee mutual funds. I liked the Calpers 457 program though. Their S&P 500 Index fund has lower fees then Vanguard.

CALPERS is one of the better Pension funds out there. Part of that comes from the fact that municipalities and the state are required to fund their obligations 100% (or close to 100% based on their discount rates and actuarial projections).

It also begs the question which program are you on. 2% at 55? 3% at 50? That makes a difference how much you need to save as well.

[lrjohnson]

Re: Confused....

I was 2% at 55, but we just went up to 2.7% at 55. That was a pretty great switch. I am 35 now, with 5 years service credit in.


I need to a) figure out whether to increase the 457 contributions-I'm doing 100 a month, which I know is really low-I thought I might need the money available for a down payment. I could definitely increase this at least double if not more, if I decide it's the right thing to do. And b) I need to figure out what offering sthere are and which to do. That scares the poop out of me, but I can do it.

[CRFSaver]

Re: Confused....

The nice thing is you are at least vested in your Pension which is very nice. As long as you maintain working in an environment where you have access to CALPERS, CALSTRS, Univ of Cal Pension or one of the County Pension plans anything you put into your 457 is gravy at the moment. 100 bucks a month is better then nothing. I am assuming they do not take out social security for you correct? If you have the CALPERS 457 their investment options are quite good. They are all managed by the same managers that manage the pension so the pricing is much better. Only thing bad about it is there is not newspaper to go to and see what your fund prices are everyday. Of course most of the insurance companies its the same issue as they are annuity wrapped and are actually only clones of the actual funds.

[lrjohnson]

Re: Confused....

My 457 is administered through ITT Hartford, not CalPERS. I'm not sure about the Hartford options, it's an area I have to get braver in. I do pay into FICA, so if there's Social Security later, I am increasing what I'll be able to draw off of it. I know some Government jobs don't pay into FICA, but I don't have one of those, for good or ill. I'm looking at my Hartfordford statement. Beginning balan 1/1 $4653, $350 contributions, $328 change in balue, ending bal 3/31 $5313. I have these 4 categories: Htfd Global tech HLS," "AIM Leisure," "AmCent SC Value," "Frkln SmMd Cap Grwth." All increased in value, the Global Tech by the largest amount. I have to see what options are available. I do note that I show zero "Plan and Contract fees"-I suppose that's good. My account by investment category is 38% Specialty, 31% Small Cap, and 31% Mid cap. Sad truth is I don't know what that means. I could use a good lecture at a local college, or maybe even a "Dummies" book to use as a stepping stone.

[sweeps]

Re: Confused....

lrjohnson: Your 457 portfolio is in pretty risky investments. Your only investments are in high-tech, entertainment, and small companies. Since you have a vested pension, you can probably take on a little more risk, but without any investment in large company stocks or international stocks, you're taking a big gamble. What other funds does your 457 offer?

[lrjohnson]

Re: Confused....

I won’t mention my small cap, mid cap, and specialty offerings, since I’m already represented there. Under International/Global (as of 2003 Original enrollment documentation) I have Janus Adviser International, Putnam International New Opportunities, Putnam Global Equity, Janus Worldwide, American Century International Growth, and Hartford International Opportunities. Under Large Cap I have MFS Capital Opportunities, Janus Twenty, Janus Inv Opt, American Century Ultra, MFS Massachusetts Investors Growth Stock, Dreyfus Premier Third Century, Fidelity Advisor Growth & Income, Hartford Index HLS, Hartford Stock HLS, American Century Income and Growth, Fidelity Advisor Growth Opportunities, Scudder Growth and Income, Hartford Dividend and Growth.

Disclosure: When I originally picked, I think my advisor/enroller suggested a Large Cap, but I was taking an anti-corporate stand at that moment. I still have liberal tendencies, and would prefer a “good” International or Large Cap, but I’m fine with corporate today. My stance today is that I need to start learning, and being active, and if in five years I’m savvy enough to invest in hemp and organic veggies and make stable money, great, but today I’ll take Coke and IBM and deal with it.

I will say that at 35, with CalPERS, and also paying into FICA, that yes I am willing to be a bit riskier, but you're right, not pure risk.

Sweeps, I am appreciating your advice, and acting on it (note Kiplinger’s subscription in another post). You are helping take the fear factor out of this, and making me see it as a series of steps, and a process. So a big thank you.

[sweeps]

Re: Confused....

Janus Adviser International and Janus Twenty are very good funds. They have performed well, and Morningstar rates them both 4 stars. Large cap funds should start outperforming small cap funds in the next few years. Most advisors think small caps have become way overvalued in the last 5 years. Meanwhile an international fund will protect you from currency risks since many advisors think the dollar will continue falling in value. My suggestion is to gradually shift your allocation toward these funds. You may even want to add a smidgeon of bonds for extra diversification.

You can either do a re-allocation, or you could leave the current funds as they are and contribute new money towards the new funds until you get to your desired allocation. Again, these are all just suggestions -- you should do what makes you feel the most comfortable.

Regarding social security, I would not include it in your retirement plans. Your pension is solid, you can count on that, but I don't think it would be realistic to expect a large contribution from social security 30 years from now. If I'm wrong, then great, that's icing on the cake.

[lrjohnson]

Re: Confused....

I agree that I need to get out of "all US dollar" and Risky, and starting with those two funds while I increase my knowledge makes sense to me.

Okay, back to Original Post topic.

I have some money in an IRA, I just checked it's not Roth, it's regular. (I had a CD mature and wasn't really sure what to do with it.) It's with Franklin Templeton, in "Frankin Templeton Founding Funds Allocation Fund - Clss A," NASDAQ FFALX.

** Is it a smart move to make a regular IRA into a ROTH? Can I even do that?

** If I want to fund a Roth IRA, and I want to check the ratings on funds Franklin templeton offers, what's a good site? Morningstar? I'm thinking Franklin because a) that's where my regular IRA is and b) that's what the adviser that works at my Credit Union deals with.
I'm still trying to get Fern's statement "So, yes, you have to invest it in some kind of investment, whether it's a mutual fund, stock, bond, CD or bank account." Well, I understand it, but it's new information so I have to absorb it. The idea that I could have a 1% savings account be Roth IRA money is weird to me. How does the account get labeled that way? Can buying T-Bills be with Roth IRA money?

It would be easier for me to limit the variety of accounts at different places, the new Emigrant and ING accounts already doubled my accounts, but if Franklin Templeton has a lousy rep and/or not the best offerings, I'd be willing to switch. Plus, since she got me the regular versus Roth and it really seems like Roth is best, maybe that adviser isn't the greatest.

I understand why some people ignore this. My hope is that once I get my ducks lined up, I should really only have to spend big time planning once a year, right? Writing that big IRA check, re-allocating/investigating funds, etc. While reading this board and Kiplinger's all year long, of course.