What separates Local banks and online Roth IRA 's???

[dgcoupe]

For an example local, wachovia has no annual fee but what separates my local bank to signing up with charles schwab or other onlines accounts like vanguard??? Im a little confuse :S

[buildmybudget]

Many times it simply comes down to cost. Trading fees or the fees associated with the mutual funds within the retirement plan often add up.

[kork13]

Banks typically only offer IRA's in the form of CD's which as CHH said, have some pretty abysmal rates for long term, young investors such as yourself. Online places offer stock and bond mutual fund investments that are much better for investing with a 30-40 year outlook.

ETA: In fairness, some banks have started partnering with companies such as Sharebuilder to provide a means of purchasing stocks/ETFs. Not sure if that's able to be used under a Roth IRA, though... Still, I would far prefer an online mutual fund company like vanguard or schwab for variety and low investment costs (sharebuilder is $4/trade I believe).

[dgcoupe]

so you can use the roth ira money to invest in stocks??

[jIM_Ohio]

A Roth IRA is an account label. Any bank representative, insurance salesman or stock broker can label the account a Roth IRA. That account is then subject to the IRS restrictions (such as $5000 in contributions per year and tax free withdraws after age 59.5).

What is put inside the account depends on where you go- Vanguard would likely put mutual funds in it, where as a bank would probably put the money in CDs. If the bank puts you in mutual funds, its probably a load fund (to compensate the person doing the investing for you) and if you go to Schwabb it might be like the bank or might be like Vanguard- just depends how you open account there.

[disneysteve]

To expand on what Jim said...

A Roth account can hold a wide variety of asets: CDs, stocks, bonds, mutual funds, exchange traded funds, even real estate and commodities. It is all up to you and, in part, determined by where you open your account.

You can have more than one Roth account, too, if you want to invest in different asset classes. For example, if you want to buy individual stocks, you could open a Roth with a discount broker like Scottrade. Then you could open a second Roth with Vanguard to invest in mutual funds. The catch is that your total annual contributions can't exceed the limit which is currently $5,000.

So how does a Roth differ between a bank like Wachovia and a mutual fund company like Vanguard or a discount brokerage like Schwab? They each offer a different mix of investment options with different fee structures as well. Most likely, the bank will sell load mutual funds which are funds where you pay a fee every time you purchase shares. In contrast, Schwab and Vanguard sell mainly no-load funds where you don't pay any fee to invest. Vanguard is also well known for having very low expenses in their funds. Their typical funds might charge 0.25% annually while the funds sold by Wachovia might charge 1.5% annually (I'm just picking numbers here - they aren't exact). Loads and expenses can really add up over a 20 or 30 or 40 year investment period.

I would agree that you should stay away from investing through a bank and stick to a low cost mutual fund company like Vanguard, T. Rowe Price or Fidelity. Schwab also offers some very good options including no-commission exchange traded funds and other low cost choices.

[dgcoupe]

Ok I guess I'm on a mindset thinking retire money for me n putting it in Roth is I put 300 dollars in n that's it I will have that much in my account till I retire or start taking it out at 59 ish but it sounds like I am getting the knowledge of me being able to use that money to invest to buy stocks so the 300 can increase or decrease???? I am so sorry guys if I don't understand this n thnk you all for your replies

[jIM_Ohio]

In my previous post I said the Roth IRA is a wrapper.

It is a wrapper around account whether you hold stocks, real estate or bonds as Disney Steve added.

All of that is true.

You can buy a bond with money now... no wrapper needed
you can buy a bond with money now inside the Roth (inside the wrapper)

the value of the bond and how it performs is "just about" the same.
The only difference is the tax implications of the wrapper.

So if you buy a CD inside a Roth IRA, you pay NO TAXES on the interest that bond generates. This is because all IRAs grow tax deferred, and a Roth IRA also says when you take that interest out, its tax free.

If you opened that CD in a normal account (not in an IRA) then you would pay taxes on the CD interest every year.

So focus on 3 things (they are all different things, but related).

One is what you invest in.

Stocks, bonds and CDs (cash) are 3 types of investments

Second is how each investment behaves.

A stock will go up and down in value, and it also pays dividends. If you buy low and sell high, you made money. Depending on account type, that gain might be taxed. If the stock pays dividends, that adds cash to your account too. Those dividends may also get taxed.

A bond will have a value (like $10,000) and an interest rate (maybe 3%) and the bond pays you 3% per year until the bond matures. If you sell the bond, it might be worth more or less than the $10,000 you bought it for. If you bought low and sold high, there will be a gain, and depending on account type, you may owe taxes on that gain. You may also owe tax on the interest the bond paid you each year.

A CD will have a value. If you put $10,000 in a CD which pays 2% interest rate, you will be paid interest (every day, month or quarter). Depending on account type, you may owe tax on that interest each year. You are GUARANTEED to have the value of a CD returned to you when the CD matures (as long as CD is less than $250k).

The third is the performance of each investment.
Above I showed how each asset will earn you money. If you put the investment inside a wrapper (inside of a Roth IRA), you are telling the IRS that investment is for retirement. In return for this agreement the IRS is promising to not tax your money this year (that is the IRA part) and not tax it when you withdraw it either (that is the Roth part).

**FYI there are other IRA types which state you will pay taxes when you withdraw the money)**
Roth withdraws are tax free (qualified withdraws are tax free).


So to start a retirement investment, find what you want to invest in (first) like a CD or a mutual fund.
Then open an account at a place you like (might be an online brokerage or a local bank)
Then each month put your $300 into the account.
Pay attention to all fees you will pay each account.

[dgcoupe]

ahhh ok!! So fan example my plan is open roth IRA with Vangaurd put 3k in and they charge .23% every year of my total in my roth right? I then can use that money to open a CD with Vanguard and be taxed free at the end of the year because I am using the ROTH MONEY and my gains will stay in my ROTH IRA? COORECT???

[jIM_Ohio]

ahhh ok!! So fan example my plan is open roth IRA with Vangaurd put 3k in and they charge .23% every year of my total in my roth right? I then can use that money to open a CD with Vanguard and be taxed free at the end of the year because I am using the ROTH MONEY and my gains will stay in my ROTH IRA? COORECT???

First, if you open an account with Vanguard, you will probably be investing in stocks or bonds (see my descriptions of those above).

The .23% expenses is about right, meaning if you invest $3000, you will buy shares of a mutual fund and each year you pay those expenses (you will never see that .23% come out, because Vanguard takes it out before it posts share values each day). That is a good thing, just pointing that out.

Vanguard might have CDs to open, if a CD is what you wanted in a Roth, you could just as easily open that account at your bank.

Go to your bank for CDs
use a brokerage for stocks and bonds.

[dgcoupe]

Perfect.. I thought i would start with CD's since i have had experience with it before n maybe as i get more knowledge i can go with stocks and bonds as i get older. Thank you!!

[disneysteve]

Perfect.. I thought i would start with CD's since i have had experience with it before n maybe as i get more knowledge i can go with stocks and bonds as i get older. Thank you!!

I wouldn't go that route. Remember, your retirement account is a long-term investment, really the longest term investment you'll ever make. This is money that you want to grow for 20 or 30 or 40 years. A CD won't grow at all. It will lose ground to inflation. If you are ready to open your Roth but aren't quite sure yet how to invest the money, go ahead and send the $3,000 to Vanguard and park it in one of their money market accounts temporarily. Once you decide which mutual fund you want to start with, it is a simple matter to transfer the money from the money market to another fund (can be done online with a few clicks of the mouse).

Since you will only be investing in one fund initially due to Vanguard's minimums, I'd suggest as a good foundation equity fund like their Total Stock Market index. That gives you broad market exposure all at once. As your assets accumulate, you will be able to branch off into other funds like international stocks and other asset categories. Their S&P 500 Index fund is also very popular as a starter fund.

[dgcoupe]

So couple questions again lol

1) I'm better of takign a 3k at vanguard for Roth IRA and use that money to invest in a moneymarket than a CD?

2)Be aware i chose vanguard for no specific reasons it was a random choice and if there is other site that you feel matches my ideal path please advice...

3)After googlign what MONEY MARKET is it sounds to me it is like a savigns account with higher interest and can have it there in periods of time like a cd to invest the money?

4)So new plan which i am plannign to do it this weekend or early next week.. sign up for an IRA put in 3k and invest the $ on a moneymarket? (I guess i'm goign with Vanguard ??)

CONCLUSION: All my investment will be tax free since i'll be using my 3k from ROTH IRA and I also plan down the road to take some money, maybe my EF and use it to get 6 acct of CD's 6 month length time like I was adviced here..


Oh yea keep in mind I am stil on a 90 day period at my job.. Prob making 30k ish, total of 6k in savings APY Earned 0.25% quarterly, no debt at all, age 24! Thanks guys!

[disneysteve]

1) I'm better of takign a 3k at vanguard for Roth IRA and use that money to invest in a moneymarket than a CD?

I would say yes (especially since I'm the one that suggested this ). Here's why. As I said above, your Roth is a long term investment. CDs are not long term investments. They don't grow over time. They actually lose value relative to inflation. Plus, they tie up your money for a designated period of time. A money market, however, is very similar to a savings account. You can access that money at any time. Of course, since this will be within that Roth wrapper, you can't take the money out to go on vacation (well technically you could but let's ignore that for now). I would use the money market account (MMA) just as a temporary place to park the money until you actually invest it.

When you are just starting your Roth, it is hard to follow the standard advice of investing a small amount on a regular basis over time called dollar cost averaging. At least at Vanguard, you need to jump into any fund with at least $3,000. I know that sounds like a lot but remember, you will hopefully be putting $5,000/year into this account so in year one, you can own one fund. By the end of year two, you'll have enough money ($10,000) to own 2 or 3 funds so that you can diversify your investment better.

2)Be aware i chose vanguard for no specific reasons it was a random choice and if there is other site that you feel matches my ideal path please advice...

I think Vanguard is an excellent choice. I have a 6-figure amount invested with them including my Roth and my wife's Roth accounts.

CONCLUSION: All my investment will be tax free since i'll be using my 3k from ROTH IRA and I also plan down the road to take some money, maybe my EF and use it to get 6 acct of CD's 6 month length time like I was adviced here..

Exactly.

[dgcoupe]

just called vanguard and got some Info.. just like u guys said with my roth ira to mutual fund investment they guy said its a good start but then he started talking about bond fund and balance fund n the different types of fund that a mutual fund has or something... Mutual fund right now is .12% he said I think this is all overwhelming maybe i am not knowledgeable enough for this level of investing money or the word investment at all.. I literally feel like a person taking a 500 question test and didnt' study or have any clue whats on it.. Sorry guys I'm just frustrated!! Maybe i should go read a book first before i open up my acct with vanguard. I even told the guy i have no clue what i am doing but throwing 3k in ROTH IRA and invest in Mutual funds/money market like i am advice. I dont' know what i will totally benefit from all this since I seem blind seeing it other than my money is tax free for the year and so on.. SIGH!!


Also he told me to take the vanguard Investor Questionnaire and i dont' even know the answer to the question but question 1.. UHG!!