Roth IRA question / interest rates etc

[jeffmem]

As I don't live in the states currenty I have forgone putting money into my traditional IRA for many years, and I never opened a ROTH IRA. I am now kicking myself for this. As I haven't been earning money in the US I actually cannot put money in my IRA anyway. But for the last few years I have enough income to do so and I want to start this year. I am already in my mid 30's and have very little in any retirement account, so it is urgent that I get this going now.

The past is the past. but now I can get going.

So, what I need to know is this. I moved my Trad. IRA to Scottrade many years ago, I just noticed the interest I am getting on that money, which is not much is like 60 cents a year, I have not invested it in any Mutual Fund or stock as I feel most mutual funds are a bunch of garbage. Those investment companies play with your money and they don't care if it goes up or down.

So this is where the Roth IRA comes into play. If I open a roth, am I going to be in the same boat with interest rates with Scottrade at like a buck a year? Or does roth earn more? My plan is before April 15 to deposit the max at 5000. And then of course before april 15 of 2014 to also deposit 5000. I need to get this going so I am going to have to max it out every year now until I retire to even come close to having enough to live. So how is the best way to open the roth? Which bank or is scottrade ok? I might try to find something to invest it in, but I am not so comfortable investing in stocks or MFunds with my IRA money.

Any advice and suggestions would be very helpful! Thanks in advance!

[disneysteve]

An IRA is just a type of account. It doesn't earn interest or dividends on its own. What it earns depends on what investments you choose to put into that account. It sounds like you have not yet invested your money and just left it in a money market where you will earn next to nothing. I'm guessing that you are probably earning less than 0.5%.

You are young and have 30 or so years for this money to grow. Growth requires taking some risk which involves investing in stocks and, to a lesser extent, bonds. If you are in your mid 30s, a typical portfolio might be about 70% stocks and 30% bonds.

So to answer your question, a money market account will earn the same interest regardless of what type of account you have - traditional IRA, Roth IRA, regular non-retirement account, etc. The way to earn more is to invest the money more aggressively, which is exactly what you should be doing at your age with your retirement funds.

By the way, the 2013 IRA limit is now $5,500, not $5,000 as it had been previously.

[jeffmem]

I had always thought an IRA earned more interest than regular bank accounts. Wow, ok, they don't, that's a wake up call.

So it really makes no difference if I open a roth accout or contribute to my trad ira at this point. What bonds would you recommend investing in? That is slightly safer, but yet not really. As for stocks, I don't want to take too much risk, slow growth is fine, but I definately need more than 1% interest. A caculator I used with an estimated interest of 6.5% woudl only get me to about 400k by the time I retire at $5500 annually. 6.5% I alrady feel is quite difficult to do...

[disneysteve]

I had always thought an IRA earned more interest than regular bank accounts. Wow, ok, they don't, that's a wake up call.

Yes, an IRA is just a type of account, not a type of investment.

So it really makes no difference if I open a roth accout or contribute to my trad ira at this point. What bonds would you recommend investing in? That is slightly safer, but yet not really. As for stocks, I don't want to take too much risk, slow growth is fine, but I definately need more than 1% interest. A caculator I used with an estimated interest of 6.5% woudl only get me to about 400k by the time I retire at $5500 annually. 6.5% I alrady feel is quite difficult to do...

Yes, it could matter a lot if you do a Roth or a traditional IRA. They are treated very differently for tax purposes and I suggest you do some reading to understand the differences between the two.

I wouldn't recommend any particular bonds. What I'd recommend is a diversified portfolio. You will not get growth if you don't invest in growth instruments. You can get a nice portfolio with as little as one mutual fund - a target date retirement fund. That is a fund of funds that includes several different asset classes and automatically adjusts to be more conservative as you get closer to retirement age. If you prefer to set your own asset allocation, a total stock market index fund, a total bond market index fund, and a total international stock index fund will allow you to build a nice portfolio.

[gostumpy]

I had always thought an IRA earned more interest than regular bank accounts. Wow, ok, they don't, that's a wake up call.

So it really makes no difference if I open a roth accout or contribute to my trad ira at this point. What bonds would you recommend investing in? That is slightly safer, but yet not really. As for stocks, I don't want to take too much risk, slow growth is fine, but I definately need more than 1% interest. A caculator I used with an estimated interest of 6.5% woudl only get me to about 400k by the time I retire at $5500 annually. 6.5% I alrady feel is quite difficult to do...

I think learning about investments, portfolios, stock markets, mutual funds, etc... is very VERY wise for you in the future.

Mutual Funds are one of the BEST ways to 'park' your money and have it grow in the LONG run. It may go up this year, down next year, but it has shown time and time again that your money grows if you leave it in for the long run.

6.5% is not too hard to get in a decent growth mutual fund, and at 30 you're still early enough you don't need to be "Safe no risk" investing... save that until after 50!

I am 27 and knowing I have almost 40 years of investment growth ahead of me, I am choosing things on the riskier side knowing that I am in long enough to ride out the ups & downs and watch my money steadily grow.

For the most part, the ONLY people that lost money in 2008 are ones that actually WITHDREW their funds! Anyone that kept the money in are now either at or far above where they were... Many people are getting 10+% growth yearly...

Try that calculator with 8, 9, or 12% growth