The Taming of the Roth

A friend at work asked me to put some information together on the Roth IRA and taxable investment accounts, so I figured since I went to all of the trouble to write it up, I might as well share it with my adoring public.

1. We don’t need no stinking retirement accounts: Ok, face the facts, Social Security will not be there for you. Regardless of what the politicians say, forget about it. Even if it is still around and maybe by some miracle is still able to cut you a check one day the realities are:
   • You will probably be 80 years old before you reach the new and improved retirement age if the government has its way
   • The amount you will receive will be a pretty tiny monthly check compared to what you put in
   • You will never get out the amount that you put in and that was put in on your behalf (remember that your employer was matching your Social Security contributions when you were working)

2. The textbook retirement plan approach: The book says that retirement plans should go like this (in this order too):
   • Employer sponsored 401(k) plan up to the company match – You really, really want to put in enough money to get the full company match. Remember the Employer’s matching contributions are like free money. Don’t you like free money? Or think of it this way, if you put in a dollar and they put in 50 cents match, you just made a 50% return on your investment. Try to do that consistently on Wall Street. Don’t forget this is Pre-Tax money so it will lessen your taxable income, but you will have to pay taxes on the money when you withdraw it in retirement.
   • Roth IRA up to the yearly contribution limit – The limit for 2005 is $4,000.00. These are after tax contributions meaning you put in money that has already been taxed. Beauty of these babies is 1) the money in this account will never be taxed again, 2) You can always remove your original contributions without any penalty (Uncle Sam already got his tax money so he doesn’t care), and 3) The contributions and any growth they achieve over the years will not be taxed when you start withdrawing money.
   • Back into the company 401(k) plan up to the yearly limit – the limit for 2005 is $14,000.00
   • If you still have money left over – then you place it in a taxable investment account……or give some over to me since you seem to have plenty to spare

3. How do I open a Roth – You must go through a third party company to open a Roth IRA account. The best companies to go through are those that only deal in No-Load Mutual Funds and those that charge extremely low expense ratios for those funds (Less than 1%). Here are some that I like along with their minimum requirements.

   The Vanguard Group (www.vanguard.com) – $1,000.00 minimum to open an account. Thereafter a minimum contribution size of $100 if contributing via check, exchange, or electronic bank transfer. The minimum for additional contributions through an Automatic Investment Plan (monthly debit of bank account) is $50. There is a $10 annual maintenance fee until your account gets over $5,000.00. A couple of nice funds are:

   VFINX Vanguard 500 Index Fund
   VTSMX Vanguard Total Stock Market Index Fund
   VGSTX Vanguard STAR Fund
   VWELX Vanguard Wellington Fund

   Fidelity Investments (www.fidelity.com) – Offers the SimpleStart IRA Account which has no minimum to open an account and no account maintenance fees. The only requirement is to set up a recurring contribution of at least $200.00 per month from your bank account. Very nice that there is no minimum to open an account. Some nice funds:

   FFNOX Fidelity Four-in-One Index Fund
   FFFFX Fidelity Freedom 2040 Fund

   TIAA-CREF (www.tiaacref.org) – No minimum and no account maintenance fee. The only requirement is to set up a recurring contribution of at least $50.00 per month from your bank account. Nice funds:

   TCEIX TIAA-CREF Equity Index

4. Taxable Investment Account – For those with just too much money lying around or that just want to play and get a feel for the market. Look for no account maintenance fees, low trading fees, automatic dividend reinvestment, and ability to purchase fractional shares. Here are some I like:

   Scottrade (www.scottrade.com) – $500 minimum to open an account. No account maintenance fees. $7.00 trades. No automatic dividend reinvestment. Only allows purchase of whole shares

   ShareBuilder (www.sharebuilder.com) – No account minimums or inactivity fees. $4 trades if done via an automatic investment plan. Able to purchase fractional shares. Automatic dividend reinvestment

Now I know that was a good bit to take in all at once. Maybe I’ll break it down further later, but that is it for now. Hopefully my co-worker will be able to take this information and decide to join the elite group of those who Roth.