Opening Roth IRA - which fund(s)?

[bw1985]

Hi all, I'm new here, found this place through google!

I'm 23 and started my career out of college about a year ago. I'm going to open a Roth at Vangaurd because thats where my 401k is, but I'm not sure what fund to start it with. I know I only have until April to fund it with the full 5k so I was just going to fully fund it upon opening. My 401k is 100% Target retirement 2050 which is mostly made up of VTSMX.

Now I've heard index funds are the best way to go but since I'm already doing that in my 401k should I pick another fund for the Roth, maybe something riskier since I'm only 23? I've read FAIRX and DODGX might be good choices?

I also have 25k in a savings account and I think I should be doing more with it to earn some returns. Maybe I should open a trading account online? I have no debt or responsibiliites so I'm open to being risky to earn higher returns than 2%. I'd like to leave some in the savings for emergency and do something better with the rest.

Thanks and look forward to advice

 

[Lusitan]

Smart move on investing your 401(k) funds in a target retirement fund.

It's a great way to start off, because you get the appropriate diversification without having to spread your money across multiple funds. This helps keep down the (admittedly minimal) overhead costs like annual fund fees etc. because they are waived for accounts that are above a minimum amount.

It also will help enforce the asset allocation you need, without requiring any (a) effort or (b) guts on your part (my target retirement funds have been rebalancing into stocks as the market has tanked, and although I'm throwing my new investments into equities, I probably would not have had the stomach to exchange from my stable bond funds into stock funds during the past few months ...)

I wouldn't do anything different with your IRA accounts. Despite being in a different "box" (an IRA instead of a 401(k)) it's still your retirement money, and I think the same smart strategy should be used for both accounts at this stage.

As for the 25K in savings you have (great work saving that up already), I would make sure that I have between 6 and 12 months of living expenses saved in FDIC insured accounts, maybe in a string of 6 month CDs that rollover each month, or maybe just in a savings account like at ING Direct or something.

Once you've got your emergency fund saved up, then you can think about how to invest whatever other savings you have.

You're at a good age to save up a down payment for your first piece of real estate in a few years. By that time, prices will probably have stablized and you could probably get a good buy with a solid 20% down if you keep saving at your current rate.

Good luck and keep up the good work. You are light years ahead of most of your peers, in your savings but more importantly in your thinking.

 

[ziggy29]

For now I think Target 2050 is fine -- it gives some diversification across equity asset classes and is appropriately aggressive for a 23-year-old's retirement plan.

When you have more money in the account, you might want to look at creating your own asset allocation with rebalancing, but for now with $5,000 in total the Target 2050 fund would be a reasonable choice.

 

[travelover]

I totally agree with Lusitan and ziggy. Nothing wrong at all with the Target Retirement fund and it is a no brainer - just keep adding to it and ignore all the business "news". You'll end up much better off than 99% of your peers and you won't break a sweat doing it.

 

[W2R]

And I agree with Lusitan, Ziggy, and travelover. Right now, the sensible thing is to put everything into a Target Retirement fund and let it go up and down, and grow over several decades. It will be well diversified and won't require much attention. Once you have a bigger nestegg, you may want to get other funds too - - but right now, you are just beginning and the Target Retirement Funds are good ones to start out with.

 

[bw1985]

So should I even bother opening a Roth or just put more in my 401k since everything would be Target retirement anyways?

 

[travelover]

I'd contribute to the 401(k) up to the maximum employer match, then fully fund the Roth, then continue funding the 401(k), then fund taxable account.

For tax efficiency, you don't want bonds in a taxable account (Target funds contain bonds), so when you get to the point of funding taxable accounts, use a total stock market index fund in the taxable account.

Advantage of Roth is future tax avoidance - future taxes will probably be higher than they are now.

 

[bw1985]

Ok that makes sense, thanks!

I guess my next question is should I open it up and fully fund it w/ 5k at that time or just open it with 3k and then break the other 2k up into equal payments until April 15th?

 

[ziggy29]

Ok that makes sense, thanks!

I guess my next question is should I open it up and fully fund it w/ 5k at that time or just open it with 3k and then break the other 2k up into equal payments until April 15th?

If I had a sufficient emergency fund in liquid savings, I'd probably put it all in now if I had the money available. Otherwise I'd put in what I could afford now and add to the 2008 contribution until April 15 when I could, and after that I'd start 2009 contributions.

I agree with the previous suggestion about the ordering of contributions -- get the company match first (if any), then go to the Roth.

 

[bw1985]

Great, looks like I've got my plan then.

 

[Diesel1030]

Hi great thread..made me register. I'm in the same spot. I have a decent amount to invest in Roth IRAs. I was debating between a TR Vanguard account vs my own portfolio. It seems that the TR would be a much easier route and would take the pain out of making my own. The prob with Vanguard is that it requires a stupid 3K per fund amount which makes it hard to start a portfolio from scratch without busting my yearly ROTH max.

Im 25 and so is my wife so would it make sense for both or just one of us to start the TR2050? If just one..which other fund would be a good complement? Thanks!

 

[kybec29]

I am having the same issue with my Roth account. I am 26 and have been contributing for a few years already. I have $6,000 to invest in the account and would like to choose between Vanguard Total Bond Market Index (VBMFX), Vanguard Total Stock Market Index (VTSMX), and Vanguard Welleseley Income Fund (VWINX). Which of the three would you recommend to buy and hold for 35 years? I'm torn because I love the idea of high yeilds and strong consistant dividends. Overall I'd consider myself a Dividend Income investor, if such a title exists.

 

[Diesel1030]

kybec,
Those are all good funds. I have been in the VTSMX and have been happy. Of course there have been major losses, but everyone has felt the pain. I feel good about it in the future. Of note, 5000 is the max you can invest into the Roth IRA for this current tax year (2008). I saw you mentioned 6K, so just wanted to be sure you knew.

 

[kybec29]

I have uninvested cash in my account from previous years. That is why I have more than the $5,000 yearly contribution limit to invest currently. I realize there have been harsh losses in each of these funds and it is a great opportunity to get in at these levels. Since the minimum investement is $3,000 for each of my choices perhaps I will choose two. I'm leaning towards $3,000 in VFIFX (thus buying both the VBMFX and VTSMX) and $3,000 in VWINX.

 

[travelover]

...<snip>..... The prob with Vanguard is that it requires a stupid 3K per fund amount which makes it hard to start a portfolio from scratch without busting my yearly ROTH max.

Im 25 and so is my wife so would it make sense for both or just one of us to start the TR2050? If just one..which other fund would be a good complement? Thanks!

The Vanguard STAR fund is a good choice for someone just starting out in an IRA . The minimum investment is only $1000 and it provides a mix of stocks and bonds. Once your balance is built up a little, switch to a Target Fund or do your own slice and dice.

 

[CCdaCE]

Hah. I just pulled the trigger and started a Roth for the wife. Threw it into Target Retirement 2035.

Can someone tell me why the 2035 fund is $7.71/share vs. 2045 is $7.98/share? Their holdings are essentially the same. Why's one .26 cheaper?

-CC

 

[GolferJeff]

I just started a Roth myself, and I'm so excited!

I picked all index funds - it's just my style.

 

[putty]

Now I've heard index funds are the best way to go but since I'm already doing that in my 401k should I pick another fund for the Roth, maybe something riskier since I'm only 23?

I think it's interesting that so many people think the Target Retirement funds aren't risky enough for them. TR 2045/2050 are 90% stocks. Unless you are going to a casino it doesn't get much riskier than that.

I am about the same age as many of the posters in this thread (24) and I have TR 2045 in my 401k and TR 2050 in my Roth IRA. The reason for the different dates is that I started with 401k and someone suggested 2045 and I never switched to 2050. Until you need a taxable retirement portfolio (READ: money that's not in a 401k or IRA) target retirement funds are perfect. Just relax and work on saving money.

 

[DFrancis]

opening a roth ira

The target date funds are truly the best "keep it simple" funds out there for an IRA. You get good diversification and a rock bottom expense ratio.

 

[inquisitive]

Basic question about starting a Roth IRA: In addition to the internal fees that mutual funds charge, does it cost anything to open a Roth IRA and are there annual fees? How does one decide what company to go through?

 

[LOL!]

There can be annual fees, like $10 or $30 or there could be no annual fees. What company to go with depends on your other investments and the amount of money you want to invest. If you have at least $1000 you go with Vanguard, but only 1 of their funds allows an initial minimum investment under $3000 and that's the Vanguard STAR with a $1000 minimum. If you have less than $1000, then it becomes more problematic, but still doable. There are lots of options, but they will generally cost a little bit more money in terms of expense ratios.

 

[jIMOh]

Hi all, I'm new here, found this place through google!

I'm 23 and started my career out of college about a year ago. I'm going to open a Roth at Vangaurd because thats where my 401k is, but I'm not sure what fund to start it with. I know I only have until April to fund it with the full 5k so I was just going to fully fund it upon opening. My 401k is 100% Target retirement 2050 which is mostly made up of VTSMX.

Now I've heard index funds are the best way to go but since I'm already doing that in my 401k should I pick another fund for the Roth, maybe something riskier since I'm only 23? I've read FAIRX and DODGX might be good choices?

I also have 25k in a savings account and I think I should be doing more with it to earn some returns. Maybe I should open a trading account online? I have no debt or responsibiliites so I'm open to being risky to earn higher returns than 2%. I'd like to leave some in the savings for emergency and do something better with the rest.

Thanks and look forward to advice

The cool thing about target funds is they take the allocation (asset allocation) decision out of the investors hands.

If you were to choose a normal mutual fund, before choosing the mutual fund you would determine how much risk you are willing to take.

So you need to know
a) risk tolerance
b) an asset allocation which fits that risk tolerance
c) mutual funds which can make up the asset allocation

if you skip to C you missed two great steps a) and b)

risk tolerance is usually defined as % stocks and % bonds. It is determined in part based on age (younger=more risk) and how you react to financial issues and financial news (if market goes down are you selling or buying).

Your current fund is 90% stocks and 10% bonds according to another poster. You should look into this and know if this is fact or not.

Before making any changes based on 90-10, you should do a risk tolerance quiz. It might mean the 2040 fund is better for you because it is less aggressive.

Not sure how many here pick their own funds vs use target funds... I pick my own. and manage my allocation myself.

 

[target2019]

With VFIFX you are underweight in small value. I would go with that in the Roth.

VFIFX is made up of:

Vanguard Total Stock Market Index Fund Investor Shares 72.0%
Vanguard Total Bond Market II Index Fund Investor Shares** 10.1%
Vanguard European Stock Index Fund Investor Shares 9.2%
Vanguard Pacific Stock Index Fund Investor Shares 4.8%
Vanguard Emerging Markets Stock Index Fund Investor Shares 3.9%

Of course you need to watch the allocation. So I would not go more than 10-15% of the total in small value (VISVX).

 

[target2019]

I have uninvested cash in my account from previous years. That is why I have more than the $5,000 yearly contribution limit to invest currently. I realize there have been harsh losses in each of these funds and it is a great opportunity to get in at these levels. Since the minimum investement is $3,000 for each of my choices perhaps I will choose two. I'm leaning towards $3,000 in VFIFX (thus buying both the VBMFX and VTSMX) and $3,000 in VWINX.

You're 26, and can only invest $5K this year in the Roth. Put it all in VFIFX, which has 10% VBMFX. If you are not happy with that, then go with a different target fund to get more VBMFX.

 

[LOL!]

inquisitive resurrected this thread yesterday.

Basic question about starting a Roth IRA: In addition to the internal fees that mutual funds charge, does it cost anything to open a Roth IRA and are there annual fees? How does one decide what company to go through?

The OP hasn't posted since last February.