vallottonw2
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| Roth IRA vs traditional |
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I am sure this has been beat to death but, I did do a search to find little results. First off, I am in the process of opening an vanguard account, but want to know whether I should open it as a traditional IRA or Roth. I understand the advantages of both but being young (20) I want to look to the future. 10 or so years possibly buying a house and If I have all my savings in the Roth IRA wont i incure fees and tax pentalities that negate even opening the account. Lets say in 5 or so year I have 20,000 in the account. and want to with drawl some for a down payment. Is this possible? what would you do in my situation?
Thanks,
Will
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Tue Jun 03, 2008 12:11 pm |
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vallottonw2
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well, i shouldnt say i PLAN on using it in 5 or so years but more so want to make sure that i could get ahold of it if need be, without to much hassel..
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Tue Jun 03, 2008 5:59 pm |
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efflandt
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Location: Elgin, IL USA
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With a Roth IRA you can withdraw (already taxed) contributions at any time with no tax or penalties. Plus you can also withdraw up to $10,000 of unqualified gains to buy build, or modify your first home (which would be taxable, but no penalty). Withdrawls come from already taxed contributions first (no tax or penalty unless you withdraw gains before age 59.5, or IRA to Roth IRA conversions before 5 years after specific conversion).
For a traditional IRA, the only thing you can withdraw before age 59.5 would be up to $10,000 (taxable, but no penalty) to buy, build, or modify your first home. Distributions from a traditional IRA are taxed when withdrawn (including that $10,000). If you make any non-deductable contributions, only a portion of those contributions are prorated with each withdrawl (NOT first like with a Roth).
Of course years ago when IRA's first started, people were projecting that if you maxed out any IRA from age 25 to age 35, you could end up with more compounded than someone beginning at age 35 to age 65, so you should avoid drawing from any retirement plan if at all possible. Now the general thought is to contribute to a Roth IRA when young and your tax rate is lowest, and deductable IRA (or employee plan) when income and tax are high, and always at least enough to any employee plan to at least get any employer matching funds (free money).
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Wed Jun 04, 2008 6:41 am |
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vallottonw2
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so would it be best for me to go with the roth IRA as long as the only reason I would need to withdrawl is in case of an emergency?
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Fri Jun 06, 2008 11:41 am |
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pf101
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If you want money for a house, start a savings account for a house. If it's either or, then do the Roth but it's better to do both and avoid stealing from your retirement.
Personal Finance 101
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Fri Jun 06, 2008 5:36 pm |
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vallottonw2
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I have an account with vanguard, how do yall like vfinx or vtsmx as far as funds are concerned?
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Mon Jun 09, 2008 11:48 am |
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vallottonw2
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and until i decide excally what fund to go with would it be advisible to put my money in their money market account VMMXX?
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Mon Jun 09, 2008 11:59 am |
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pf101
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quote:
Originally posted by vallottonw2
I have an account with vanguard, how do yall like vfinx or vtsmx as far as funds are concerned?
Those are both good funds, however, given the state of the U.S. Economy I'd personally be a bit leery of putting all of my money into U.S. focused funds. Plus investing all of your money in one country is not really diversifying.
Have you taken an asset allocation test? Vanguard provides one (though I don't particularly love it) or you can just do a web search of Asset Allocation Calculator.
You need to figure out what the appropriate investment mix is for your time line, risk tolerance, etc. Then you'll build a portfolio and every 6 months re-balance it to follow your initial allocation plan. The problem with this is that this can be hard when you're just starting out because you don't have enough money to open more than one fund.
A much easier (and, IMO for most people, better) option is to invest in a Target Retirement Fund. A Target fund is a fund of funds with an automatic allocation that gets more conservative as you get older. These are great for people who don't want to have an active hand in managing their money or who need somewhere to park their money while they're educating themselves.
But going with a Target fund depends a lot on your risk tolerance. Personally I find them a bit conservative and too U.S. heavy, but I like to invest aggressively. My IRA is 50/50 two sector funds and I'm 34. I wouldn't recommend that to anyone else, but it works for my personal situation. If I were opening an IRA now I would probably go 100% into VGTSX or VFWIX now and add a touch of domestic in a few years when I have enough money in my account to make the domestic portion of my investment less than 15% of my allocation. This is not a recommendation for you, just an example of what I would do.
Whatever you decide, just remember that this money is invested for the long term so don't get itchy about moving it around if it isn't performing well. You should only look at/move your money every 6 months and that's only to rebalance it to get it back to your original allocation. As long as you pick strong funds, you're going to be fine in the long term no matter what's happening today.
Good luck!
Personal Finance 101
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Mon Jun 09, 2008 3:48 pm |
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