Roth IRA and 401k questions?
Roth IRA and 401k questions?
I have learned a bit about the stock market in my economics class and since
I just turned 18, I am planning to eventually open a Roth IRA account with Scott Trade.
I will be taking Economic college courses in the spring, so would investing in spiders be a good idea until I become more knowledgeble and be more comfortable in deciding which stocks to invest in?
My Teacher had called Spiders "The idiot proof way to make money"
I have read up that mututal funds have larger fees and that Spiders are a safer investment than investing in individual stocks.
I would like to know exactly why are spiders safer? I just would like someone to confirm the information I have read.
Are Roth IRA accounts FDIC insured? Or just the investments insured?
Also would investing in 401K also be a good idea? Online I have read that it's "free money" but my father and brother have
told me that it might not be a good idea since people with 401k had lost a lot of money recently. They are not investorswhat so ever but this is what they had heard.
Can anyone give me a little more info on that?
I apologise for all the questions but I am new at this sort of thing and I want to have my facts straight before I start anything :]
"Learn about IRAs before you try to open one. You realize, I hope, that one must have EARNED income to contribute to an IRA."
and
"A 401k is only offered by a company you work for. If you invest in a 401k, your company has set this up with an investment company"
Yes already know both of these things, I already know what IRAs are as well. I just want to learn everything I can before I start anything.
And Yes I have checking account that I can access, I already have some money saved and am still saving.
Also just to defend my old teacher, he owns multiple properties, investments and has really good credit. So I guess he must be doing something right. I guess perhaps his wording was just misleading haha
Also Thank you everyone for your answers, every single answer so far has help me a lot. =)
Answers:
kckid2: Your questions need work, that's for sure. But since you age 18, you're on a terrific roll.
Spiders have some benefits, that's true. But your teacher... just tell him some jerk on Yahoo claims he doesn't know what he's talking about. It will be one of the few chances you get to call him ignorant without going to the penalty box.
You do not invest in 401(k)s. Rather, they are investment accounts and you put money in and decide what it gets invested in. You must be an employee and the money must come from wages. I think we're done with that one.
All those folks who lost money in their 401(k)s that Dad and brother discussed.... it wasn't because they were in 401(k)s... it was because they chose investments poorly. True story.
Okay, now for your education. There is so much to learn about investing. And with all the bear traps out there, learning good is not optional if you want to make money. You need to do your homework, and I can't do it for you.
So here is your assignment: search on the name Larry Swedroe. He has written many books about investing and I have read most. His advice, and reasoning, is very sound. Reliable
He's not the only by any means. But you're a freshman in my class, so we will be begin there.
Now get started
2010-10-20 17:25:19
2010-10-20 17:25:19
efflandt: ETF's (exchange traded funds) are very similar to mutual funds in that they invest is a variety of equities (which could be a group of stocks or bonds or whatever the fund invests in). So you are not affected as much by the movement of one stock, etc. like you would be if you owned a bunch of shares of that stock.
One advantage of mutual funds is that you can regularly add to the funds without cost (provided you chose funds with no load and no transaction fee). Since they often pick and chose different blends stocks, etc. the cost of that research and trading often makes the expense ratio somewhat higher that ETF's, but whether that costs you depends upon they guess right or wrong on their blend. The expense ratio is already factored into historical returns. Other disadvantages is that you cannot sell them instantly if the markets suddenly turn (they settle overnight at closing prices) and some have a minimum holding period of 30 days to 6 months to avoid an early termination fee.
ETF's are also a mix of equities, but usually closely follow a set index, so the expense ratio is lower (less research required). One thing that can be an advantage is that they can be traded instantly like stocks, but that could be a disadvantage if you make a knee jerk reaction to a momentary dip. One other disadvantage is that there had been a usual stock fee to buy or sell them, although, that disadvantage has shrunken since trade fees have lowered, and some brokers even offer free trading of certain ETF's
Spyder (SPDR) was the original name of a particular ETF, but is now a brand name of a bunch of ETF's in different market segments.
2010-10-20 17:29:53
2010-10-20 17:29:53
Chosen Answer
How may I help you: A 401k is only offered by a company you work for. If you invest in a 401k, your company has set this up with an investment company. Many companies will offer you a match if you first put in a required amount, and then some do not. So the normal employer may offer to match funds you put in up to 6% of your gross pay. That means if you get paid $20,000 per year, you put in $1,200 of your money, before taxes even get you (tax free). Your employer will match your $1,200. That means, you made 100% on your investment to begin with. Great beginning. Now, the idea is you keep that money invested, come hell or high water until you retire. Along the way, you can change companies--but do not cash out or you will be mercilessly be taxed. When you retire, and have a low income level, you withdraw funds. This amount is now income and is taxed at your retirement rate as it is added to your income at that time. The IRA is different from the 401k. You can choose from many different investments under the umbrella of IRA (Individual Retirement Account). You pay for the IRA with after tax dollars---the money you take home on your pay check has been taxed already. Total combined this year and next, will be $5000. Your best bet is a ROTH IRA. Why? The money you put into your ROTH IRA will never be taxed again. You must earn the money, meaning you must be employed. You invest an over the years continue to invest the max if you like (I hope you do). What ever the ROTH investment comes to at retirement time, and it can be way over a million dollars including interest and compounded interest, you NEVER pay taxes on the money. With the traditional IRA, you will be subject to taxes on your gain. Supposed you put in $200,000 in 40 years (40 x $5000). And it grows to $900,000 with compounded interest. You will pay taxes on the $700,000 you made. So choose wisely. No, invested money is not insured, just your savings accounts at banks.IRAs and especially ROTH IRAs are very good investments. Spiders, I dunno???. What your dad may not know, or did not explain, is the investments of the past two years have been very rocky. The people who lost money are those who panicked and took out their money when the market went down. The SMART people have recognized a bargin and bought as much as they could, and/or left the invested money alone. The market will rise, as sure as the Sun will rise tomorrow. The left-alone-investments have already shone they are coming back up to a profit. Last thing: IRA, and 401k investment is a loooong road. You put your money in for the long haul or don't even start.
2010-10-20 17:42:59
How may I help you: A 401k is only offered by a company you work for. If you invest in a 401k, your company has set this up with an investment company. Many companies will offer you a match if you first put in a required amount, and then some do not. So the normal employer may offer to match funds you put in up to 6% of your gross pay. That means if you get paid $20,000 per year, you put in $1,200 of your money, before taxes even get you (tax free). Your employer will match your $1,200. That means, you made 100% on your investment to begin with. Great beginning. Now, the idea is you keep that money invested, come hell or high water until you retire. Along the way, you can change companies--but do not cash out or you will be mercilessly be taxed. When you retire, and have a low income level, you withdraw funds. This amount is now income and is taxed at your retirement rate as it is added to your income at that time. The IRA is different from the 401k. You can choose from many different investments under the umbrella of IRA (Individual Retirement Account). You pay for the IRA with after tax dollars---the money you take home on your pay check has been taxed already. Total combined this year and next, will be $5000. Your best bet is a ROTH IRA. Why? The money you put into your ROTH IRA will never be taxed again. You must earn the money, meaning you must be employed. You invest an over the years continue to invest the max if you like (I hope you do). What ever the ROTH investment comes to at retirement time, and it can be way over a million dollars including interest and compounded interest, you NEVER pay taxes on the money. With the traditional IRA, you will be subject to taxes on your gain. Supposed you put in $200,000 in 40 years (40 x $5000). And it grows to $900,000 with compounded interest. You will pay taxes on the $700,000 you made. So choose wisely. No, invested money is not insured, just your savings accounts at banks.IRAs and especially ROTH IRAs are very good investments. Spiders, I dunno???. What your dad may not know, or did not explain, is the investments of the past two years have been very rocky. The people who lost money are those who panicked and took out their money when the market went down. The SMART people have recognized a bargin and bought as much as they could, and/or left the invested money alone. The market will rise, as sure as the Sun will rise tomorrow. The left-alone-investments have already shone they are coming back up to a profit. Last thing: IRA, and 401k investment is a loooong road. You put your money in for the long haul or don't even start.
2010-10-20 17:42:59
Caveat Emptor: "Spiders" are just a particular "brand" of ETFs - nothing more. And ETFs are NOT "idiot proof ways to make money." I assume that your teacher has an economics degree; that does not make one an intelligent investor.
Learn about IRAs before you try to open one. You realize, I hope, that one must have EARNED income to contribute to an IRA.
2010-10-20 17:45:14
2010-10-20 17:45:14
ahubb: Before putting money into something like a Roth IRA where your money will be tied up until you are 59.5. Make sure you have at least $10,000 in a savings/checking account you can access. You need to have money you can access before you tie up extra income.
You will be best off mixing a roth IRA with a Tax sheltered account. You don't want to do a roth alone. Mixing accounts appropriately will give you the best tax advantages.
If you are looking for a safe investment, you would not want to go with a spider. A spider is still in the stock market, and a well diversified portfolio can out perform spiders and become safer. Learn about "beta". Beta is a great tool to determine the risk of your portfolio. When researching stocks, money cenrl, gives accurate beta's of stocks. If you are looking for a safer investment, look into equity index annuities. THis is what I have. I have averaged 6.38% and when I retire, I will be guaranteed $6,000 a month for the rest of my life, plus numerous other benefits. Also, my EIU has no fees with it. So where you may be losing several hundred dollars a year in other investments, most of these charge no fees.
Regarding mutual funds. I worked for a broker dealer that sold 8 of the most well known companies mutual funds. The truth is that they use complex formulas to calculate their returns and it is deceiving. 80% of mutual funds lose money in a year and the others do not outperform a CD. Along with high fees, this is why I will never own a mutual fund. None of the cleints I ever met outperformed low interest accounts, and most lost money. None of them returned over 3% which is inflation, so their money was actually losing value even though it was gaining money.
Along those lines, and you can/should look up this fact. CD's have outperformed the stock market for the last 50 years. To make money in the stock market, you have to activly watch it every single day. You have to wathc it so you buy and sell at the right moments. If you aren't active in the market, your return will be less than that of a CD.
I don't want to have to watch the market for hours everyday to make money in it. I have around $3,000 in the market, just because it is fun to play with stocks and not because I expect to do well in the market. One of the books that changed my views on investing is "The Lazy Person's Guide to Investing." I had to read this as an economics major in college and it changed my perspective. Don't let the title fool you, it is a deep insightful investing book.
Good luck!
2010-10-20 17:51:40
2010-10-20 17:51:40