What happens after opening a Roth Ira in a Mutual Fund?
August 12th, 2010
Hello,
I have a Roth Ira CD in a bank, I am thinking about buying a mutual fund and put my Roth Ira there instead. But, I would like to know:
-How to open a Roth Ira in a Mutual Fund?
-Is it better to open the Roth Ira in a mutual fund directly with the mutual fund company?
-After opening the Roth Ira in a mutual fund, what should I expect? What happens after that? Is it safe?
Thank you
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You asked: -Is it better to open the Roth Ira in a mutual fund directly with the mutual fund company? Yes it is. The banks and discount brokers will charge you a fee to invest in Vanguard’s and other very low expense funds.
-After opening the Roth Ira in a mutual fund, what should I expect? What happens after that? Is it safe?
You will get quarterly statements (Vanguard will charge you an account maintenance fee if you insist on paper statements. Get everything from them via the web, print it out yourself if you need paper and then they will not charge you extra) showing account activity. What happens after that? Sit back and hopefully watch the account value grow.
Is it safe? Value of the fund will vary as goes the stock market. It is not like a CD. But, with CDs, you will lose power of the money to inflation, so in my opinion, over the long term, equity mutual funds are safer. Since around 1926, there has never been a 20 period where you would have lost money investing in a well diversified stock index fund. As to what happens if the mutual fund company goes bankrupt, your fund is safe. Legally, mutual funds (an example: Vanguard Total Stock Market Fund) are completely different companies than the fund’s "family parent" (The Vanguard Group Inc.). If the "parent" (Vanguard Group) goes bankrupt the fund’s board of directors will just transfer the fund to another manager or "parnet" (like T. Rowe Price).
First – only buy a fund or a stock if you can stomach the ride for the long term. Americans have the habit of panicking and selling when prices decline – that is actually the time to buy!
The tough part is deciding what fund you want. Money magazine makes some recommendations, but I like funds that are low fee and go with the larger market, like a Vanguard S&P 500 or Russell Fund.
First you call Vanguard (or Fidelity, or whoever) or visit them on-line and open an account. They will do a "custodian to custodian" transfer, which avoids taxable events, and move the money for you.
Try to avoid checking the balance more than once a year – this is after all a 20 + year plan, so don’t get hung up on whats happens tomorrow!
Another great thing is to arrange for monthly automatic transfers to your IRA so it will grow faster. Whatever you can do, add each time you get a raise.
Good Luck!
You need to reverse your terminology.
You have a Roth, you put investments into it, not the other way around.
Call a brokerage house and tell them you want to open a Roth. Ask them the best way to roll the CD to the new account.
Do NOT get mutual funds that invest in tax free bonds–your ROTH is already tax free (if done to retirement), so why accept a lower rate of return.
You can get a mutual fund form your bank, then there is no need for a transfer. The disadvantage to that is their funds tend to have slightly higher fees.
Alan G. mentioned Vanguard, they are very good with low fees on the funds they offer.
My suggestion is to open a Roth at Vanguard and deposit next years money there. If you have already made a contribution up to the limit for 2009, then you will have to wait until January, if not you have between now and April 15 2010 to make contributions for 2009.
First off, you contribute funds to a Roth IRA, and then you use those funds to purchase investments such as CDs, mutual funds, stocks, etc. So it’s more accurate to say you would purchase a mutual fund inside your Roth IRA rather than the other way around.
If you’re using new money to fund your Roth IRA, just go to any discount broker and open an account. Then, designate that account as a “Roth IRA.” Fill out the necessary information they ask for, and you’re ready to purchase.
Most online discount brokers will allow you to purchase shares of stock, mutual funds, or ETFs for between $6-$8 per trade, so just find one you’re comfortable with.
If you’re looking to invest in the stock market without having to worry about mismanagement of your money, an Exchange Traded Fund (ETF) that mimics a major index is probably your best bet. You can trade ETFs like stocks, while mutual funds are only bought and sold twice a day. In addition, ETFs usually offer lower management fees.
Some good ETFs include:
Vanguard Total Market Index (VTI)
Expense Ratio: 0.07%
iShares: S&P 500 Index (IVV)
Expense Ratio: 0.09%
The former tracks the entire stock market, while the latter tracks the S&P 500. Both have very low expense ratios. While you won’t outperform the stock market with these funds, you also don’t have to worry about underperforming the market either.
Hope this helps, and good luck with your investment plan!