Results 1 to 10 of 10

Thread: And yet another Roth IRA question...

  1. #1
    Featured Member greggy's Avatar
    Joined
    Feb 2005
    Location
    New York
    Posts
    983
    Thanks
    0
    Thanked 4 Times in 3 Posts

    Default And yet another Roth IRA question...

    I opened up a Roth IRA with HSBC about a year ago and I have to admit that as much research as I've done on the thing, I don't really understand how it works. I get the whole pre-tax vs. after tax dollars thing, and the limit on the amount of money i can put in it annually, but otherwise, it just seems like a savings account with rules.

    The thing doesn't earn that much interest at all (I think my ING savings account earns more interest than the IRA), so I'm wondering if I should move it somewhere else (is that a rollover?)... like a Charles Schwab type place vs. a regular bank like HSBC. Would that make a difference? Perhaps i should hire a financial advisor, mostly b/c I really don't know what the hell I'm doing... any advice/ suggestions? I really just can't seem to make sense of it all, and I don't know what kind of interest rate I should expect a Roth IRA to be earning... 3% just seemed a little low. Is it? HELP!!

  2. #2
    God/dess Emily's Avatar
    Joined
    Feb 2003
    Location
    Las Vegas
    Posts
    11,302
    Thanks
    4
    Thanked 143 Times in 72 Posts

    Default Re: And yet another Roth IRA question...

    an IRA can go down, so look on the bright side!

    Seriously, it's all about the fund you put it in. You can put it in a fund that does well, or one that does poorly. You can buy mutual funds or bonds or a combination of both. You're basically playing the market here.

    I don't know much about HSBC's choices, but they should have at least something that interests you and is earning more money. I agree that 3% is low in this market. The DJIA has a 12.51% year to date growth. You should be able to find an Index Fund that mimics it, even in HSBC's choices.

    I usually have a hard time picking my funds too, so I go by the Morningstar rating. if it's got a 4 or 5-star rating, it's usually pretty good. Usually.

  3. #3
    Featured Member Katherine's Avatar
    Joined
    Oct 2004
    Location
    NYC Baby
    Posts
    1,359
    Thanks
    0
    Thanked 8 Times in 8 Posts

    Default Re: And yet another Roth IRA question...

    An IRA (either type) is like a holding account for you money. It follow certain rules, so then you get certain benefits by following it.

    Mutual funds are the most popular investment for an IRA. I have a ROTH as well and I have mine in a Franklin Templeton Fund. I opened it with M&T Bank. Mine has actually not been making me any money as of yet. But because it's a fund, whenever I'm buying into it, I'm buying shares. I'm pretty happy with it not making much now, as that means more shares. I have 40 years for it to make me money, so the more shares the better.

    Find out what you're IRA is invested in. If it truly is just sitting in some account (I doubt it though) then it's worth it to look for a fund you like to invest in. If it is invested in a fund, I say leave it there. You are buying shares with your money and it has time to grow. It's good to buy the shares at a lower price!

    Good luck!

  4. #4
    Featured Member greggy's Avatar
    Joined
    Feb 2005
    Location
    New York
    Posts
    983
    Thanks
    0
    Thanked 4 Times in 3 Posts

    Default Re: And yet another Roth IRA question...

    Ok, so the money is supposed to be invested in different funds? Like, I've seen my mom going through one of her retirement accounts or something (I'm not sure exactly what type of account it is), and she has a certain percentage in real estate, another percentage in bonds, another percentage in technology stocks, etc. Is my IRA supposed to be something like that where I pick and choose what percentage of the money I want invested where based on a list that HSBC gives me of things that they invest in? Did that make any sense?
    Last edited by greggy; 11-10-2006 at 10:47 AM. Reason: i should have proofread it

  5. #5
    God/dess Emily's Avatar
    Joined
    Feb 2003
    Location
    Las Vegas
    Posts
    11,302
    Thanks
    4
    Thanked 143 Times in 72 Posts

    Default Re: And yet another Roth IRA question...

    that's exactly correct...Diversification! Of course, you can still diversify and have good funds.

    here's more info from Fidelity (which I use) and they are pretty good at explaining these things. They have funds specifically designed for your retirement date....as the percentage depends on how close you are to retirement. Meaning, the longer you are in it, the more risk (more reward!) you'll have.

    http://personal.fidelity.com/product...ira.shtml.cvsr

  6. #6
    Sitri
    Guest

    Default Re: And yet another Roth IRA question...

    And to take more advantage of Tax benefits, I am opening a HSA Health Savings Account. That way I can pay for my medical with pretax dollars ... including dental, etc. I can put about $5000 / year in it.

  7. #7
    God/dess Emily's Avatar
    Joined
    Feb 2003
    Location
    Las Vegas
    Posts
    11,302
    Thanks
    4
    Thanked 143 Times in 72 Posts

    Default Re: And yet another Roth IRA question...

    Quote Originally Posted by Sitri
    And to take more advantage of Tax benefits, I am opening a HSA Health Savings Account. That way I can pay for my medical with pretax dollars ... including dental, etc. I can put about $5000 / year in it.
    Aren't those use it or lose it?

    I remember having one and it ended up costing me to do it because I didn't use all the money in my account. I remember trying to submit receipts for vet bills as a last ditch effort to get some of the money back. But that was back in my corporate days.

  8. #8
    Sitri
    Guest

    Default Re: And yet another Roth IRA question...

    That was probably a section 125 plan. You forfeited what you didn't us. The HSA accumulates and you can even invest it in Mutual Funds, etc.

    It is worth checking out.

  9. #9
    God/dess doc-catfish's Avatar
    Joined
    Nov 2002
    Location
    123 Tornado Alley Way, Hooterville USA
    Posts
    6,322
    Thanks
    0
    Thanked 36 Times in 30 Posts

    Default Re: And yet another Roth IRA question...

    Quote Originally Posted by greggy
    Is my IRA supposed to be something like that where I pick and choose what percentage of the money I want invested where based on a list that HSBC gives me of things that they invest in? Did that make any sense?
    Your IRA can be invested in whatever you want it to be invested in. However, if you have a long time horizon ahead of you, it makes sense to put a large percentage of it in the stock market so you can get the 10-12% average returns that stocks can give, and gradually adjust it towards a safer holdings as you near retirement, so you can shield yourself against the risks of stocks. They actually have mutual funds that will auto-adjust your allocation for you.

    http://www.bankrate.com/brm/news/inv...20050411a1.asp

    As for getting an IRA from an IRA trustee like a bank, you can only invest in what they have to offer you, so unless HSBC also has mutual funds (some banks do, but I don't recommend these for they're usually poor performers and bogged down by fees) you're probably better off going to one of the larger mutual fund companies or to a discount brokerage.

    http://personal.fidelity.com/product...efhp=pr&ut=A12
    https://flagship.vanguard.com/VGApp/...ry=Homeoffer02
    http://www.schwab.com/public/schwab/...efpid=P-999697
    http://www.tdameritrade.com/planning.../overview.html
    Former SCJ now in rehab.

  10. #10
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: And yet another Roth IRA question...

    back to the real basics re taxes and retirement funds. Say that during the year you earn $4000 (before taxes) that you wish to invest in one form or the other.

    With a 401k or Conventional IRA, you simply take the $4000 without paying any income taxes and stick it in the retirement account on January 1 2007. Then lets say that your IRA sector investments let you achieve a 5% rate of return. At the end of 2007 you therefore have $4200 with no taxes due on the interest earnings. You contribute another $4000 in 2008 and at the end of 2008 you therefore have $8610 with interest compounding tax-free. This goes on for the next 30 years and you have a 401k or Conventional IRA balance of around $250,000 when you retire 30 years from now. Then, once you're retired, say that you need $1000 a month or $12,000 per year to pay additional bills. However, because 401k or Conventional IRA withdrawls are considered to be taxable income at the time of withdrawl, in order to wind up with $12,000 a year to spend you actually need to withdraw $12,000 + the future taxes due. Thus, depending on what the feds and NY state and the city of NY decide to do about tax rates 30 years from now, you may need to actually withdraw $14,000 or $17,000 or $20,000 per year in order to wind up with $12,000 to spend. At today's 25% combined tax rate, and with zero additional earnings after you retire, this retirement fund would run out of money in 17 years of retirement. If future tax rates go up, this retirement fund might run out of money in 15 years of retirement or even less. But if future tax rates go down, this retirement fund might last for 20 years. The point is that you have no way of knowing what is going to happen to future tax rates, therefore you can't know the actual effect on your 401k or Conventional IRA until you actually reach retirement age.

    With a Roth IRA, things are a bit different. Say you contribute the same $4000 in pre-tax dollars. However, after paying fed + NY + NYC income tax that $4000 turns into $3000 after paying 25% income tax. You make the same January 1 contribution and earn the same 5% return and at the end of 2007 your Roth account is worth $3,150. You make the same contribution in 2008 and your 5% interest can compound tax free thus your Roth account is worth $ 6,458. This goes on for 30 years and when you retire your Roth account is worth about $ 187,000. But with a Roth, since the income taxes were paid each year before the contribution was made, in order to get $12,000 a year to spend you only need to withdraw $12,000. Thus regardless of future income tax rate changes, your Roth has enough money to last for 16 years of retirement withdrawing $12,000 a year.

    In both cases, the $250k or $187k balances in your retirement fund are known to the gov't . It is distinctly possible that 'means testing' will be applied re future eligibility for Social Security and Medicare. If that happens, then the $250k 401k or conventional IRA retirement fund is likely to result in smaller Social Security checks than the $187k Roth IRA fund because the $14k or $17k or $20k in annual withdrawls from the 401k or Conventional IRA needed to wind up with $12,000 to spend must be added to your annual reported taxable income after you retire, whereas the $12,000 withdrawl from your Roth IRA does not. In other words, if the gov't passes a new Social Security law in the future that says that anybody who earns more than $30,000 is no longer eligible for full social security benefits, and if your 'other' retirement income amounts to $30,000 a year, having a 401k or Conventional IRA will put you over the eligibility threshold whereas having a Roth IRA will not.

    As to whether this will actually happen, how it might be set up by the gov't in the future, and how much difference it might make in terms of larger or smaller resulting social security checks, there's also no way to know until you retire. But the 'tin foil hat' crowd is of the opinion that the Social Security system, the federal budget, and the NY state budget will all be in big trouble 30 years from now - thus the probability of tax rates being higher and Social Security checks being 'means tested' is pretty high - thus the risks of going with a 401k or Conventional IRA over a Roth IRA significantly outweigh the higher 'on paper' rate of return - which relies on tax rates and Social Security rules not changing for the next 30 years in order to actually achieve it !

    (and yes I know that the dollar figures and simple interest used in my example are not exactly comparable to real world retirement funds that use daily compounding ... nor is the fact that real world retirement funds based on investments other than CD's may have an increase or decrease in 'principal' ... nor is the fact that real world retirement funds will continue to earn interest on the declining balance even after retirement ... nor is the fact that my dollars are not adjusted for probable future inflation ... but it hopefully serves the purpose of providing a bare bones easy to understand example for people who might be totally unfamiliar with the differences in IRA types.)

    PS if you want to play around with various different amounts, rates of return, or other assumptions, there is an easy to use calculator available at
    ~
    Last edited by Melonie; 11-10-2006 at 04:09 PM.

Similar Threads

  1. Replies: 12
    Last Post: 10-03-2010, 04:01 AM
  2. And yet another Roth IRA question
    By greggy in forum Dollar Den
    Replies: 4
    Last Post: 12-18-2008, 08:13 AM
  3. IRA differences (no, not Roth, etc)
    By RoseLeigh in forum Dollar Den
    Replies: 10
    Last Post: 07-28-2008, 12:08 PM
  4. roth ira and simple ira
    By anomar in forum Dollar Den
    Replies: 6
    Last Post: 02-12-2008, 10:16 AM
  5. Roth IRA
    By rain in forum Dollar Den
    Replies: 15
    Last Post: 10-31-2005, 01:59 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •