Author Topic: Roth IRA or Invest Directly into Index Funds??  (Read 1580 times)

Jimmyjon

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Roth IRA or Invest Directly into Index Funds??
« on: April 10, 2017, 02:44:26 PM »
What would be the benefits of having a Roth IRA or investing directly into index funds?

For example, if I started a Roth IRA and invested into 5 different Vanguard Index funds versus just buying those funds directly through Vanguard?  It seems to me that it would make more sense to invest directly because I could take those funds out if needed vs being penalized before age 59... Am I missing something??


Gin1984

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Re: Roth IRA or Invest Directly into Index Funds??
« Reply #1 on: April 10, 2017, 02:47:48 PM »
First, if you open a Roth with vanguard you are investing directly with vanguard.  And the difference is the money won't be taxed.

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neo von retorch

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Re: Roth IRA or Invest Directly into Index Funds??
« Reply #2 on: April 10, 2017, 02:54:53 PM »
To elaborate, assuming a Roth IRA is your best retirement vehicle over a traditional (i.e. you've checked out Investment Order), then the comparison is between a taxable brokerage account, and a tax-advantaged Roth account. Before investing, you have money you've already paid income tax on. Then you invest it one of the accounts, and you purchase the funds you desire.

With the taxable account, you'll pay taxes each year on dividends paid (whether or not you re-invest them.) When you sell funds, you'll pay tax on capital gains. You are free to withdraw those funds at any time, but you have to sell funds before doing so, triggering those tax events.

With the tax-advantaged Roth account, you'll never pay taxes. You can buy and sell funds, re-balance, and re-invest dividends with no tax events. You can withdraw up to the amount of your contribution at any time, but capital gains exceeding your contributions will have to wait until you're 59.5 You're limited (by age) to only contributing $5500/year to a Roth IRA, though.

So read up on investment order, and where it makes sense to do so, max out your Roth before contributing to a taxable brokerage account.

MDM

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Re: Roth IRA or Invest Directly into Index Funds??
« Reply #3 on: April 10, 2017, 08:08:00 PM »
Am I missing something??
A few things, but the good news is that those things are simple enough to learn.  As already noted, it's not a question of "index funds or a Roth IRA."  It's a question of "traditional vs. Roth vs. taxable" - within all of which you can use index funds.

See the chart below, in case that helps: