Investing Noob

[HydroJim]

If you haven't check out my introduction post, I invite you to check it out for more info on me.

But it's not necessary. Basically, I'm 18 years old and I'm investing $3000 into a Roth IRA. I'm opening my IRA with vanguard and in the process I ran across this:

Select what you'd like to do with your dividends and capital gains

This selection will apply to all eligible holdings in your account. Once your account is open, you can change your dividend and capital gains options for eligible holdings at any time.

Dividends and capital gains:   
Reinvest?
or
Transfer to your money market settlement fund?

I chose to reinvest because I don't have a money market settlement fund. But I have no idea what these things are.

I figured someone here would know. So if someone would be willing to explain this to me and help my stubble, it would be appreciated.

EDIT: Looks like opening a vanguard account comes with a money market settlement fund. Still don't know what it is though. Thoughts?

[Bart1ma3u5]

I believe that is just their standard account your money goes into if you don't/before you allocate it into the funds of your choosing. If you want to select different funds to put your dividends in, then you could have them go there and reinvest them at your leisure. In a Roth or Traditional IRA I don't see an advantage to that and just have all dividends automatically reinvest.

[GGNoob]

Assuming that $3,000 was put into a single mutual fund, reinvesting would be best. I invest in ETFs and decided to direct all money to my money market sweep account so that I can use dividends to rebalance. Bart1ma3u5 is probably right though, that in a tax-advantaged account, it doesn't really matter as you can just sell funds to rebalance without tax consequences. Any money not reinvested from dividends will just sit in cash until you do something with it.

[DrF]

Reinvest dividends, it is how millionaires are made.

Your cash account, should be near zero almost always. Money should only be there if you have just sold an investment or are about to make an investment.

Set up automatic withdrawal from your checking to instantly go into your investment every month, then increase the amount as you get paid more.

You'll be FI in 10-12 years.

[HydroJim]

Thanks for the advice everyone. reinvest was my initial instinct but just wanted to make sure.

[MrsCoolCat]

I wish when I was 18 I had ur mindset or I'd be even closer to retiring! Good luck!!!

[Cwadda]

The Money Market settlement account is just where money goes when it's not being used to buy funds. Reinvest is the best option.

Also note the deadline for the $5500 2014 contribution limit is April 2015. If you so choose to contribute more up until April of next year make sure it counts for 2014 so you can get a reset for 2015.

ALSO MAKE SURE YOU DO NOT CONTRIBUTE MORE THAN YOUR CLAIMABLE INCOME IN A GIVEN YEAR. This will result in a penalty.

[Asclepius]

Why lock your money into a Roth IRA when you likely fall into the 0% tax bracket for long term capital gains and qualified dividends? You could open a simple online brokerage and have free access to your money should the need arise.

[BooksAreNerdy]

The money isn't locked away in a Roth. You will always ha e access to your *contributions*, but not the gains. Also, I'm assuming you are in a stupid low place tax-wise right now a d I would assume that doing a Roth is the exact right place for your money.

That being said, the most important thing to do is start investing and stick with it. The details of what fund, where to optimize, what type of account, what tax benefits, etc are less important. Once you get started you can decide to optimize your knowledge later. The key is to invest in low fee funds and stick with it.

Also, my DH is a ME and works for an oil services company. His pay has doubled since he graduated in 06. He works 60-70hrs a week and has a very stressful job. Manufacturing is just that way. Plants operate 24/7, so engineers end up working long hours.tl;dr- manufacturing engineering will give you both the desire and salary to retire early.

[RyeWhiskey]

Why lock your money into a Roth IRA when you likely fall into the 0% tax bracket for long term capital gains and qualified dividends? You could open a simple online brokerage and have free access to your money should the need arise.

Because you only get 16 months a year to contribute to a Roth for that year (you get until April of the following year, I believe). If you don't contribute for the year in that time period you just lost up to $5,500 of tax shelter forever. If one doesn't have access to a 401k or employer-sponsored plan or an HSA then the advantage of the Roth is even more clear: it's probably one's only tax shelter. The notion of not using a tax shelter because of current low income is quite silly. What if one moves into a higher bracket later? All that lovely 0% compounding interest doesn't seem so great anymore as you are now taxed on dividends (and cap gains if you sell).