Author Topic: Roth IRA from funds invested in mutual fund  (Read 3562 times)

parkskier

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Roth IRA from funds invested in mutual fund
« on: May 07, 2012, 11:24:40 AM »
Hello Mustachians!

I am obviously new here and just recently stumbled across this site.  I've been feverously reading as many of Mr. Money Mustache's articles and am loving them.  Seems like many of you on here offer some great advice as well and I look forward to learning more as I spend time on here.

As for my question.  I recently just got married (Dec. 2011) and for a wedding present my grandmother gave me full access to an investment account she had set up in my name several years ago.  I've filled out all the paperwork to put the account in my name and now I'm wondering what to do with it.  Currently, the account has about $11,000 and is fully invested in a single mutual fund, dividends are automatically reinvested.  Obviously I want to be wise with my money that she has generously gifted me with.  The account is through Invesco (any opinions on that?).

To give you some background, my wife and I are currently renting, have never had any debt, and have no retirement savings (I'm 23, she is 21).  I'm thinking about using some of this mutual fund money to set up a Roth IRA.  Is this a good idea?  I'm thinking of funding it with the full amount allowable for 2012 ($5000 I believe), to kick start my retirement savings.  If this is a good idea, would you recommend I stick with Invesco or someone else like Vanguard?

Thanks for any advice and tips, I look forward to replies!

astadt

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Re: Roth IRA from funds invested in mutual fund
« Reply #1 on: May 08, 2012, 04:41:23 AM »
Welcome Parkskier!

Can we get some more information from you about your situation.

What is the fund your are invested in? What about its fees? Ive only heard of Investco so I cant comment on it, my question is is if they are going to charge you any fees for having your account there?

I think a Roth IRA is a good idea, but I think TWO Roth IRAs is an even better Idea! Heres my thoughts. First off, you and your wifey can open Roth IRAs and contribute 5,000. I would recommend you look into opening Vanguard accounts for these (personal preference here of course) and fund those with 10K into money market accounts or short term bond funds.

Than I recommend start reading about investing. After, Sit down with your spouse and come up with your long term/short term goals and aspirations (do you want to be Mustashians?). After you figure your goals you can figure out your risk tolerances and pick appropriate mutual funds for your risk tolerance to make up your Asset Allocation. (Note. If you want to invest in ETFs with Vanguard you will need to open a Brokerage Roth IRA with them vice their Standard Account...I think thats pretty annoying.)

Good luck!


astadt

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Re: Roth IRA from funds invested in mutual fund
« Reply #2 on: May 08, 2012, 04:42:39 AM »
Oh and 11k is a killer Wedding present. Thanks Grandma!

twinge

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Re: Roth IRA from funds invested in mutual fund
« Reply #3 on: May 08, 2012, 05:34:05 AM »
Roth IRAs are great if you're not currently making a high income and are thus in a low tax bracket because you're forgoing a tax deduction now for one in the future.  Another thing to remember is that because contributions can be withdrawn at any time without penalty (except the opportunity cost of not being able to replenish that specific contribution unless you can do it in 60 days) Roth IRAs can be used as a potential source of emergency funds if need be.  When I was younger and had less access to multiple sources of income/credit, I used my Roth as my psychic buffer of an emergency fund rather than having too much cash sitting around.  I never touched it but I knew I could if I needed to. 

As you are beginning your investing process now, it is a good time to think about

*What asset allocation do you want?
* What other cash resources/credit lines do you have for emergencies? Are you considering a portion of your Roth to be your emergency fund?

*What to keep in a tax advantaged fund (like a Roth IRA)? For instance, something like an REIT (Real Estate Investment Trust) are better kept in a tax-advantaged account.  You may not be planning on investing anything in a non-tax advantaged account yet, so this might not be an issue yet, but it should at least be something in your mind down the road.



Due to various employer accounts over the years, I've had funds with Fidelity, TIAA-CREF, ING, Trans-America, Banc of America, Merrill-Lynch etc. and I always voluntarily put my money in Vanguard and roll-over funds there whenever I get the chance.  The fees are usually lower, the analytics are useful and I've used them for 15 years--since my first IRA contribution when I was your age!-- without a single cause for complaint.

parkskier

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Re: Roth IRA from funds invested in mutual fund
« Reply #4 on: May 08, 2012, 11:31:04 AM »
Wow guys, thanks for the wonderful responses.  Let's see if I can give you some more info.

The single fund that the money is in right now is a domestic equity account invested in Invesco Van Kampen Equity and Income Fund -Class A.  The ticker is ACEIX.

I like the idea of opening two roths, but I'm afraid future years' contributions might not reach the $5000 mark (or $10000 with each account) because right now we are relatively low income (household gross around $36000/yr).  Hopefully that will be changing going forward, but this is our current circumstance right now.  We do have about $10000 set aside as an emergency fund (I know there's mixed feelings here about this) that is just sitting in a brink-and-mortar bank's money market earning about .20% interest, I'm playing with the idea of moving that to Ally to at least get a marginally better interest rate, though maybe that could be invested in a roth and it would still be accesible as an emergency fund.

Our main goal right now is to save up enough for a 20% down payment on a house.  As you can probably tell, I know very little about investing, which is why I came to this site and these forums.  Any recommendations for books to read to learn more about investing?

Thanks!

astadt

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Re: Roth IRA from funds invested in mutual fund
« Reply #5 on: May 09, 2012, 01:23:27 AM »
Alright.

Thanks for the info. Even with a low income I'd suggest opening two Roth IRAs. You done HAVE to contribute the maximum each year but should certainly try. Remember your Roth will take post-tax money and it grows tax free, so its great for your situation, starting in a low tax bracket and hopefully ending in a higher one (but that Roth $$ has already been taxed...what a great deal!) The opposite is true for a 401k plan (but also a great way to save)

Basically what you could do would be put the 10k in tomorrow. Than this time next year you can put your 10k emergency fund money in (I would hate to pull out money from a Roth, so consider this an EMERGENCY!! fund). And dont forget to use that extra 1K from Grandmas money as a real emergency fund cushion till you have more savings.

Quick note on your situation. Yeah you've got a lowish income but youre young, have income and have no debt. Compared to your peers youre doing very well. Dont forget to read up. Start with Boggleheads Guide to Investing or the Investment Answer.