Author Topic: Where to open Roth IRA? 24 y.o relatively new to investing  (Read 5742 times)

astvilla

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Where to open Roth IRA? 24 y.o relatively new to investing
« on: November 09, 2014, 12:18:33 PM »
I posted before but I'll briefly summarize my situation.

I'm 24, no debt, have about 41k total. $800 in Fidelity 401k, $20k in fidelity account for stock trading, $2750 in Fidelity Roth IRA, $16k in checking account, another $900 in Fidelity checking account. I posted before about purchasing a home but you guys convinced me it's not a good idea and I did some of my own research and I have to agree, it's better if you're raising a family to buy a home and a very unreliable, expensive, risky investment vehicle. So for now, I'm staying at home making roughly $4k/month take home part time and saving up and will probably rent cheap next year cause I have to get outta my house.

So main question is, where should I put the other half of my Roth IRA contribution limit to (the other $2750) ? Open up a Vanguard account? Different brokerages seem to offer different options in trading and fees I'm not sure which is the best. I opened one in Fidelity thinking it would let me be a bit more of an active trader and I thought Vanguard would be good for index fund trading and holding? I can only put up to 5500 though/year. How should I allocate money in Roth or regular trading account? Index funds? bonds? I'm more of a conservative type of investor and I'm not sure I can afford/remain stress free to stay in a volatile stock market.

I'm also currently contributing 30% to 401k but I'm wondering if 401k is really worth it? Seems like a scam way to make $$ off of people's retirement because it traps money for the next 35 years and you're limited in where you can put money. Wouldn't it be better to take as much take home and invest most of it in more flexible vehicles and make more that way, as well as the $$ being more available? I thought people catch up on 401k later in life by contributing more than when younger? Maybe lower my %, I know I'm probably making more contributing but it isn't forcing me to save more as I save pretty much everything already. I'd also like to have $$ in the future for a home purchase as well later years down the road.

Paul der Krake

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #1 on: November 09, 2014, 12:33:08 PM »
Fidelity has low cost index funds. If you already have an account there, I see no reason to open another one elsewhere unless there's a specific fund or type of fund you can't get at Fidelity.

I'm also currently contributing 30% to 401k but I'm wondering if 401k is really worth it? Seems like a scam way to make $$ off of people's retirement because it traps money for the next 35 years and you're limited in where you can put money. Wouldn't it be better to take as much take home and invest most of it in more flexible vehicles and make more that way, as well as the $$ being more available? I thought people catch up on 401k later in life by contributing more than when younger? Maybe lower my %, I know I'm probably making more contributing but it isn't forcing me to save more as I save pretty much everything already. I'd also like to have $$ in the future for a home purchase as well later years down the road.
It's up to you to decide exactly whether the added flexibility outweighs the immediate tax savings. Keep in mind that you will get old eventually, so investing at least some in your 401k is a good idea.

GGNoob

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Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #2 on: November 09, 2014, 01:55:19 PM »
May as well just add more to your Fidelity Roth IRA. You can invest in the low cost Spartan index funds or iShares ETFs commission free.

Keep adding to your 401k. There are ways to get that money out sooner if needed.


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« Last Edit: November 09, 2014, 01:57:43 PM by Logan T »

MrsCoolCat

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #3 on: November 09, 2014, 03:17:11 PM »
I'm interested in what others will tell you. I think now may not be the best time to buy a home but I bought a townhome back in Dec 2010, and it was a short sale. It's now worth approx. $50k more than what I paid for it. I don't have a mortgage. So maybe for most people getting involved in a $200k+ mortgage is not ideal, BUT realistically when someone is losing someone else is gaining. Sadly, someone lost this house. However, ironically enough, I got a home for cheap. We all just have to hope we make good enough decisions where we're gaining and not losing. The house is not for everyone, but for some people it may be well worth it. Sorry, didn't really answer your question. Good luck!
« Last Edit: November 09, 2014, 10:03:35 PM by ChinaChao »

Asclepius

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #4 on: November 09, 2014, 03:28:22 PM »
Have you checked to see if you are still within the tax bracket for 0% tax on long term capital gains and qualified dividends? If you are within that bracket, it makes more sense to invest independent of a retirement account. Sounds like you make a good amount of money so you might be in a higher tax bracket filing individually.

401ks make sense to lower your taxable income. Also if your employer offers a match you are basically earning free money. My employer does not offer a match, but I use mine to keep myself within the 0% captial gains bracket, and also as a psychologically easy way to save money since I never see it to begin with. You should always roll your 401k into a regular IRA when you switch jobs, or if your employer allows an in-service roll-over. You're right, 401ks often restrict you to crappy mutual funds.

You were asking for recommendations about brokerages. Scottrade works well for me. I also use loyal3.com which offers $0 commission trades in a few dozen stocks, many of them being high quality dividend growth stocks. I dropped e-trade since they fine you if you don't make a certain number of trades per quarter, or have a large sum of money invested. Also their fees are kinda high. As far as allocation, obviously the money mustache blog author does pretty well on low cost index funds. I prefer to steer clear of mutual funds all together when possible since they expose you to the full panic of the other humans with ownership in the same mutual fund. I also don't like the idea of paying a fee to a mutual fund mananger for the privilege of owning shares of companies that I could otherwise own outright. Expensive actively managed mutual funds also rarely beat the stock market index. I consider them to be a scam.

My preferred form of investing is to buy shares of strong companies with well known brands, with long track records of regular dividend increases. Consider KO for example. Coca-cola has increased their dividend every year for something like 51 years, and has not missed a dividend in that time. In 2008 when everyone with a 401k saw their life savings in mutual funds get flushed down the toilet, owners of coca-cola continued to receive the same dividend right on through the crisis, because coca-cola continued to be a profitable company. This is because no one in America has ever said "Shit! The stock market is crashing! I have to immediately stop eating junk food, buying gasoline and smoking cigarettes!" People still spend their money on the same garbage they don't need even when the stock market index is down. When you invest for dividends from quality companies, you cease to have anxiety about the volatility of the stock market. The only way you lose money is if Americans stop buying hamburgers tomorrow, which would mean life has become so shitty in America that you would probably not be worried about the value of your investments so much as obtaining guns and ammunition to fight off marauding hoards.

Check out the dividend growth investor blog, dividend mantra blog, and the smart investing show podcast for more about dividend growth investing.
« Last Edit: November 09, 2014, 03:31:28 PM by Asclepius »

astvilla

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #5 on: November 09, 2014, 08:54:56 PM »
Fidelity has low cost index funds. If you already have an account there, I see no reason to open another one elsewhere unless there's a specific fund or type of fund you can't get at Fidelity.

I'm also currently contributing 30% to 401k but I'm wondering if 401k is really worth it? Seems like a scam way to make $$ off of people's retirement because it traps money for the next 35 years and you're limited in where you can put money. Wouldn't it be better to take as much take home and invest most of it in more flexible vehicles and make more that way, as well as the $$ being more available? I thought people catch up on 401k later in life by contributing more than when younger? Maybe lower my %, I know I'm probably making more contributing but it isn't forcing me to save more as I save pretty much everything already. I'd also like to have $$ in the future for a home purchase as well later years down the road.
It's up to you to decide exactly whether the added flexibility outweighs the immediate tax savings. Keep in mind that you will get old eventually, so investing at least some in your 401k is a good idea.

I guess that's the main question is are there better funds offered at other brokerages that are NOT offered at Fidelity? Like Vanguard index funds, I was thinking going into Vanguard Roth IRA?

I will continue 401k contribution just to lower my taxable income. Honestly it seems like a scam and the only safe places for my money in 401k is in the single Vanguard Index fund and money market. Feels like a scam by fidelity to get money off fees. I watched the Retirement Crisis on PBS so I'm pretty leery of these brokerages even though so many of us encourage using them.

gomike

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #6 on: November 09, 2014, 09:02:06 PM »
Yeah I hate Fidelity and their fees, open a ROTH IRA with Vanguard

wtjbatman

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #7 on: November 09, 2014, 09:15:25 PM »
I guess that's the main question is are there better funds offered at other brokerages that are NOT offered at Fidelity? Like Vanguard index funds, I was thinking going into Vanguard Roth IRA?

It sounds like you're trying to talk yourself into opening a Vanguard Roth IRA. If so, go ahead. Maybe the peace of mind will be worth it by itself. But so you know, like the other poster pointed out, Fidelity's Spartan Index funds are just as good as Vanguard's. There are no fees to invest in Fidelity funds or ishares ETFs.

Cwadda

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #8 on: November 09, 2014, 09:36:35 PM »
Maybe consider this also: Contributing to a Traditional IRA to get a tax benefit and then later converting it to a Roth.

Details found here: http://www.madfientist.com/retire-even-earlier/

astvilla

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #9 on: November 09, 2014, 10:02:22 PM »
I'm interested in what others will tell you. I think now may not be the best time to buy a home but I bought a townhome back in Dec 2010, and it was a short sale. It's now worth approx. $50k more than what I paid for it. I don't have a mortgage. So maybe for most people getting involved in a $200k+ mortgage is not ideal, BUT realistically when someone is losing someone else is gaining. Sadly, someone lost this house. However, ironically enough, I got a home for cheap. We all just have to hope we make good enough decisions where we're gaining and not losing. The house is not for everyone, but for some people it may be well worth it. Sorry, didn't really answer your question. Good luck!

I agree with you, it's not a good time to buy a home, I think prices will go down in the future or hold and not change. I'll continue to save, invest, and stay at home in the meantime. It really depends on the property too I guess. And in life, there's winners and losers, when you get a good deal, someone is losing, unless you shop in China where they make you feel like you got a good deal but really they're acting just to make you feel good about yourself! Least when I went there.

Have you checked to see if you are still within the tax bracket for 0% tax on long term capital gains and qualified dividends? If you are within that bracket, it makes more sense to invest independent of a retirement account. Sounds like you make a good amount of money so you might be in a higher tax bracket filing individually.

401ks make sense to lower your taxable income. Also if your employer offers a match you are basically earning free money. My employer does not offer a match, but I use mine to keep myself within the 0% captial gains bracket, and also as a psychologically easy way to save money since I never see it to begin with. You should always roll your 401k into a regular IRA when you switch jobs, or if your employer allows an in-service roll-over. You're right, 401ks often restrict you to crappy mutual funds.

You were asking for recommendations about brokerages. Scottrade works well for me. I also use loyal3.com which offers $0 commission trades in a few dozen stocks, many of them being high quality dividend growth stocks. I dropped e-trade since they fine you if you don't make a certain number of trades per quarter, or have a large sum of money invested. Also their fees are kinda high. As far as allocation, obviously the money mustache blog author does pretty well on low cost index funds. I prefer to steer clear of mutual funds all together when possible since they expose you to the full panic of the other humans with ownership in the same mutual fund. I also don't like the idea of paying a fee to a mutual fund mananger for the privilege of owning shares of companies that I could otherwise own outright. Expensive actively managed mutual funds also rarely beat the stock market index. I consider them to be a scam.

My preferred form of investing is to buy shares of strong companies with well known brands, with long track records of regular dividend increases. Consider KO for example. Coca-cola has increased their dividend every year for something like 51 years, and has not missed a dividend in that time. In 2008 when everyone with a 401k saw their life savings in mutual funds get flushed down the toilet, owners of coca-cola continued to receive the same dividend right on through the crisis, because coca-cola continued to be a profitable company. This is because no one in America has ever said "Shit! The stock market is crashing! I have to immediately stop eating junk food, buying gasoline and smoking cigarettes!" People still spend their money on the same garbage they don't need even when the stock market index is down. When you invest for dividends from quality companies, you cease to have anxiety about the volatility of the stock market. The only way you lose money is if Americans stop buying hamburgers tomorrow, which would mean life has become so shitty in America that you would probably not be worried about the value of your investments so much as obtaining guns and ammunition to fight off marauding hoards.

Check out the dividend growth investor blog, dividend mantra blog, and the smart investing show podcast for more about dividend growth investing.

I like this approach, reminds me of a comment I saw on a news site. The stock market is a bunch of men in suits and gold watches banging on the table shouting "Buy! Buy!" And then 1 guy starts selling "Sell?" "sell! sell!" and it spreads, which is why mutual funds are not reliable and subject to panic. It's also like buying a lotto ticket and letting some manager who drinks and parties all the time to manage your money w/out you knowing how it's being managed! Sounds crazy but millions do it!

Any suggestion Asclepius as to good companies with good dividends? Like 5% dividend and 10X trailing earnings?



wtjbatman

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #10 on: November 10, 2014, 05:33:56 AM »

Any suggestion Asclepius as to good companies with good dividends? Like 5% dividend and 10X trailing earnings?

Don't do DGI. Why would I say that, when I believe in it? Because DGI is not nearly as passive and easy as investing in index funds, and if you need to ask someone on these forums for what dividend stocks to invest in (and your criteria is 5% dividend (yield) and 10x trailing earnings... yikes), you're not ready.

I suggest you stick with index fund investing for now (Fidelity or Vanguard, doesn't matter, just pick the passive low cost index funds at either service). While you're saving and investing in index funds, begin reading about DGI, and eventually you can decide whether that's an appropriate way for you to invest or not.

That's just my opinion, it's your money :)

astvilla

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #11 on: November 10, 2014, 06:55:55 AM »
Don't do DGI. Why would I say that, when I believe in it? Because DGI is not nearly as passive and easy as investing in index funds, and if you need to ask someone on these forums for what dividend stocks to invest in (and your criteria is 5% dividend (yield) and 10x trailing earnings... yikes), you're not ready.

I suggest you stick with index fund investing for now (Fidelity or Vanguard, doesn't matter, just pick the passive low cost index funds at either service). While you're saving and investing in index funds, begin reading about DGI, and eventually you can decide whether that's an appropriate way for you to invest or not.

That's just my opinion, it's your money :)

So DGI is a whole other ball game huh? I guess I have some reading to do. I assumed DGI was pretty passive compared to active trading because you're just holding the stock to get the dividend and you have to hold for a certain period, generally long-term.

Asclepius

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #12 on: November 11, 2014, 09:13:54 PM »
I think it certainly depends on your comfort level. The Money Mustache blog owner sounds like he does very well with index funds. Within my 401k I am limited to mutual funds, and so I use low cost index funds in that venue.

I began experimenting with dividend growth investing after hearing mike wren's podcast. His words just made sense to me. I have begun to enjoy learning about companies and picking appropriate dividend growth stocks. If a person did not have the time or desire to spend time analyzing companies, learning about good business practices, and what all the numbers surrounding stocks mean (P/E, payout ratio, yield, etc), then that person would most certainly be better served by putting their money into an index fund. 

I typically look for a company with a solid history of regular dividend payments, and frequent dividend increases. The company needs to have a P/E under 20, a yield above 2%, good growth history and growth potential, and a reasonable payout ratio. I also read a bit about the CEO. I look for a CEO who is stable and has a strong background in managing successful businesses.

You mentioned a yield of >5%. That is not always desirable. AT&T, for example, has a yield above 5%, but their most recent dividend increases have been below the rate of inflation. While they are still a good company, my money might not grow as fast with them as other companies. A company with a lower current yield but a culture of regular dividend increases will likely continue raising their dividend for many years to come, growing my money with time. If you hold those stocks and reinvest dividends for a period of decades, you may at some point even begin earning more money per year than you initially invested.

When I invest for dividends, all anxiety about a stock market crash ceases to exist. The best thing that could ever happen to me would be for people to panic and cause stock prices to tank. I could then load up on awesome dividend growth stocks at a discounted price. Those companies would continue to remain profitable, and continue to pay ever increasing dividends. No person ever checks the price of the stock market before choosing whether or not to use their food stamps to buy sodas and pizzas. It is irrelevant to consumer spending.

If you want to give dividend growth investing a try, loyal3 is a great platform to use because they don't charge any commission fees. You can only invest in a few dozen stocks through them, but quite a few of those stocks are good dividend growth stocks. You can start out investing as little as $10 at a time, so won't be a huge deal if you make a few mistakes as you get started (fractional shares are purchased in whole dollar amounts, in batch purchases placed twice a day, so there is no way to try to time the market with that platform).

« Last Edit: November 11, 2014, 09:19:00 PM by Asclepius »

DavidAnnArbor

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #13 on: November 12, 2014, 12:09:31 AM »
What an interesting variety of questions you're asking about how to invest your money for the long-term. 
A Roth IRA is a great way to save money that will grow a lot, and that when you withdraw from it, anytime after age 59.5 it is all tax free. You can withdraw your initial investment before age 59.5 without any tax penalty.
The Roth can be with Vanguard, Fidelity or a brokerage like TD Ameritrade.  You can move your Roth from one to another, from your Fidelity to Vanguard, or to TD Ameritrade, Scottrade, etc.
You can choose to invest in passively managed index funds, or you can get individual stocks, or bonds, or exchange traded funds.
Vanguard and Fidelity both have brokerage account options where you can trade stocks or ETF's, but Vanguard and Fidelity are better known for the no-load mutual funds that they offer you.
You discussed a desire to get stocks paying high dividend yields. So one way a company can reward shareholders is by giving away accumulated cash to shareholders in the form of dividends. Or the company can hold onto the cash, like Apple, and the price of the stock goes up from when you bought it.
If you are going to save money in your Roth IRA there's no advantage to having dividends because any kinds of income from your investments such as dividends or capital gains will not be taxed. Qualified dividends are sought after by retired people or rich people who wish to pay lower tax rates for that source of income. That's why Warren Buffett said he was paying a lower tax rate than his secretary.
Someone mentioned that if you are in a low tax bracket your investments don't have to be in a tax-advantaged retirement account (your Roth, 401k) because you will pay no taxes on capital gains. That's fine for now if your income is lower, but you're 24 years old. You may end up getting a high-paying job at some point, and then you would have to pay capital gains taxes on your investments. Also if your take home pay is $4,000 a month then you are in the 25% tax bracket and you would have to pay taxes on dividend and capital gain income.
So I recommend you continue to invest in your 401k and your Roth IRA. Does your company match some of the money you put into the 401k?
Figuring out which companies are going to outperform, which stocks will give you the best dividends, and when to jump into and out of the market are impossible to figure out. For one thing people with advanced degrees in Finance/Accounting who understand the financial statement jargon of publicly traded companies are still unable to beat the return of the low cost Total Stock Market Index Funds that are offered by both Fidelity and Vanguard.  Secondly, a lot of the chief executives of companies have ways of manipulating revenues, expenses, and thereby affecting the stock prices, that it makes relying on the financial statements not a good idea. You could pick the wrong company.  Rather, it makes more sense to spread the risk of stock ownership over the thousands of companies represented in a total stock market index fund, whereby your success is based on economic trends.

The disadvantage of splitting your Roth contribution between Fidelity and Vanguard is that if you have a low amount of money invested with them, then they will charge you certain fees.  Once you reach a threshold amount the fees are removed.  At least that's the way it used to be.  If that's no longer the case then by all means put some money with Vanguard, that's what I use.

Finally, in terms of when to go into the stock market, it's hard to time that. You can choose to do something called dollar cost averaging, whereby you will put $500 a month automatically into a Total Stock Market Index Spartan Fund in Fidelity, until you reach the $5500 you can invest for Roth 2014.
And the choice on how to allocate your investments should be based on a model that you have chosen and will stick with. Younger people tend to go with a higher percentage in stocks versus bonds/cash.  So you can be in 70% stocks, 30% bonds as one example.

So your money in the Fidelity brokerage trading account, Roth, and 401k is your money for the long-term. The trading account money you can withdraw at any time without tax penalty. If you're planning to retire before 59.5, then that is the money you would presumably use to live off of.

Your asset allocation for this which amounts to about $23,550 to which you plan to add another $2750 to the Roth brings you to $26,300. 70% of that could be in a total stock market index fund, 30% of the rest could be in a total bond market index fund.

The other $16,900 is your emergency fund and can also be the beginning of the savings for your down payment to buy a home.  That should remain in cash and not be invested because you don't want to run the risk of losing it in the volatile stock market.

el_beardo

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #14 on: November 13, 2014, 09:42:49 PM »
Quote
If you are going to save money in your Roth IRA there's no advantage to having dividends because any kinds of income from your investments such as dividends or capital gains will not be taxed.

I don't understand this - don't you get the benefit of not paying income tax on the dividends inside a Roth IRA ?

Bbqmustache

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Re: Where to open Roth IRA? 24 y.o relatively new to investing
« Reply #15 on: November 14, 2014, 01:47:20 AM »
Quote
If you are going to save money in your Roth IRA there's no advantage to having dividends because any kinds of income from your investments such as dividends or capital gains will not be taxed.

I don't understand this - don't you get the benefit of not paying income tax on the dividends inside a Roth IRA ?

If the growth in your Roth IRA will be coming out tax-free, it does not matter if that growth came from gains or dividends.  Neither will be taxed!  Sorry to just re-state what El-Beardo said, but it is no simpler than that!