Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

When to open a Roth IRA

Dear Dr. Don,
I am 25 years old. My question is, would it be a good idea for me to open a Roth IRA and how much would I have to put into it to open it? Also, I have a rocky credit history and would like to do some smart investing to help with my credit. Any help would be greatly appreciated.
Thank you,
Katherine Credit

Dear Katherine,
Credit and investing aren't one and the same, although how much you have invested certainly does influence your need for credit. Pay your bills on time and, with time, your credit history will improve dramatically. What's critical to this process is to ensure that your spending doesn't exceed your income. That's doubly true when you realize that you need to spend less than you make to be able to invest, whether the investing takes place in an IRA or some other type of account.

Roth IRAs, unlike traditional IRAs, are funded with after-tax dollars. The attraction is that qualified distributions out of a Roth IRA are free of federal taxation. A traditional IRA offers tax-deferred investments, but qualified distributions are subject to federal income taxes.

If you're currently in a low income tax bracket, then the tax deferral provision isn't as attractive as the ability to have tax-free distributions later, while someone in a higher tax bracket may find the deferral aspect of a traditional IRA to be more attractive because they expect to be in a lower tax bracket in retirement.

Most IRA and Roth IRA accounts have low initial investment requirements since annual contributions are capped at a few thousand dollars. (Bankrate has more on annual contribution limits.)

Since you have until April 15, 2004, to fund the account this tax year, you can accumulate the minimum investment in a savings account, ideally through automatic transfers from your checking account. Set a goal for this year and determine the amount of your weekly, biweekly or monthly transfer.

This approach will give you some time to decide where you want to open an account. My preference would be for a no-load mutual fund with low annual expense ratios. An indexed stock fund or a balanced fund that invests in both stocks and bonds is a good place to start.