Starting an IRA at
I am 21 and would like to open an IRA.
What is the best percentage of mutual funds and stocks for my IRA to contain just
starting out? -- Laurie Layaside
It's great that you're ready to start putting aside money in
an IRA account to save for your future. It's hard to make retirement savings a
priority in your twenties, but by doing so it becomes a lot easier to reach your
financial goals for retirement. IRS
Publication 590, Individual Retirement Arrangements, has all the details
on whether you qualify to invest in an IRA account.
on your tax bracket, it may make more sense to put this money in a Roth IRA vs.
a traditional IRA. In general, the lower your current tax bracket, the more sense
it makes to use a Roth IRA account. That's because Roth IRAs are funded with after-tax
dollars, but qualified distributions out of the account are free of federal taxation.
Bankrate feature has more about Roth IRAs.
There are a
lot of options as to where you open an IRA account. You can open a bank account,
a brokerage account or an account with a mutual fund firm. If you change your
mind later, you can move the account to a new provider.
you're just starting to invest, it's really important to be aware of the account's
annual expenses and fees. For example, if you split the account between three
mutual funds and each of those funds charges a $30 annual fee, then you've spent
$90. If you open a brokerage account and own shares of stock that you trade frequently,
then the trading costs become important.
In general, I think
when you're just starting out, you should concentrate your investment in diversified
funds vs. diversifying your investments in concentrated funds. A no-load mutual
fund that invests in a broadly based stock index is a great place to start out
investing your traditional or Roth IRA account. Exchange Traded Funds (ETFs) are
another way to accomplish diversification. Indexfunds.com
provides a primer on index and ETF investing.
If you're uncomfortable
investing 100 percent in stocks, then you can look at a hybrid mutual fund that
invests in stocks and bonds. Keep an eye on annual expense ratios and account
fees. I'd suggest contacting a no-load mutual fund directly vs. buying mutual
funds through a brokerage account. You can use Morningstar's
Mutual Fund Screener to shop for no-load mutual funds.
longer your investment horizon, the more willing you should be to invest a higher
percentage of your money in stocks. If this is retirement money, then your investment
horizon is long enough that putting 100 percent of your first year's contribution
to an IRA account in stocks isn't a problem. If you're funding the account with
the idea that you'll withdraw money in a couple of years using the account's "first
time home buyer" provisions, then you'll want to be more conservative in
your investing and consider the hybrid mutual fund or CDs.
brokerage account to trade stocks can come later, after you've accumulated enough
assets and are willing to take on some speculative risks by investing in individual
stocks. An investment in CDs can provide security and peace of mind, but isn't
likely to give you the growth needed to meet your goals in retirement.
started is the hardest part. Once you've opened the account, it'll be much easier
to make contributions in future years. Good luck.