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Starting an IRA at age 21

Dr. Don TaylorDear Dr. Don,
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

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Dear Laurie,
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.

Depending 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. This 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.

When 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.

The 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.

A 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.

Getting started is the hardest part. Once you've opened the account, it'll be much easier to make contributions in future years. Good luck.

-- Posted: Oct. 15, 2003




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