Expert: Paul Henneman - 2/17/2008

Question
O.K. so I'm new to investing...still in my 20s but I know I need (and want) to save so I can actually retire someday. Ive got a basic 401k at work and have 5% of my income invested there, but it only pays maybe 1-3% with their best "aggressive growth" fund (they do a match though which is why I'm signed up). Ive got other online savings paying between 3-5% for my "emergency funds" (6months living expenses)...but what I really want is to start a Roth IRA and begin investing in stocks.

I fully understand the risks involved and I'm sure I'm ready for it but I just don't have the slightest clue what to do where to begin or anything. I came upon this site and figured maybe someone could help me out. I'm really just looking for a nice simple/easy to use online company that will set up a Roth IRA for me and then allow me to add funds as I wish (electronic transfers from other accounts) and pick the investments/stocks I want.

I'm thinking Roth because I cant be taxed on any earnings I make with the investment and it will really simplify the process...just buy and sell easily with no paperwork or other complicated processes or taxes to figure out. Not that I'm lazy, just new..and the simpler it is the easier it'll be for me to learn. At first I think I might trade every few months or so, I'm a really hands on guy and I need to do this or have someone sitting with me showing me how it all works. I figure the best (and pretty much only) way for me to get into stock and such is this, since I don't have anyone to sit down with me and show me the ropes.

Even if I lost a significant portion of my initial savings, I don't consider it any different than throwing the money at "schools" or whatnot. Id rather be doing and learning than reading and speculating. Ive always been good with my money, I have no debts (just my rent/insurance) and I always shop around for the best prices/values and I also have the discipline to make an investment and keep it. I'm not afraid to lose money or buy when the stocks go "on sale".

So can you help me figure out/setup a Roth IRA that will allow me to trade my own stocks and such? I really need to be able to have a website that I can use as well, to track all the stuff and actually see whats going on. One other question I have that I don't know if you can answer, is how to best take advantage of tax deductions or savings. I don't make very much, and never will, so maximizing every dollar I save will help. From what I understand a Roth is after tax money, but is any of it deductible? Should I keep my 401K at work or can I transfer those funds into the Roth? Does the 401K count towards the maximum deposit with the IRAs (is it 5000$/yr now)?

Sorry for the long rant, but a big thanks for reading it all. And heck, hows about a thanks in advance for any help/tips/info you can offer.

Answer
Rainer,
   Thank you for your question!
   First, congratulations on thinking about your retirement and considering a ROTH IRA. It is perhaps the best thing you can do, you are thinking about this the right way. Keep investing in the 401k to get that company match, and if you can also begin a ROTH IRA, all the better.
    First some general information about a ROTH IRA. For a ROTH, your contributions are typically not tax deductible. That is because the growth of your investments is not taxed at all. This is the main difference between a ROTH and a regular IRA or 401k. In other retirement accounts, you pay income tax when you withdraw the funds when you retire. For those that do not have a retirement account such as a 401k through work, they can generally make a tax deduction for contributions to a standard IRA account each year. But, you cannot do this for a ROTH IRA. This is fine, as the advantage of not paying taxes when you retire on the funds far outweighs this, and you would not qualify for the tax deduction anyway since you have access to a 401k at work.
    The 401k does not count towards the maximum amount allowed to invest in a ROTH or standard IRA. You can still invest up to $5,000 in an IRA account for 2008, regardless of the 401k.
    Finally, how to set up an IRA account? Almost all online trading services offer this. You simply find the page to set up a new account, and during the registration process you should come to an option of what type of account to set up. Both a ROTH IRA and standard IRA should be listed. Thats it, the IRA account then functions like a normal trading account, where you can buy and sell stocks, mutual funds, CD's. or other investments within the IRA account.
   Yes, you can transfer the funds from the 401k to an IRA if you want to. But I recommend shooting higher: Keep the 401k, and make it a goal to invest as much additional as you can in the IRA account.
    I do recommend that you pick up a copy of "Investing for Dummies", available at most major books stores and of course online at www.Amazon.com   It covers these types of investment accounts, and will give you all the details you need to make sure that set up the account properly, and most importantly make the most use of the benefits of such a retirement account.

Here are some services I like to check out regarding where to set up the IRA account:
www.FOLIOfn.com (Cheapest fees out there)
www.Scottrade.com (relatively inexpensive fees, but more research available and better service)
www.TDAmeritrade.com (ok on fees, but the best research and service)

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine Inc