Expert: Paul Henneman - 8/15/2009

Question
I need some advice. My husband and I are 25 and 26 with two children. We would like to get into some investing but still have many questions. My husband is in the army and has the option to invest in a thrift savings plan. I have been doing some research though and read that we wouldn't get a match on our money. I also read about a Roth Ira. I liked the idea that at retirement that would be tax free. My question with that is when would we pay the taxes on it: up front or when we did our tax returns? Also, we are interested in stocks, mutual funds, ETF's,etc. My husband will be getting a raise within the next several months and we would have about $500.00 a month to work with. So what would be your advice for us? I know with only $500 a month it can only go so far, but feel we need to get started sooner than later.We do have a rental property as well that we have some equity in and keep very little debt other than our two mortgages. If I had to choose between a Roth Ira or a TSP which would you recommend? If we split that money up and get into some stocks or something where should we begin? Or could we even split the money three ways and put maybe a $160.00 a piece in a TSP, a Roth Ira, and some stocks? I would really like to get started in at least two of the three. Let me know what you think. Thank you for your time and sorry for so many questions.We just really want to make the best decisions now so we can breath easier later :o)

Answer
Natalie,
  Thank you for your question! Yes, a ROTH IRA is an excellent way to save for retirement.  As you say, there is no tax on the withdrawls from an IRA account when you retire, as long as you are more than 60 years old when you begin to take money out.  You cannot take a tax deduction for the contributions to a ROTH IRA like you can with a standard IRA account each year, so this means that you are contributing 'after tax dollars'. You have already paid income tax on what you contribute, but then your deposits can grow tax free until retirement, and then avoid paying any additional tax when you withdraw. It is one of the best types of retirement accounts available.
  The current maximum amount you can invest into a ROTH IRA is $6,000 per year, so your $500 a month would be the max. However, if you both work, then you can each set up such an account for a maximum of $12,000 per year.
   Focus on the ROTH IRA, no need to split things up. You can buy and sell any type of stock, mutual fund, or ETF within the ROTH IRA account, so this would be very flexible. Unless you plan to spend a great deal of time researching your investments, you probably will be best served to go with general index ETF's or mutual funds that track an overall index. For example, there are ETF's that track the S&P500 index (Ticker symbol SPY is one) perhaps the most suitable index for this purpose. I would also put some of your funds into a bond ETF, this will produce less returns, but also has less risk. Read up a bit on bonds, then select a general bond fund if you find this suitable for you.

I hope that this helps! Congratulations on thinking about this so early in life. $500 a month may not seem like much, but if you invest $500 a month for the next few decades, you can accumulate a million dollars or more in your investment accounts if you account for the returns you will be earning over that long period of time.  Some years will be poor in that you will lose money on  your investments. Keep at it, discipline to keep it going month after month, year after year, decade after decade is the key.

I wish you the best, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com