Expert: Paul Henneman - 12/12/2006

Question
GEE, GREAT ADVICE. THANKS SO MUCH.
So after reading everything you wrote. I think it is best that I save atleast $1-2000 before i put my whole $500.00 savings into this IRA?

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The text above is a follow-up to ...

-----Question-----
So, I am 27 and in the past year I have been reading personal finance books. I would like to say more money. Since I am a consultant (temp job), I don't make a lot of money nor does my job offer 401k.  I currently have $500.00 in my ING direct but haven't added anything in the last 3 months. So, my next step was to open an IRA. However I am just confused about where. I know about Fidelity and Vanguard...but there is also TROWE (probaly spelled wrong) and its an brokerage acct.
So my question is there any different between TROW and Fidelity. I was thinking since Trowe was a brokerage accnt, how could it be a IRA all at the same time. If you dont think opening an IRA is good for someone planning to leave their job in a few months or makes about 23000 a year, can you offer any other ways I can save. I think my main concern is openign an IRA now and loose a job and my money would fold.
any info on where i can start would be appreciated.
thanks
-----Answer-----
KG,
  Thank you for your question! The quick answer is absolutel yes, you should definitely open your IRA account. Here are some more specifics about IRA's:

IRA (Individual Retirement Account) is an account structure where you can place investments. An IRA account is not an investment in itself, you must select stocks, mutual funds, cd's, or other investments to place into your IRA account once it is set up.

You can set up the IRA account structure at any brokerage firm. The two you mention are both good institutions. Some of the ones I like that have very low fees are www.Scottrade.com and www.FOLIOfn.com  You could turn your TRowe account into an IRA. You would probably have to contact them to set up the IRA account, then transfer the funds from your other account into the IRA.

IRA's are not connected to your place of work in any way. This means that it will have no effect on your IRA if you lose your job for any reason, or switch to a new position. The only affect would of course be your income and how much you would be able to contribute to your IRA account. Your money would not fold in any way.

There is no required contribution. You could open the account with what you have currently, and if you lose your job, simply stop making contributions until your income is back to a point where it is possible.

Investments that are in an IRA account grow tax free. You must pay taxes on profits made for most investments. This is not true for IRA's, your investments will not be taxable until you retire, this is very good.

There is a maximum contribution of $4,000 per year for IRA accounts. This can change from time to time, but that is the current maximum.

If your work does not offer a 401k, the contributions you make to your IRA each year are tax deductible. There is a line on the tax forms for this, and it means that your tax refund each year will increase. More money to put into your retirement account!

It is important that you start now, even if your job is not secure. Interest adds up over time, so even very modest contributions now will become worth much more the longer the period of time the investments have to work. For example, if you start with your $500, invest an additional $100 a month, and have some general Index mutual funds in your IRA that get the market average 10% return per year, after 40 years (when you are 67), you will have just over $650,000 in the account! But if you wait just 10 years before you start this, and begin your investments when you are 37 instead of 27, the amount you would have drops to $230,000. Of course the more you contribute, the more this number grows. If you can Contribute $150 a month for the next 40 years, you would retire at 67 years of age with a million dollars. You are young enough that if you start now, you can truly see good results.

One last thing: There is something called a ROTH IRA account. This is very similar to an IRA account, but has even better tax advantages. I would strongly suggest that you set up your account as a Roth IRA.

This sort of retirement planning takes discipline and patience. Years will pass and it will seem like your retirement funds are growing very slowly. That is how interest works, as it compounds over time the effects become greater.

I hope this helps. I can't stress enough how strongly I feel that you should establish your IRA account now, and contribute what you can. But also be warned that while you can withdraw funds from your IRA account if you really need to, there are very stiff penalties. So you should always have a month or two of expenses in your bank account, and leave yourself enough to pay the bills and provide for some enjoyment.

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  

Answer
Thank you for the follow up!
yes, I do think that you should be certain you will not need your funds before you invest in the IRA. I would be good to have one or two thousand saved for emergencies and unexpected expenses. You could get there pretty quickly if you begin a monthly budget where you save perhaps $100 a month. You already have $500, so in just five months you could be up to $1000.
An excellent place to keep these savings is a money market account. This is basically a savings account that pays you a small amount of interest on the balance. You have full access, just like a savings account. My favorite money market account service is through www.NetBank.com  They have the highest interest payment, so your savings will grow very slowly over time, and just about no fees. Once you reach one or two thousand in your money market account, you could begin your IRA or Roth IRA account.
I hope 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
www.ValuEngine.com