Expert: Paul Henneman - 10/31/2007

Question
QUESTION: Hello,

I am married and have a 13 year old daughter with autism.  I have been working at a large corporation for 6 years and my wife just started working.  I am looking for the best way to invest to have the most money when we retire and also have enough to take care of our daughter.  I am 33 years old.  I have a 401k plan through my work with about $16,000 in it so far. I contribute 6% and my company matches that with another 6%.    My wife is 23 years old and just started working.  She will enroll in the 401k plan at her work.  In addition to the 401k plans, I am leaning towards opening a Roth IRA or IRA.  My wife and I can each open up an IRA with $1,000 each and contribute $200-250 monthly to each.  Does it make sense for my wife and I to open up individual IRA's?  What is the main difference between a Roth IRA and an IRA?  I read about the 11% return but are there any IRA's that actually offer this percentage back? I do not know much about investing but I have learned a great deal just by reading your responses.  Do you think each of us contributing to a 401k and IRA account help achieve a great amount of wealth when we retire?  

Thank yo for your help on this!

Ed and Andrea

ANSWER: Ed and Andrea,
   Thank you for your question! Yes, I think you are definitely going about this the right way. The tax advantages and benefits of your company matching your 401k contributions is too big to ignore. You are right to be investing through your 401k, and for your wife to do the same.
   You are also right that the best way to invest additional funds is through a ROTH IRA or IRA account. There are substantial tax benefits to each. I will try to summarize each one for you.
   First, it is important to understand that an IRA or ROTH IRA is a type of account, but is not an actual investment. You can hold just about any type of investment in a ROTH IRA or IRA account such as stocks, mutual funds, certificate of Deposits or other things. So there is not an 11% return for an IRA, the return will depend upon what type of investments you buy within the IRA or ROTH IRA.
   IRA account: There is a $4,000 maximum investment per year, going up to $5,000 for the year next year. You do not pay any taxes on the IRA investments at the end of each year. This is why IRA's are so nice, no taxes on the profits. That is until you retire. You can withdraw the funds after age 59 and 1/2, and then pay income tax on the amount that you withdraw each year.
   ROTH IRA: Same maximum yearly contribution levels. ROTH's are generally seen as better than IRA's because you do not pay income tax on the withdrawls you make after age 59 and 1/2.
   As to if you should open individual IRA's, not much difference. I would suggest yes, and you could each be responsible for contributing to your own IRA. But, if you do not intend to invest more than $5,000 a year, one combined IRA would do. If you each have your own IRA, you could increase your contributions in the future if you ever wanted to $5,000 each, total $10,000 going into both IRA's.
   Now the question becomes once you set up the IRA's or ROTH IRA's, what do you invest in? Anything you want. Typically I suggest an index mutual fund if you do not know much about investing. Vanguard has ticker symbol VFINX that is an S&P 500 index fund. This fund tracks the S&P500, so your performance will always match this market average. It takes research and dedication to do better than the market on a consistent basis, but it is very possible. If you are interested in this, please do not hesitate to follow up with me as it is a large topic. But I would be happy to get you started.
   One last thing, in case you are wondering how to set up an IRA or ROTH. This can be done at any major online brokerage firm, such as Etrade.com, TDAmeritrade.com, FOLIOfn.com, Scottrade.com, or many others. Visit a few sites, find one that looks easy to use with low fees, and set up a new account. During the set up process it will give you the opportunity to set it up as an IRA or ROTH IRA. There are income limits to a ROTH IRA, I am not exactly sure what they are. If you and your wife together make over $100,000 a year, you should check into what the max income level is to be able to qualify for a ROTH IRA.

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


---------- FOLLOW-UP ----------

QUESTION: Thank you for your reply Paul!

Ok, so I think my wife and I will be opening two Roth IRA's probably through etrade.  As to what to invest in, I will need to research that.  Can my wife and I have the same exact investments in our Roth IRA's? How many actual investments can I have in my ROTH IRA?  Is there an average?  I would like to get to the 11% or more return so I guess I need to play around with different investments to get that type of return?  Do you have any index funds or investments you would recommend? How often do I change investments?  Here is a real dumb question.  when I open up the two Roth IRAs, how do I actually contribute the $250 a month to Etrade?  I do photography on the side so I might just contribute the extra money I make there into the two Roth IRAs.  Are there any negatives to investing in a ROTH IRA?  My wife and I both have excellent credit scores.  Do these scores play any role when it comes to investing or getting the Roth?

thanks so much again for  your help

Ed and Andrea

Answer
Thank you for the follow up question!
Yes, your wife and you can have the same investments in your ROTH IRA's if you wish. However, then your investments would always match, and you lose some opportunity to diversify. Perhaps one ROTH IRA could be more agressive and the other more conservative in nature.
You can have as many investments as you want within the ROTH IRA account. But keep in mind that each investment has fees associated with it. It is good to diversify and have a few different investments, just keep in mind that fees will increase if you go wild and buy dozens of different things.
For your goal of 11% a year, I am happy to say can be achieved very easily. The S&P500 is one of the most recognized and stable stock market indexes in the world. Over time, it has shown on average an 11 to 12% annualized return. Some years are bad, some much better, but over time that is the average. This makes your investing quite simple as you can purchase an index fund that tracks the S&P500 index. There are many, one of the largest and well known is the Vanguard fund with the ticker symbol VFINX.
YOu will need to contribute to each ROTH seperately. There are several ways to contribute to the accounts once they are set up on Etrade. You can mail in a check, wire the funds, or set up an electronic funds transfer to automatically take place each month. Once the transfer is made or Etrade receives the check, your account will show a cash balance for that amount. You then log in, and purchase either more of your current investments with those funds, or purchase a new investment within the IRA account. Etrade has decent customer support, if you have any trouble with this they can help. But, if you are fairly computer literate (for example if you do your banking online), it should not be a problem. Do not be intimidated, these online brokerage services make it fairly simple. And help is just a phone call away.
Unfortunately credit scores do not play any roll in the the IRA or investing in general.

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

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com