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Sweet Rose Ramblings (AKA The Call-Waiting Blog)

A place for my unformed thoughts. Help me sort them out!

Monday, July 14, 2008

IRAs

I need to open an IRA (Individual Retirement Account) and I know almost nothing about them. Also, student loan payments are getting close and I'm clueless. Anyone know finance stuff and want to help me get organized?

1 Comments:

At July 21, 2008 12:09 PM, Blogger ~~Silk said...

I'm surprised no one left a comment here. I bookmarked the entry so I could come back and see what other people said. Wow.

Well, I can offer a little advice on IRAs. Don't go to your bank. They'll try to talk you into CDs (Certificate of Deposit) or money market accounts. Those are miserable for long-term investment.

Go to a large bookstore and look through the financial magazines, like Money. They will often have a section listing mutual funds. Pick one.

I recommend that you select what's called an "index fund". Index funds own the stock tracked by the DOW, or by the S&P 500. You won't make a killing, but your fund will increase exactly the same as the index. Right now the indexes are down, but historically they go up, and while they're down is a good time to buy.

Index funds are also not actively managed, since they have a set list of stocks, so the costs are much lower. Never pay more than .9% annual maintenance. Even that is high. "Load" is the charge to open or close the account ("front load" or "back load".) Look for a "No Load" fund. Most large index funds are no load.

Stocks in a mutual fund pay dividends, which are folded back into your account to buy you more shares in the fund, so you get growth both from increase in value of the stock, and from increased shares.

You'll need to decide whether you want an "old" or a Roth IRA. The old style you deduct your contributions before income tax, and then when you eventually start taking distributions, you pay taxes on what you take out. With a Roth, you pay income tax on the money, then put it in the IRA. When you eventually take distributions from a Roth, they are tax free. There are advantages to both. With the non-Roth, you'll end up paying taxes on the entire earnings of the IRA. With the Roth, the earnings are tax-free.

You can open multiple IRAs, putting a portion of your allowed annual amount in each. Then if you are happier with one than with another, you can transfer any amount from one to another, at any time.

 

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