I'd like to open a Roth IRA account but am not sure about the trading part. As I understand, I can put in up to $2000.00/yr. I may also choose the investments for my Roth. This is where I get lost.I ask Datek about choosing investments for the Roth. They say I can and then can start trading them. What do they mean? This is an IRA. What am I trading and how?Thanks,brettr
The IRA is the formal account. What you hold in it (stocks, bonds, cd's) are what you "trade" so to speak. You have to invest in something in your Roth. You don't just give money and it magically makes more. That is where the "trading" comes in. You will choose your investments.I hope this clarifies somewhat. Let us know if you need further assistance.
I'd like to open a Roth IRA account but am not sure about the trading part. As I understand, I can put in up to $2000.00/yr. I may also choose the investments for my Roth. This is where I get lost.I ask Datek about choosing investments for the Roth. They say I can and then can start trading them. What do they mean? This is an IRA. What am I trading and how?Datek is an online brokerage. They make money when customers trade. In a retirement plan, you don't want to be trading. You invest, and periodically (annually) reallocate those investments, but your IRA is not the place to gamble on some stock tip.You are starting a retirement account for long term investing. You don't have enough money to sufficently diversify by buying individual stocks, and it doesn't sound like trading stocks is what you want to do. You should be looking at investing in mutual funds (a basket of stocks which offers you more diversity than you can afford by trading one stock at a time), and if you're going to invest in mutual funds you should look into a mutual fund provider directly rather than purchasing through another broker. Vanguard & TIAA-CREF are two excellent low cost providers. I believe TIAA-CREF has lowere minimum investments. Visit their sites, read their fund prospectuses, and continue reading the Fool. When you've chosen a good fund (or funds), you can send them a check, and perhaps even set up a periodic investment plan where funds are direct deposited from your paycheck or automatically withdrawn from your checking account.
When you open a Roth IRA at a discount broker like Datek, you get to pick the investments that are put in it. If you don't pick, the money earns a dismal amount of interest. [If you want someone else to pick the investments, you need to open the IRA at a full-service brokerage, but that's REALLY expensive.]Datek, being a discount broker, can't choose investments for you. They can show you ads for various investments, but you have to make the final decision.Datek would love for you to actively switch between investments regularly ("trade them"), since they get a commission each time you switch. But there's little reason to do so. Except for the most skilled professionals, trading tends to reduce your investment returns.The point is no trading happens unless you want it to.You can simplify things a lot by picking an appropriate mutual fund, for which the trading costs are much less, and putting all your money into there.I like a certain type of mutual funds called "index funds". So does the Fool.
Thanks. This clarifies things quite a bit.I won't use this scenario but am curious. If I don't choose any investments and earn the dismal interest, how is it being earned? What is making the IRA earn interest in other words?Will Datek (or whoever) have a list of funds I can choose from? Can they also be single stocks?I like the index idea also. Say Vanguard or some one like that correct?Thanks,brettr
If I don't choose any investments and earn the dismal interest, how is it being earned? What is making the IRA earn interest in other words?Most brokerages have a Money Market account that your funds "sweep" in and out of. **************** Will Datek (or whoever) have a list of funds I can choose from?Yes. But, be careful. You might be charged to contribute to some of them...Vanguard, for example. Many discount brokerages charge a fee each time you buy into Vanguard. This is why "Fools" recommend setting up your IRA directly with the fund company. Remember, an IRA is something you will want to consistantly contribute into. ****************Can they also be single stocks?I'm not sure on this one, but I think so. But I agree with the PM, and jrr, you'd probably be better off with diversified mutual funds. ************** I like the index idea also. Say Vanguard or some one like that correct?Yes, but go back and read PM's post. Vanguard has some great funds, but their fee's aren't really structured for the small investor. For this reason, I myself, chose TIAA-CREF for my Roth. You can look into TCEIX as a core fund. It's an index fund, and has low expenses. Down the line, after you accrue 10k in your account, if you still want to look at Vanguard, you can always roll it over. Otherwise, make sure to call Vanguard and read these boards (specifically the "index funds" board, and the "mutual funds" board) so that you understand the fee structure before you invest. Some people think the fees are worth it to be with Vanguard from the beginning. That's something you have to decide for yourself. One more thing...and I'm sure everyone is sick to death of hearing this from me...but my best recommendation is to read "Mutual Funds for Dummies." This should get you off on the right track. There's also a section on retirement plans in "Personal Finance for Dummies." These are the two books that really made "the penny drop" for me.Good luck and welcome to Fooldom.Caat
Question asked: "If I don't choose any investments and earn the dismal interest, how is it being earned? What is making the IRA earn interest in other words?"My answer: "Most brokerages have a Money Market account that your funds "sweep" in and out of." Retraction: I just called Datek, and their money sweeps go through a "cash account." (Yuk.) They don't have the MMkt account option, and the cash account is now only paying 2.5% to 3%.Caat
If I don't choose any investments and earn the dismal interest, how is it being earned? It may be making short-term loans to other Datek customers who want to borrow money ("credit interest") or it may be making short-term loans to extremely creditworthy corporations ("money market fund/sweep account"). Check the account agreement and application form to be sure.But if you want that, you could just go to a bank (or online bank) and open an IRA.Will Datek (or whoever) have a list of funds I can choose from? Can they also be single stocks?Yes, Datek will have a list of mutual funds from various providers, some of which are no-transaction-fee and some of which have a transaction fee. Datek will also let you use your cash to buy individual stocks, paying a trading fee for each buy or sell.Vanguard is the best-quality index fund provider, but they do have a $10/year fee on small accounts. Your discount broker will sell you Vanguard, but you'll pay a trading fee each time you buy or sell. For the lowest cost way to get Vanguard, open the IRA at Vanguard (they charge $10 a year, but only until you get $5000 in the fund).I went with Vanguard and accepted the $20 a year in fees because I wanted to go with the best. Now I have over $5000 and am only paying $10 a year in fees. In a few years my contributions will bring the account over $10,000 and I won't pay any fees except the 0.28% expense ratio.There are some index funds that don't charge the "account too small" fees -- TIAA-CREF comes to mind.
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