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I'm hoping to start a Roth IRA and would appreciate anyone's input. I currently have a 401K plan. My employer does not match, but does provide many fund options, from stable income to high risk. I'm putting most of my payments into the Vanguard S&P 500 fund. But I'd now like to supplement this retirement investment with a Roth IRA. I'm wondering if I should go fairly conservative with the Roth, keeping the 401k plan somewhat higher risk, hoping for greater returns. Or vice- versa. As a Statefarm Internet Bank customer, I'm considering their CD-funded Roth IRA, but it seems their interest rates are kind of low (4% give or take), even for a seemingly "safe" fund. I've another 20 years before I'll be needing the retirment money. I guess my questions boil down to: where is it better to have your higher risk investments, in the pre-tax 401k funds, or the post-tax Roth IRA; and if not Statefarm for a low-risk Roth IRA, then where? Thanks in advance.
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Dollar cost averaging reduces risk.
There is no point in dollar cost averaging in a fund that holds the same price every time you add funds.
Therefore, the high risk fund that is expected to fluctuate in value, is the ideal candidate for dollar cost averaging.

You contribute to your 401k with every paycheck.
You MAY contribute to your Roth throughout the year, or you may put in your annual contribution all at once.

The contribution every paycheck IS dollar cost averaging.

Therefore, choose the riskier investments for the 401k UNLESS you
add to your Roth every paycheck, in which case the fact that you won't be paying taxes on profits from the Roth steers you toward small cap funds or small cap stocks in your Roth.
Best wishes, Chris
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If your employer doesn't contribute to your 401K plan, you would probably be better maxing out a Roth IRA first, then putting any left over retirement savings you can afford in the 401K plan. The Roth is a tax free account forever one you have paid regular taxes on the money you contribute and don't take distributions prior to age 59 1/2.

As for which should be a risker investment, I'm not sure. The Vanguard Index 500 fund though would be a good choice for either one or both.

You can open a Roth virtually anywhere, but directly with a mutual fund company is probably the cheapest.

Good Luck,


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When do you anticipate accessing your Roth IRA? If it is within the next 5 years, a CD may be suitable.

If you anticipate that your Roth IRA and 401(k) are both for retirement and it will be at least 20 years before accessing either one, generally it is good to have the preponderance of those assets in the stock market (stocks or stock funds, such as an S&P500 index fund) because over long periods of time the stock market has historically been the best (most growth) investment. Some people recommend 100% equities except what is needed for the next 5 years, as long as the short-term volatility doesn't spook you. As far as how to divide it up, you can cosndier the 401(k) and Roth IRA as one portfolio if both have the same investment horizon and split it up by whatever makes sense, e.g., making use of the strengths of what is offered in the 401(k) and, if necessary, using the investments in the Roth IRA to help balance the portfolio. If that is not a consideration, I think I would rather have the meatiest growth in the Roth IRA because withdrawals won't get taxed if one follows the rules, but all withdrawals from the 401(k) would be taxed at ordinary income tax rates. That doesn't necessarily mean sector plays in the Roth IRA, but it could mean a diversified small-cap or a diversified mid-cap fund among other investments. But I doubt I would put bonds or bond funds, CDs, or other money equivalences in the Roth IRA unless I was intending to make a withdraw from the Roth in about 5 years or less or I purposely decided to have cash "on the sidelines" with the intent to invest at the "approrpiate" time. (And I personally don't have cash "on the sidelines" unless you count my emergency fund or savings for short-term goals.)
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I read an article once (I think on TMF) in which the author told a story of how he invested a significant portion of his Roth IRA in to a small cap stock, expecting huge, tax free, returns. It subsequently tanked. The thing about IRA's is that you can't make up the losses. However, I'm far from a bear, in fact I'm 100% equities in both my Roth and 401k.

For my Roth I invest in large cap blue chips I expect to beat the market over the long term, since I'm also in the 20+ years to retirement category. So you might consider even that too high of a risk, it's a matter of individual choice.

However, IMHO, I think a CD is not a good investment for your Roth. At 4% you'll be neck and neck with inflation (particularly now), not a good thing. At the very least, I'd go with a index fund.

Also keep in mind that you can re-allocate it as you get closer to retirement (as I plan to do).

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