Originally posted by @David White:
Originally posted by @Billy Rogers:
Put it in an index fund. Avoid ALL managed funds. No fund manager can beat the indexes on a consistent basis.
What is an index fund? And how is it different from a ROTH IRA?
David, you most definitely need to read the book I posted a link to, "Little Book of Common Sense Investing". It's a good place to start.
An index fund is a mutual fund or an ETF that simply tracks an index, like the Dow Jones or the S&P500. There's no manager picking and choosing individual stocks (an "active" fund). It's purely passive.
A Roth IRA is a type of account. There are basically two different types of retirement accounts (not including your 401k). A Traditional IRA and a Roth IRA. Both do the same thing; they shelter your money from taxes. The question is when do they shelter your tax dollars.
A Traditional IRA takes pre-tax income and puts it into a tax-sheltered account, where it grows tax free until you pull the money out during retirement, at which point it's taxed as regular income at whatever tax bracket you're in at the time. You get an immediate benefit up front by reducing your tax burden today. Assume you make $100k, and put away $5500 into your IRA. You've effectively lowered your current tax burden by $5500, so the IRS only considers you having made $94.5k for the year, which is what you'll be taxed at.
A Roth IRA does the same thing, except you pay the taxes up-front, with the "promise" that it'll be available tax-free for withdrawal during your retirement. So if you made $100k this year, and put in $5500 into your Roth IRA, the IRS will still tax you on the full $100k you made.
I put "promise" in quotation marks because I have serious doubt that the Congress of 30 years from now will keep the promises made last decade. The government has already hinted at trying to tax various other tax-havens over the past few years, and I have little doubt that at the rate we're burning through cash Congress of the future will say "yeah, we made a promise, but so sorry... gonna tax you anyways."
A bird in hand is worth two in the bush; I'd rather have my tax benefit today.
Of course, there are always exceptions to the rule. For instance, if you're already in the lowest tax bracket today, it would make sense to put your money into a Roth IRA. But if you're 20% or higher, parking your money into a Traditional IRA makes way more sense.
As to where do you open up a Roth IRA, any brokerage will do. Vanguard, Schwab, TD Ameritrade are great places to start.
However, that being said, you asked about your company sponsored 401k plan. That's a totally separate type of account, although it acts much like a Traditional IRA; money you put into it today will directly reduce your taxable amount during tax time tomorrow. The big difference is that you can contribute something like $18k annually into a 401k plan, while with an IRA (both Traditional and Roth) you're currently limited to $5500 a year.
Also, many employers offer a match, where they'll contribute a certain amount for every dollar you put in, up to a certain limit. Think of it as free money.
Finally, if you're really in love with the Roth idea, check to see if your company offers a Roth 401k. Operates the same way as a regular Roth IRA, but again, larger contribution limit and usually a company match.
But before you do anything else, go to the library or to Amazon and get the book I mentioned. It's an easy read, and it's a great place for you to start learning.
