Need some IRA advice

I dont currently have a IRA. I switched jobs a couple years ago and this is the year I get paid out of what I had vested in the old job. The way I understand it my two options are cash it out, or roll it into a IRA. My current job doesnt leave me a lot of extra to put into retirement so I dont know if it is worth opening one or not.

I hope to buy a house in the next year or two and that money would make a good hit in a down payment, just not real keen on giving a big chunk to the taxman.

My biggest hesitation on the IRA is that I know nothing about them (finances of all sorts for that matter). I dont know who to go to, or which companys are any good.


Any advice??

You will get varied opinions and strategies. But your questions are sound. Good for you for digging into it.

First rollover your existing IRA/401K into a new one- that is a no-brainer. Unless you're 59 and 1/2 you'll pay about 40% in taxes while throwing away your retirement if that is your only IRA.

Second, rollover that IRA with a fee based adviser/financial planner who will only invests in varied no-load funds. The keys in my second point are "fee based", which means they charge a small percentage of the value of your account for doing your investing. Everybody will charge you (some many different ways), but this method of charging puts you and them on the same side of the table. The only way they can shake more money out of you is to make the value of your account rise- that's a good thing. Unfortunately there are many places and people who would rather sell you funds and financial products they make a commission on- just like a car salesman (no offense to the car salespeople out there), and they often are not very sound investments. Try to find a "financial planner" as opposed to just a broker. A financial planner (although there are a lot of great brokers too, and some people are both) has a legal fiduciary duty to make investments for you that are appropriate and sound for your situation- in other words, have your best interest in mind. You should not be holding individual stocks and bonds- you will be investing in "mutual funds" which pool money together to invest in tens or even hundreds of different things. This creates diversification to protect you from losing all your money when a company or two goes out of business or the price of a commodity drops. Lastly, a load is a fee you pay to a mutual fund company just for the privilege of purchasing shares of their fund. Avoid funds with front or rear-end loads. Hopefully you find a good financial planner- they will create an investment strategy for you based upon how much you need to retire while taking into account your overall life situation. Note- no one fund company holds the keys to all of the best funds in every sector. You should probably end up with an IRA portfolio containing 4-7 different "no-load funds" from at least 3 or 4 different mutual fund companies.

ETA- I assume your current company does not offer a 401K. If they do and they have a company match- that is up to a point they will match every dollar you put into it you HAVE to take the free money and put in at least whatever it takes to get it.

Third, lock yourself into a low fixed rate 30 year loan as soon as you can. Never again will you be able to borrow money as cheap as it is right now, the elevator is at the bottom floor. Nobody knows exactly when it will go up, but there is only one place for it to go, so take full advantage of that. You can always make extra payments to pay it off early- plus the lower monthly payment will allow you to fully fund your retirement. You would be amazed at what you might find you are spending money on when you put it on paper. Your properly invested IRA will grow more money than the interest savings. Taking a 15 year fixed rate loan and not fully funding your retirement will give you a good feeling when your house paid off, but you will have lost a massive amount of money that could have been compounding over time in the IRA. Make sure it is a fixed rate- not a variable rate loan.

Keep putting money into it. Figure yearly amounts for everything you buy. I'm sure you'll find a thing or two you'll look at and say "yep- that's gotta go". Combine house and cell phone, lose big cable package, cigarettes, lottery tickets, soda pop, eating out, the list goes on and on. That's where you need to find the extra cash every week to keep putting into your new IRA or 401K. I don't believe in budgets as nobody ever follows them- they seem eerily like New Years resolutions to me. Remember- not only do you get a tax advantage for doing it, but you have to pay yourself and your family first. I do not want to have to depend on the government when I retire for my existence, so my plan is to assume Social Security will not be there. If it is- great, it will be just gravy- but for some that are not asking questions like you, well it's gonna be rough.

Maybe a post in your hometown forum would yield something from someone who has had a good experience. After you get familiar (if you like) www.morningstar.com will tell you everything you need to know about the actual investments, but without knowing the lingo, the investment vehicles, and asset allocation it will take some time to see the big picture as there is a lot of data there.

I've bolded a few things you may want to investigate and learn more about. Also, in this forum there are many good books that have been recommended for people new to investing.

Good luck in your quest- but when you get it all dialed in "luck" will have nothing to do with a comfortable retirement.

GoGo

If you don't roll the funds over into an IRA or other tax-deferred account, you will pay a hefty tax bill. If you are under some time constraints to make a decision, open an IRA account at your local credit union or bank. Roll the funds over to this new account, and invest it into their money market account. You'll get .000000001% interest while you take the time to speak with financial advisors and planners about your long term goals.

Then, when you are comfortable with your new long term plan, you can roll the funds (tax free) into another account if necessary and begin to implement your plan.

You may be able to roll it into your current employer's tax advantaged retirement plan. I rolled my 401k from my old employer into my 401k from my new employer. There were several reasons why I did that rather than an IRA, asset protection, required withdrawals among them.

My current employer has no retirement whatsoever

Contact Vanguard and start educating yourself about personal finance any way you can. I suggest looking for a community college or organization which teaches it.

Good advice if he wants to learn, but will settle for "index" and mediocre funds. Should he want to learn it will take a while- then go with a Schwab account. See my note above on one company not having a lock on all the good funds. With some knowledge even a novice can pick better funds with all that are available with Schwab. Vanguard isn't bad- they have a couple decent ones, especially when juxtaposed against falling prey to a salesman and getting stuck into something like an annuity. If he's going to learn- maximize his returns and go with Schwab, but I get the feeling (could be wrong) a fee based pro is in order here. We go to the best doctor when were sick, a trained mechanic to fix our car, why not go to a pro to make sure something as important as your retirement is safe?

The thing is the pros can't beat the market. Better to stick with index funds and shovel as much money into them as possible.

Sorry- you are wrong. Regularly fund managers beat the index.

My statement is a matter of public record. If I founded Vanguard I'd lie to you as well. I do not intend to argue with you. You are incorrect on the point an active fund manager never beats the index. www.morningstar.com

ETA: I have to say this bugs me a bit. Go to Morningstar, punch in a Vanguard Ticker and see where it rates for trailing returns over similar no-load funds for ANY time horizon. Jeeesh!!!!!!!!!!! Again, Vanguard isn't awful- I manage a Vanguard exclusive account for someone else (not my profession however), but there are certainly considerable returns to be had when one is more familiar with the actual fund managers who have proven they beat the index in good times and bad.

Bogle had been saying that you can't beat the market 25ish years before he founded Vanguard or even started working in the financial industry. One of the reasons is that active fund managers usually take 80% of an investors profits for themselves. There is no reason to let brokers and managers, who I usually refer to as thieves, take most of your hard earned money and profits when you can do just as well by buying the whole damn market through a place like vanguard. They don't rape an investor with fees and loads.

Your advice of puchasing individual stock is just plain crazy. Enron? Fannie Mae? GM? Come on. Let me help you. As a fund increases in monetary value the fund manager is not allowed to "put too many eggs in one basket". Ergo, the fund manager has to invest in funds which are his second and third and fourth picks. This detracts from the funds yield. Smaller funds with sharp managers with a proven track record can give the investor much better returns because of this. Your other reference to "thieves" is addressed in my initial advice above- please read it again. That fear of yours is real, but taking my above advice cures that. Really, I enjoy reading your posts and appreciate you being here, but I think you have a little ways more to go before suggesting how someone should invest for the long term. Please do not take that as an insult.

http://www.people.hbs.edu/dbergstresser/dbjchpt.pdf



(btw, the author [D. Bergstresser] is not an idiot on the staff of Money magazine. he is a professor at Harvard Business School, has a PhD in economics from MIT, and an undergraduate engineering degree from Stanford University. )

ar-jedi

Roll to a conventional IRA. The advice about getting a 30 year mortgage is correct. Rates are at a significant low right now. You can always make an extra payment if you want to. Assets tied up as equity in a home are dead assets. They are not making money for you. The value of the house can stay the same, go up (which happens if the house is paid off or not) or the value can go down like it is in many many areas of the country.

Once you have your IRA, then put your money into differing investments. Do not go all in to one type or fund. Spead it across 5 to 7 different funds ranging from bond to foreign investment mutual funds. Also invest in domestic large and small cap funds. If you don't know what these are, pick up some books or read about them online. Research about your money. You spend time learning about other things in life. This should warrant some study time.

I dont know what they are. I literally know nothing about finance/investment.

It just seems overwhelming sometimes. Where do I start educating myself?

Purchasing individual stock is not crazy. It is a valid and profitable way to invest a portion of your overall investment money.

Find a community college and take a personal finance course. It is the single most important thing you can do as an adult.

don't try to drink the entire whiskey keg at once. it's better at the rate of a glass per day.

Graham, "The Intelligent Investor"
Bernstein, "The Four Pillars of Investing"
Larimore et al, "The Bogleheads Guide to Investing"
Ferri, "All About Asset Allocation"

these are not math books, and you can get them for about $40-$50 total at Amazon. they are not get-rich-quick manuals; they teach fundamental investing basics, instruct on on a methodology called asset allocation, and will provide you with a basis for long term investing. do not get your investment information from a magazine stand nor the TV, these approaches are the primary problems in successful long term investing. most investment periodicals are saturated with "10 Funds you must buy NOW" type articles –– not time-proven lifecycle approaches to successful investing. the TV is worse.

if you read and understand those four books above you will be ahead of 99.9% of folks in terms of long term investment knowledge. again, these are not "technical" books –– they explain in straightforward terms how to create an investment strategy that works for you. these books do not offer get-rich-quick schemes, they do not advise on real estate speculation, and they definitely don't guide you into currency trading. what they do is educate you on various investment fundamentals, including risk-vs-reward, portfolio composition, lifecycle investing, and appropriate long term, low cost investment vehicles.

important note:
there are many approaches to investing in equity and bond markets. there is not one "right" way to do it, and how you approach long term investing is a matter of your current finances, risk tolerance, timeframe, time available for research, tax situation, and other factors.

see also
http://www.bogleheads.org/readbooks.htm
and
morningstar compendium
note that the link above includes two "free" web-based online books.

one thing that you will come to understand is the cyclical nature of markets. take a look at the following,
http://www.callan.com/research/download/?file=periodic%2ffree%2f457.pdf
you see that one investment type does not (and can not) always "win" –– that is, outperform. once you understand this, you can begin to determine your asset allocation strategy that not only is diversified but it shape-shifts over time via a process called rebalancing. you will only need to rebalance once or twice a year, it's not as complicated as it sounds.

ar-jedi

Unless you have a lot money (read that in millions)- you simply cannot have yourself properly diversified in an appropriate asset allocation. Plain and simple as ar-jedi says. You might have made 1.5 million (sure me too in hindsight)- but the funny thing is, even the pros can't do that- otherwise they all would be rich. What the skilled pros do is create a strategy to beat the index while protecting you from losing your shorts. A game plan to be adhered to with the individual investors attitude taken into account. If someone is happy monkeying with the sliders/screener at Vanguard and thinks that's the best- hey good for them. If someone wants to convert their IRA to a 100% gold IRA right now- hey good for them (the government will be there later for sure to take care of them). It's my assumption we want to be as rich as we can when we retire, but surely some may not be comfortable or have the investment "stomach" to deal with the ups and downs along the way to getting the most out of a long-term investment.

Great point, although I can drive 25 minutes south, or north to two major universities with many PhD professors proving global warming (and even crazier stuff). Remember they are lumping the sharks in with the honest people, the good in with the bad. It's almost like an "index" of brokers!! Hence my point to find a skilled one- you'll beat the rest. Notice in your snip it says the "funds" purchased do no better, why- because they were sold for a commission and not the investors best interest in mind. Comparing a group of people who are interested and have learned at least a bit who invested in funds directly to all brokers many of whom do not pick the best funds for their client, well that's no surprise. Further it talks about a lack of being able to time the market. Scary- nobody should be trying to time the market. Instead of timing the market one would be best served to protect oneself by having eggs in many baskets- there's that diversification thing again. Without doing it yourself the original way I describe in my original post is the best way to do it and avoid getting preyed upon. If you can filter thru that article there is some value to be had there. I feel your point is great for those who want to delve into it that deep- I like to myself as I really enjoy it. If the OP does too it will take some time. It is certainly safe to say a lot of people put this type of thing off far too long- and then it's too late. Some try at first and make wild rookie mistakes. It will take some time for someone green to learn and for example not react to the market on a daily basis. What if he started a self-managed IRA with ETF's and then began selling on gut feelings when they drop, and further losing when they gain it back and more. For example I have a co-worker who brags about his fund picking skills within our company 401K. He has everything in two funds. One is an extremely perma-volatile sector fund with a name that alludes to the oil industry. He has 70% in that fund alone- the other in emerging markets. No U.S. stock, no core funds, no bond funds (for his age he should start getting into them). Very sharp guy, very pleasant guy, but his thinking is "gas is going up, so this fund should make me the most money". I simply smiled and changed the topic. He's gonna find out the hard way. If you do not know how to do it a fee based adviser would be best, but by all means if one has the free time to educate oneself that's cool. In the OP's first post he asked where to go- not where to learn. Should he want to get good enough to bet his retirement on it- good for him. Bottom line, I'd like to see all of us here make the most of things as I have a high opinion of the folks around here.

1. Anybody who recommends to a complete novice to buy individual stocks is doing a disservice. I find it hard enough to narrow down mutual funds. Investing in individual stocks requires some degree of training/experience, and STILL resembles gambling. I really wished I had some free money to throw at Xybernaut about 10 years ago. Very high-tech wearable computers. They were trading at like $1 at the time. Rather than hit it off (or be acquired by IBM, which they thought was likely), they went bankrupt and the execs are under indictment. That COULD have been a very lucrative investment. If you go with the one-off stock tips from someone who knows someone...well, you will lose your tail.
2. Learning to diversify is more than about types of investments. For example, I tend to favor specific types of mutual funds. I am 37, my wife and I are both decently employed, and are willing to take some risks. I invest in similar mutual funds across tax-deferred investments, including pre-tax and post-tax type investments, as well as non-tax deferred vehicles, just so everything isn't tied up in the retirement fund in case we suddenly need a big house repair. In addition to investing across a lot of different taxable positions, I also diversify my investments across types of funds (some, not as much as some people say we should). In limiting the types of funds we buy, we have made very conscientious decisions to accept some degree of risk. Every investor needs to figure out both what risk means, and what their tolerance of it is.
3. ar-jedi is one of my go-to examples of how to learn about investing. He has a multi-year track record of encouraging people to become informed, and his book recommendations haven't changed in that time (which should tell you they are timeless). Others in this forum have a track record of pushing people to a specific investment. For example, there are a couple people here who are dogmatically tied to precious metals. I think that ar-jedi's advice generally is about empowering people to make more informed decisions, NOT telling them what that decision should be. There is, however, some advice, that is universal. For example, don't pay taxes if you don't have to. But, the flip side is that sometimes it is worth it to pay taxes to have more short-term and medium-term options.
4. People who calculate what they could have made tend to only remember the winners they didn't buy. In 1996 or so I thought Yahoo was over-valued by 9:30am on the IPO day, so I didn't buy it. But I could have bought then, and turned a profit at closing time, OR bought and held and turned a massive profit if I timed the exit well. But - remember my Xybernaut example. Not every IPO is Yahoo-like. Most are not. I could have easily made thousands and thousands on Yahoo, and turned around and given it right back on Xybernaut. I don't know if that strategy would have been better than what I have done, but I do know that I didn't blow my savings on a somewhat-informed hunch.
5. If you aren't sure where to invest, follow the earlier advice of putting that money in a low-risk account for now, while you get smarter on investment options.

Most important tip - this is a gun board, the advice you are getting is worth every penny you paid for it. In this case, you have to make a bunch of decisions that nobody can make for you BEFORE you start making actual investment decisions. You need to identify goals and objectives, as well as your appetite for risk.

-shooter

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