I agree that you should fully fund an IRA for 2006 and 2007, although I strongly recommend a Roth IRA. And if you don’t want to think about the investment too much, you can simply put the money in the Vanguard Target Retirement 2050 Fund or a similar “lifestyle fund.” The investments are split among large cap/small cap/bond funds in a ratio appropriate for someone who plans to retire around 2050, and they adjust the ratio as your retirement age approaches.
wow thanks for the info guys. So for a Roth to become something worthwhile you should contribute the max (4,000) annually?
Yes. You should take as many tax breaks as the government will allow.
Unless you know you’re going to need the money in the future, you should max out all IRA (Roth and/or trad) contributions before setting up individual investment accounts.
Well, a Roth IRA is still worthwhile even if you can’t fully fund it.
But it sounds like you could afford to set aside the $4,000 this year and next, and you’ll gain a lot in the long term simply by virtue of the compound return, so why not max it out?
An alternative to index funds are exchange-traded funds (ETFs). They work just like index funds except that they’re bought and sold in the same way stocks are. The three most common macth the Dow, S&P500 and Nasdaq indices, but there are many others, including funds for overseas stocks.
The upside of ETFs is the convenience of buying and selling them through your brokerage just like stocks. I don’t know if this still is a factor, but when I first looked into Vanguard index funds, my parent’s broker said I could only invest in them directly through Vanguard. Living overseas, this would have been a nuisance for me.
The downside is the cost of buying and selling them through your brokerage just like stocks. Many mutual funds let you set up a monthly deposit program where you can make smaller purchases ($25-$50, for some) without any broker’s commissions. With an ETF, you have to pay a commission each time you buy, which can significantly eat into your purchase if you’re buying or selling less than a few hundred dollars’ worth at a time.