Invest in a Roth IRA Mutual Fund

You have decided that you wish to invest in a Roth IRA and reap its benefits in retirement. You want to invest in a mutual fund, for a higher rate of return than a certificate of deposit or savings bond, with less risk than individual stocks.

How to Determine if a Roth IRA Mutual Fund is For You

First, do you meet the income requirements? You must have earned income, with an adjusted gross income on your taxes of less than $95,000. You can make a partial contribution with agi of $95,000 to $110,000. But, if your agi is more than $110,000 you will not be able to contribute to a Roth IRA.

Second, when will you want to access the money? A Roth IRA has an advantage because you can take the money you invested out at any time with no penalties or tax consequences, since the money you are investing is after-tax income. So, if you have an emergency you'll be able to access your money.

A Roth IRA also allows you to keep the money invested past age 70 1/2. A traditional IRA requires you to start taking money out at this age. So, if you plan to work into your nineties, this could be ideal for you.

The Roth IRA is also great if you work for yourself or change jobs often. You don't have to keep rolling over money to new investment plans as it can stay in the Roth IRA regardless of where you work or who you work for.

Once 5 years pass after your Roth IRA investment, contributions and earnings can be withdrawn penalty and tax free to buy a first-time home, or if you become disabled. In the event of your death, a beneficiary may withdrawal with no penalty or tax. Otherwise, you must wait until you reach age 59 1/2 to withdraw the earnings with the contributions.

In 2008, you may contribute $5000 or $6000 if you're more than 50. Each year after that, the amount will increase slightly based on the increases in the cost of living.

How to Set up the Account Itself

First, decide which mutual fund company to invest in. T Rowe Price is a good one that doesn't charge a sales fee (front-end load) for purchasing the funds. They have many different types of funds (domestic, international, small cap and large cap, etc.). The yearly expenses for holding the fund are also low. American Funds is another good one for the Roth IRA. Although you pay a commission up front, the dividends each year are high on many of their funds, and the company has a proven track record since the 1920s for many of the funds.

Once you choose a company, you need to decide which funds to invest in. You could simply pick a retirement fund for your projected retirement year. T Rowe Price has a Retirement 2040 fund, for those who will turn 65 in 2040. These types of funds change their overall investment portfolio from mostly stocks to a more conservative mixture closer to your retirement year.

Read the prospectus first! (An American and a T Rowe Price prospectus) Call the mutual fund company, and request a Roth IRA mutual fund investment form, as well as a prospectus for any fund you are interested in. You will want to read the prospectus to learn about the past history of performance, and what the fund is all about before you invest.

Once you receive and read the information, fill out the Roth IRA form, and choose your fund/s. Send this back to the company with a check for the amount of your investment.

Many companies allow you to view your account online, and watch the money grow. You can go to the company's website, and set up your account online. You can then even make contributions online from that point on.

Tips & Warnings

• The Roth IRA is great because when you go to withdraw the money once you reach age 59 1/2, you don't have to worry about paying the taxes at that time, since you were already taxed on this money when you originally earned it as income.
• If you have a large income, well over $100,000, you will have to consider some other form of retirement planning.
• Retirement-based funds are good for Roth IRAs. You could also choose funds that do well over the long term, such as large-cap stock funds.
• Pick funds that distribute strong dividends each year, which will be reinvested and help keep your money growing.
• Some companies may allow you to set up your account initially and invest funds all online. You'll have to find out the policies for the company you decide on.
• You can invest different places each year. Maybe one year you'll pick American and the next year T Rowe Price. You can even break up the $5,000 for 1 year among different companies (just don't go over the limit to invest!)
• When picking a mutual fund, you may want to think twice before using a specialized fund or 'hot now' fund, since you will be keeping the money there for maybe 30 or 40 years (depending on your age). If you pick a fund that his hot now, it could cool off in 2 years, and then your investment might not make much more in the years to come.
• Don't go over your maximum allowable contribution each year, or you will face taxes and penalties!
• If you don't have a good knowledge of finances and mutual funds, you should get an advisor to help you decide what investments to make with your money.