Dead Money

[STONER]

Financeers,

I am young professional with what can be considered little debt. In fact, besides every day living expenses, I just have my student loan as my long-term debt. Anyway, I have accumulated some money over the past year or so and now I find its just sitting in my checking account. I have researched until my head as exploded exactly what to do with it....well...besides gamble (admitted small time degenerate here). And now I got to say I am experiencing information overload.

I spoke to my pops and he suggested opening up an IRA. I was curious as to what type I should open up and what exactly I can expect from doing this. Also, is this a viable/logical solution? If not, any recommendations would be greatly appreciated by the finance gurus here. I am not looking for extreme risk/reward, just looking for something to do with this 'dead money' in my checking account.

Thanks in advance

Stoner

 

[LineTamer+]

I would go with a ROTH IRA, can do 4000 this year. Tax free distributions when you take the money out. No tax deduction on the front end though.

 

[cdg333]

yeah i did the same thing with a finacial advisor and he made me 16% last year.

 

[YourAllAmerican]

An IRA is always an option. The downside to that your money is tied up until you reach 59 1/2 years of age (unless you want to pay a penalty). Still, if retirement is what you're saving for, it's a good option.

If your place of employment offers a 401(k), especially if they match contributions at all, that's likely an even better option. If you leave that job, you can either roll it all over into a new 401(k) or an IRA.

But if you're looking to get started in the world of stock purchases, I'm a big believer in sharebuilder.com, which allows you to invest a set dollar amount (as opposed to buying whole numbers of shares) on a regular basis at low fees. I believe they currently chage $4 per standard purchase. It's an easy matter to set up a sharebuilder account to debit your checking account for $100 per month (I'm just using that figure as an example), which would put $94 toward the purchase of whole and partial shares of whatever stock you choose.

 

[YourAllAmerican]

Er, make that $96. $100-$4=$96.

Math. Not my strong suit.

 

[STONER]

Thanks for the info fellas. I really appreciate it. Couple more questions if you dont mind. Again, pardon the ignorance, but this stuff is not my strong suit. How exactly does an IRA work? What kind of penalty do you face if you choose withdrawal early? (ex. 45 yrs old instead of 59 1/2 yrs old) Also, I heard of 2 different types of IRA's, but not sure the difference.

As far as the 401(k) at my place of employment, they offer one but do not match any contributions on my part. In this case is it still worth it to invest in one?

I have considered investing in stocks and am aware of sharebuilder.com. It just seems like there is so much info out there that I would not know where to begin unless I invested in mutual funds. Like I said in my first post, I am experiencing extreme information overload, but want to do something with this 'dead money' that is not growing in my checking account.

Any information or banter is greatly appreciated.

Thanks again for the previous insight LT, cd, and All-American. Look forward to hearing more.

Stoner

 

[TheAce]

the roth ira is money that you've paid taxes on...when you take the money out at age 59 1/2 you do not pay taxes on said money.

another point is to save up money... around six months living expenses...use as an emergency fund in case you lose your job...then fund your ira....you could probably do both at the same time if you're safe in your job.

 

[YourAllAmerican]

Stoner, you're doing exactly the right thing: learning as much as you can before putting any of your money into something. Had I been as careful when I started investing, I'd probably have several thousand more dollars in my portfolios today.

A great website for basic information on IRAs, 401(k)s and beginner's investing is the Motley Fool (www.fool.com).

Ace makes a great point about putting away emergency funds. That'd be a very wise thing to do first of all.