Please teach me about IRA's

Gearheadotaku wrote: Good info everyone, thanks. My employer does not match, and I'm not maxed out. I'm putting in about 15% of my pay. (hitting 17K a year won't happen unless I give up eating and owning a home) Fedelity runs the 401K program, but wasn't much help when I called them for guidance. Basiclly they said to invest in the fund that matches my retirement date. How do you find a good broker?

You don't need a broker. If anything you need a fee-only financial advisor, but probably don't need that either. The basics are simple...pick low-cost funds that historically perform well, and spread across market segments and industries. Dollar cost average in, then rebalance regularly (quarterly, yearly, whatever) as the market moves back and forth.

Don't pick the "retirement year" funds of funds either. Fidelity pushes those since they manage them and make money on them. They are easy, but generally higher fee than you can find elsewhere in the available options, and more conservative than you need to be.

Our 401k is with Fidelity also, each year we review the available funds and request to add or delete options as appropriate.

Despite have a pretty good handle on my finances, this thread made me go back and check some of my assertions... thankfully.

I use the "Moderately Aggressive" portfolio allocation in my 401k. It has an unnecessary amount of overlap from multiple funds, and the expense ratios range from 0.36% to 1.00%. The weighted expense ratio for this portfolio works out to 0.79%, which is not good.

By carefully selecting my funds, I can get it down to 0.45% while still having a solid portfolio.

I'm still not sure if I'm going to do a Roth or max this out first. The expense ratios will be lower, but I also expect to be in a tax bracket quite a bit lower when I retire.

Armitage wrote: Good points about investing your 401k/IRA in funds with low fees. This is something I had never thought of until recently, but many funds in traditional 401k programs have very high expense ratios. 1-2% might look small but it isn't. Put in simple terms, if all your retirement money is invested in funds that all have a 1% fee, that means you're paying 1% of the entire value of your combined funds every year, regardless of whether your return is positive or negative. As you get further towards retirement and have more money, let's say 500k, in your 401k, $5000 a year will be disappearing from your account in fees each year, every year. Over the lifetime of your retirement account, this can add up to an astronomical (6 figure) number. That's why it's important to examine your fund options carefully before investing. Also, if you've ever been a federal employee and have access to a TSP, keep it active and roll your 401k investments and any vested employer match into the TSP. Their funds typically have a MUCH lower (e.g. .03% versus 1 or 2%) fee structure.

Quit your bitching. Canadians pay 2.75 or more on their funds and are expected to be grateful for the opportunity. There is a good reason our banks did not flinch during the financial crisis!

MattGent wrote: You don't need a broker. If anything you need a fee-only financial advisor, but probably don't need that either. The basics are simple...pick low-cost funds that historically perform well, and spread across market segments and industries. Dollar cost average in, then rebalance regularly (quarterly, yearly, whatever) as the market moves back and forth. Don't pick the "retirement year" funds of funds either. Fidelity pushes those since they manage them and make money on them. They are easy, but generally higher fee than you can find elsewhere in the available options, and more conservative than you need to be. Our 401k is with Fidelity also, each year we review the available funds and request to add or delete options as appropriate.

the easy button is to put at least some of your money in an index fund (S&P 500 comes to mind) it usually outperforms most managed funds …. and it is CHEAP

I wouldn't necessarily put all my funds there, but for sure some of them

Armitage wrote: That's why it's important to examine your fund options carefully before investing. Also, if you've ever been a federal employee and have access to a TSP, keep it active and roll your 401k investments and any vested employer match into the TSP. Their funds typically have a MUCH lower (e.g. .03% versus 1 or 2%) fee structure.

That's interesting, I wasn't aware we could keep contributing to TSP once we get out of service (military side).

ProDarwin wrote: Despite have a pretty good handle on my finances, this thread made me go back and check some of my assertions... thankfully. I use the "Moderately Aggressive" portfolio allocation in my 401k. It has an unnecessary amount of overlap from multiple funds, and the expense ratios range from 0.36% to 1.00%. The weighted expense ratio for this portfolio works out to 0.79%, which is not good. By carefully selecting my funds, I can get it down to 0.45% while still having a solid portfolio. I'm still not sure if I'm going to do a Roth or max this out first. The expense ratios will be lower, but I also expect to be in a tax bracket quite a bit lower when I retire.

Wow. I did the math on the above assuming an investment of 17.5k/yr for 30 years and the difference between those two expense ratios is >$100K.

The difference between what I would get through Vanguard/Fidelity Roth and my custom allocation is still around $36K ($5500/30 yrs), so pretty significant. Looks like I'll shuffle around my investments. I'll be maxing the Roth IRA and still contributing heavily to the 401k though.

FWIW, it was mentioned earlier, but here is the link regarding the amount you can deduct if doing a traditional IRA & you have access to a 401k.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

ProDarwin wrote: Despite have a pretty good handle on my finances, this thread made me go back and check some of my assertions... thankfully. I use the "Moderately Aggressive" portfolio allocation in my 401k. It has an unnecessary amount of overlap from multiple funds, and the expense ratios range from 0.36% to 1.00%. The weighted expense ratio for this portfolio works out to 0.79%, which is not good. By carefully selecting my funds, I can get it down to 0.45% while still having a solid portfolio.

Thanks - your post prompted me to do the same exercise. Over about 15 funds mine ranged from 0.05 (index funds) to 1.12 (mid-cap growth) with a weighted average of 0.61%. Not bad, but not great either. The trends were fairly obvious...index type funds were very low, and the smaller, industry-focused, and foreign funds were the highest.

I'm probably due for a rebalancing and will dump a couple of the high cost funds.