Roth IRAs and traditional IRAs, which one should I invest my future in? Wait, maybe we should step back, do you have an IRA set up for yourself? If you do not, set one up TODAY! The younger you are when you start an IRA, the more you will accrue compound interest… and it’s not just a little more, it’s a lot more.
Roth IRA: An individual retirement account that you pay taxes on the money that you put in right away. Therefore, you are paying minimal taxes at whatever the tax rate is right now. You will not have to pay taxes when you take out your money when you retire.
Traditional IRA: An individual retirement account that you do not pay taxes on until you pull out your money to use it. Therefore, you will be paying the taxes at whatever rate they are when you retire. Can you imagine what the tax rate will be in 20 years? 30 years?
Compound interest: When you earn interest on your initial money put in, your account will keep adding a percentage to the total money in your account. Therefore, the interest will make your total dollar amount higher, giving you additional money on top of what you put in. This is where you’re making your money work for you instead of the other way around.
Here’s an example of compound interest: Let’s say you put $100 per month in your IRA, therefore contributing $1200 per year. Historically, the S&P 500 has earned around 7% annually, so we will go with a 7% rate. That is $84 per year.
Year 1: $1200/year + $84 in year 1= $1284
Year 2: $1200/year + $1284 in year 2 (7%) = $173.88 Year 2: $2657.88 (that’s a $257.88 gain). Considering the market is stable, which it is a little volatile, because 7% is probably not average.
If you are wondering where to start, there are a few companies that are big ones, you can just Google them: Fidelity, Charles Schwab, Edward Jones, and the most recent one I have read about is America’s Best. You have probably heard about these companies somewhere, because they each have a big name for themselves- good for them! Although, the reason they’ve got their big name is because they make a lot of money. Partly because of all the unknown fees that they’re charging innocent investors, like yourself. In which case, good for them for creating a great business, but don’t let your loss be their gain.
Check the fees that your IRA charges you
Have you even thought about how much your IRA charges? Me neither, until someone told me to. I just assumed the fees my IRA charged me were normal. I’m sure that’s just how you are as well. Let me be the one to tell you, many times they are not, and it’s possible that you are losing a lot of your money that could be compounded in to thousands of dollars. Sometimes your financial advisor may not even know that he/she is charging extra fees to you. Many people in this industry are just doing their job, and it isn’t completely explained to them. It is common for a fiduciary to charge a 1-1.25% advisor fee, and you should be able to see it on your statements, but nothing more. Watch for mutual funds with no-load and no upfront costs, because those will extra charge fees that can be going directly to the company.
Make sure you have a fiduciary
What on earth is a fiduciary? A fiduciary is a person that puts your best interest before their own, seeking the best terms and prices. Fiduciaries avoid using the client’s assets to benefit themselves. All investment advisors registered with the SEC act as fiduciaries, but not all advisors are fiduciaries. Stockbrokers, broker-dealers and insurance agents are only required to fulfill a suitability obligation, which means he or she can provide recommendations, but they don’t have to put the client’s needs before their own. In a nut shell, fiduciaries make everything that is happening with your account transparent.
So, ask your advisor if he or she is a fiduciary. Ask them how they earn money and what certifications they hold. It is our money, and we can’t expect advisors to take care of it. Taking care of our money in the stock market is really up to us.
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