When should I open my Roth IRA?

May 12, 2006 10:18 AM

Should I open my Roth IRA now and buy what I can afford, or wait until I can afford the minimum investment in the fund I really like?

I know it's important to plan for retirement. I've got an existing stock fund that I've been kicking around since high school with a little more than a thousand dollars in it. I'd like to cash this in and open a Roth IRA.

The fund I really like, though, Fidelity's Freedom 2040, has a steep price. I'm a college student, so a $2500 minimum investment is at least a temporary setback. Should I open my IRA now and put what money I have from the sale of (most of) my current portfolio in it, invested in a money market or something? Or should I hold off on selling everything until I have what I need to invest in the fund?

Bonus points awarded if you can answer these questions:

1) Is there a particular time of the year when it's most beneficial to sell stocks, or when it's best to open an IRA?

2) Can you point me to a good source of advice on when to sell stocks advantageously? I know the longer I've owned them up to, what, 5 years, the lower my gains tax, but what else should I be aware of?

3) Should I, as maybe a third option, try to convert my taxable investment account into an IRA before selling? Is that even possible?

4) Am I right to like the Fidelity Freedom 2040 fund? I'll be 55 at its nominal, glorious culmination, FWIW.

posted by electric_counterpoint to work & money (9 comments total)

Start saving now. The magic that is compound interest is way in your favor the younger you are. Open the IRA and just accumulate the cash if you need to - although there should be other funds to invest in in the interim. A total market index fund would be good for somebody your age.

1. Your not smart enough to time the market - nobody is.

2. Generally speaking, you should sell a stock when the reasons you bought it no longer apply. Again, trying to time the market (in the absence of inside info) is a losers game.

3. I don't think that is possible - you'd be avoiding the tax on the capital gain in your securities. Govt isn't going to make that easy to do!

You might look into the Vanguard targeted retirement funds too. Their cost structure is usually a little better than Fidelity, and the minimum investment might be more palatable.
posted by COD at 11:00 AM on May 12, 2006

I wouldn't be interested in that fund. Its basically a FoF that changes the allocation over time to different Fidelity funds according to their pre-determined risk return profile based on a planned retirement age. I don't see the value- especially at a shop like Fidelity. Do the allocation yourself and pick the best individual managers you can find.

It just seems like a gimmick to me.
posted by JPD at 11:01 AM on May 12, 2006

Move your money into the Roth ASAP. Right now that money can be earning over 4% in a money market account until. Why not have that be tax free? You can always move it into an equity fund of your choice later.

Because it is very difficult to out-guess the market in terms of timing, many people recommend dollar cost averaging.

Good luck!
posted by alms at 11:07 AM on May 12, 2006

Thanks COD for the advice. I know compound interest is great, in fact that's why I opened my investment account in the first place. Where I'm at right now is pretty much procedural. In my 1) and 2), I'm not looking for magical moments to beat the market on returns, I'm just thinking about tax incentives. I've partially absorbed a lot of investment advice having to do with when to buy and sell to save on taxation, so I'm just asking the hive mind if there's anything relevant to my particular situation that I ought to refresh my memory on.

As for Vanguard, I really should look deeper into them. I suspect I'll have a lot more research under my belt by the time I finally invest in a fund.
posted by electric_counterpoint at 11:07 AM on May 12, 2006

Alms: Is there a good way to sell the securities I currently own to fund my new IRA? Or should I just bite the bullet and pay whatever capital gains taxes etc. I would owe in order to start the IRA now?
posted by electric_counterpoint at 11:09 AM on May 12, 2006

If you're planning on selling stocks at a gain, do it at least a year after you bought them. That will make it a long-term capital gain, which is taxed at a lower rate.

You say your existing fund's been around since high school, though, so I imagine that won't be a problem for you.
posted by nebulawindphone at 11:41 AM on May 12, 2006

With about a thousand dollars, it sounds like you have a stock mutual fund rather than individual stocks. If that's the case, you may have been paying capital gains taxes as you go along, as dividends were paid and stocks were bought/sold out of the fund. Your statement (is this at Fidelity?) should have an adjusted cost basis available for your fund. The difference between that and the selling price is what you'll pay taxes on. Also, mutual funds will generally calculate long vs. short term capital gains for you, which can be plugged straight into your tax return. These little details are partly why mutual funds are a lot easier for new general investors.

If you do actually own individual stocks, you should strongly consider investing in index mutual funds instead when you step back into taxable investing. The odds are that it'll outperform your individual picks, the fees are very low (much lower % than fees for buy/sell orders on a few hundred dollars in stocks will work out to) and the automatic dividend reinvestment can make your holdings grow amazingly quickly. You can easily open this at whichever company you choose for your IRA, your accounts will all appear together, and minimums are often lower if you agree to a small automatic investment.

Also, Vanguard is very similar to Fidelity but noticeably cheaper. Look at the expense ratios carefully.
posted by pekala at 12:37 PM on May 12, 2006 [1 favorite]

also, a lot of places waive the minimum investment (or at least drastically reduce it) if you're opening an IRA with them. You might want to check that out too.
posted by smithmac_99 at 3:35 PM on May 12, 2006

Hey, I've been in this exact situation (wanting to open a Roth IRA or some sort of investment account while still in college but not having $2500 for the minimum in a good mutual fund).

I ended up picking up Class B stock when I only had $500 to play with in undergraduate (which sucked big time), and the gains have hardly done anything for me. More recently, now that I'm in graduate school, I've been putting money into a no-load Fidelity fund (the kind that require the $2500 to get into) and it's been performing really well.

Here's what I would do if I were you. Go down to your nearest Fidelity center, perhaps the one at:

Ann Arbor, MI
500 East Eisenhower Parkway
Suite 100
Ann Arbor, MI 48108
800-624-2286

Make an appointment to see an investment representative. Tell him which fund you'd like to get into and how much you have. Although there's a $2500 minimum investment, the representatives have the ability to get you in for under that (though you may eventually get hit with fees if you don't maintain/achieve the necessary balance). Committing to a direct deposit from your paycheck may be enough, but the representative (if he's good) will jump the hoops for you.

Final note, once you're with Fidelity, you have the ability to trade mutual funds from other companies. I'm fairly certain that the special offers they can give you are only with Fidelity funds.

I am not a serious investor or even well-read on the topic, just somebody in the same boat.
posted by onalark at 10:33 AM on May 13, 2006