Where to put your retirement money is always a problem. There is allocation, diversification and risk to consider. Expenses and fees, performance and tenure also come into play. If that is the case, is investing with a Roth IRA that much different than with a Traditional IRA?
Yes and No.
In a traditional IRA, the money you invest is done so on a tax deferred basis. Money you invest in a Roth IRA has been taxed, leaving only your earnings on those investments taxable at the date of your retirement. Because you paid taxes on the money you have put in, it is essentially yours to remove at any time. But once you do, although you will not face the tax or penalties associated with withdrawing invested dollars from a Traditional IRA, it still hampers the overall investment.
In both plans, the money is set aside (invested) for the future. It is not meant to be taken out before you retire - for any reason. Doing so will take potential growth off the table and this will change any projections you may have made based on assumed growth and potential retirement distributions, no matter how small.
The inside workings of these two types of IRAs is essentially the same. Although Roth 401(k) plans have surfaced recently, Roth IRAs have gained acceptance as a way for folks to continue to invest for their future in lieu of pensions and 401(k) plans. This makes the Roth IRA perfect for the investor who has maxed out every other form of tax-deferred investment.
Which makes the Roth IRA not so ideal for those looking to pay less taxes now by deferring those taxes until a time when their income will be less (most retirement planners will point to an annual income post-work of 75% of your current/future earnings as a benchmark for your retirement plan's success). Using a Roth may seem attractive at first glance, but unless you are swimming in invest-able dollars, it might be wise to keep the tax deferred plans fully funded first.
If you have, your current fund family, broker or bank will be a good first place to look. If you do, you should have a working knowledge of how to solve those nagging allocation and diversification problems (be careful to avoid buying funds that have similar investment goals in both your Traditional IRA and your Roth IRA - although they seem different, they still belong to you), fund expenses and fees (I'm assuming that if you have already committed to a group of funds in your tax-deferred accounts, they are already inexpensive compared to their peer group and in some instances, to the benchmark) and the overall performance of the offerings (look long-term, preferably longer than five years).
Once that is accomplished, you can invest in a Roth IRA with exactly the same discipline you would any other investment. You should understand your objectives, have a relatively decent grasp on your own investing behaviors and tolerance for risk, and do so with an eye on investing as inexpensively as possible.
Paul Petillo is the Managing Editor of BlueCollarDollar.com