Naked Truth Investing: Go for the Roth IRA!
Question: What is better. Traditional or Roth IRA? I have my Roth IRA invested in the Vanguard Total International Stock Index Fund (VGSTX)? I am 38 years old.
Answer: While this subject is not free of doubt, I prefer the Roth IRA. Both the Roth and traditional IRA's are tax-deferred accounts. But, unlike a traditional IRA, Roth IRA contributions are made with already-taxed income.
Here is a summary of the benefits of the Roth IRA:
- No mandatory withdrawals when you reach any age;
- No penalty for early withdrawals;
- No taxes on withdrawals up to the amount contributed;
- No tax on investment earnings within the Roth IRA once you reach age 59 1/2 (or become disabled), provided that the account was in existence for five or more years.
You should not have 100% of your money invested in an international stock index fund. Instead, you should:
First: Determine your asset allocation by taking an asset allocation questionnaire. You will find many on the internet, including one on my web site.
Second: Keep your account with Vanguard. There are other fund families you could consider, like Fidelity and T. Rowe Price. However, Vanguard has historically been the leader in offering an excellent choice of low cost index funds.
Third: Invest 70% of the amount of your funds allocated to stocks in the Vanguard Total Stock Market Index Fund (VTSMX), and the balance of 30% in the Vanguard Total International Stock Index Fund (VGTSX). Invest 100% of the funds allocated to bonds in the Vanguard Total Bond Market Index Fund (VBMFX).
Fourth: Once or twice a year, re-balance your portfolio to be sure that your asset allocation remains intact.
This plan gives you a globally diversified portfolio of stocks and a broadly diversified portfolio of bonds.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.