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I am a 24 year old high school teacher. Currently, I don't have that much capital to open two accounts. I would rather focus on one at a time until I gain more capital.

Should I start with a Roth IRA and max out $5,500 every year, or invest in the S&P 500 (I have $3000 to open an account) and build that up?

Ben Miller
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YungAznBeast
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    These options are not mutually exclusive. – mattm Oct 04 '17 at 14:04
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    Your question does not exactly make sense. You could invest in the S&P 500 inside a Roth IRA. The two are not opposites. – Grade 'Eh' Bacon Oct 04 '17 at 14:05
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    Put another way - a Roth IRA is a 'tax vehicle' that gives you certain tax advantages. Anything you invest in an account listed by your financial institution as a 'Roth IRA', can get those advantages. It's like saying, "Should I open an investment account with Bank of America, or should I buy stocks?" When really, opening an investment account could be one of the steps to buying stocks. – Grade 'Eh' Bacon Oct 04 '17 at 14:06
  • Could someone explain how to invest in the S&P 500 inside a Roth IRA? – YungAznBeast Oct 04 '17 at 14:22
  • Related: Best starting options to invest for retirement without a 401k – Ben Miller Oct 04 '17 at 14:27
  • @YungAznBeast which brokerage do you have an account with? Then put that name plus "S&P 500" in the Google search bar. After you've transferred money to the IRA, buy the fund specific to your brokerage. – RonJohn Oct 04 '17 at 15:33
  • I'm thinking of using Vanguard or Fidelity. Do you have any recommendations. – YungAznBeast Oct 04 '17 at 15:43
  • Purchase an exchange traded fund (ETF), such as a Standard & Poor's Depository Receipt (SPDR) inside the Roth IRA. I imagine your bank is offering some fixed rate on IRAs, ignore that advice from the bank. – Glen Pierce Oct 04 '17 at 15:57
  • @YungAznBeast: I have an IRA account at a major brokerage firm. In this account I hold an S&P 500 index fund that is widely available. (Not my broker's in-house fund.) Use your favorite mutual fund research tool to see what is out there. – Codes with Hammer Oct 04 '17 at 17:55
  • @YunAnzBeast: I opened my Roth IRA with Vanguard years ago. The Vanguard Index Trust is one of the oldest and cheapest S&P 500 funds out there. I forget whether I currently have my Roth in the VIT or one of the various supplemental index funds I also use, but it's easy enough to do it. You don't have to use Vanguard as the custodian, and you can invest in other S&P 500 index funds if you prefer, but if you just want "a Roth IRA invested in a good S&P 500 index fund", it's reasonable to just go through them. – dewtell Oct 04 '17 at 20:14
  • I personally would maybe put an amount in the ira so 500 index but would recommend seeking larger yield on an investment with only 3000 to start. What are you going to average on the sp, maybe like 10% which is 200 which is insignificant in today's economy. Also considering you are 24. Saving is great but at this point that 10% before taxes and fees is maybe not worth the effort, which could be spent on higher yeild/risk. I see the So more for like 100k plus principle investments. Maybe I'm pessimistic. Buy here key factors are more you saving as much as possible and efficiency. – marshal craft Oct 05 '17 at 04:10
  • As a teacher in the US are you eligible for a pension? Are you planning to invest outside of any pension (IMO a good idea given that pensions keep getting messed with)? If OP is eligible for a pension, does that change OPs status as to eligibility for IRAs? – Freiheit Oct 05 '17 at 14:42

3 Answers3

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Your question indicates confusion regarding what an Individual Retirement Account (whether Roth or Traditional) is vs. the S&P 500, which is nothing but a list of stocks.

IOW, it's perfectly reasonable to open a Roth IRA, put your $3000 in it, and then use that money to buy a mutual fund or ETF which tracks the S&P 500.

In fact, it's ridiculously common... :)

RonJohn
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    The "A" stands for "arrangement" not "account". There are questions here whose answers use this fact as part of the answer. – JTP - Apologise to Monica Oct 04 '17 at 16:16
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    @JoeTaxpayer while the IRS calls them Arrangements, brokerages call them Accounts, since they are a kind of account in their systems. – RonJohn Oct 04 '17 at 16:37
  • An "individual retirement account" is a type of "individual retirement arrangement." See https://www.irs.gov/publications/p590a#en_US_2016_publink1000230371 – minou Oct 04 '17 at 16:40
  • Why buy a mutual fund that tracks the S&P? Wouldn't an ETF be better? – Sam Oct 04 '17 at 17:00
  • @Sam mutual funds usually have lower costs than exchange traded funds. Also, you can buy mutual funds in "units of currency" (i.e. $50 worth of a MF), whereas ETFs can only be purchased in share units (so you're stuck if the ETF costs $122 and all you have is $50). – RonJohn Oct 04 '17 at 17:39
  • @RonJohn Are you possibly thinking of index funds? "ETF’s many times have lower expenses then a similar mutual fund in that there are no loads and the operating expenses are often lower" https://www.forbes.com/sites/feeonlyplanner/2013/07/18/whats-the-difference-mutual-funds-and-exchange-traded-funds-explained/#3d4b0e7418ac – Sam Oct 04 '17 at 17:43
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    @Sam what I originally wrote was "mutual fund which tracks the S&P 500". VFIAX has a 0.04% expense ratio, and so does VOO. So why should I bother with VOO, which -- as of yesterday -- forces me buy in units of $232 when I can buy any dollar amount of VFIAX? – RonJohn Oct 04 '17 at 17:50
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    @RonJohn Well, in this particular case, VFIAX requires a $10k minimum, and the OP only has $3k, exactly enough to meet the minimum for VFINX, the investor-class version, which has an expense ratio of .14%–3.5x that of VOO, which has no minimum. – Kevin Oct 04 '17 at 18:26
  • @RonJohn, FGIAX is a index fund, I don't believe that is the same thing as a mutual fund. Mutual fund, (to me) implies active management. Index or ETF imply tracking of a market. – Sam Oct 04 '17 at 19:23
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    @Sam whether a fund is "mutual" (how it's legally organized) or not has nothing to do with how it decides which securities to buy & sell (track an index, or be actively managed). – RonJohn Oct 04 '17 at 19:52
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A Roth IRA is simply a tax-sheltered account that you deposit funds into, and then invest however you choose (within the limits of the firm you deposit the funds with).

For example, you could open a Roth IRA account with Vanguard. You could then invest the $3000 by purchasing shares of VOO, which tracks the S&P 500 index and has a very low expense ratio (0.04 as of last time I checked). Fidelity has a similar option, or Schwab, or whatever brokerage firm you prefer.

IRAs are basically just normal investment accounts, except they don't owe taxes until you withdraw them (and Roth don't even owe them then, though you paid taxes on the funds you deposit). They have some limitations regarding options trading and such, but if you're a novice investor just looking to do basic investments, you'll not notice.

Then, your IRA would go up or down in value as the market went up or down in value.

You do have some restrictions on when you can withdraw the funds; Roth IRA has fewer than a normal IRA, as you can withdraw the capital (the amount you deposited) without penalty, but the profits cannot be withdrawn until you're retirement age (I won't put an actual year, as I suspect that actual year will change by the time you're that old; but think 60s).

The reason not to invest in an IRA is if you plan on using the money in the near future - even as an "emergency fund". You should have some money that is not invested aggressively, that is in something very safe and very accessible, for your emergency fund; and if you plan to buy a house or whatever with the funds, don't start an IRA. But if this is truly money you want to save for retirement, that's the best place to start.

**Note, this is not investment advice, and you should do your own homework prior to making any investment. You can lose some or all of the value of your account while investing.

Joe
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  • Oddly I was looking at this yesterday, but couldn't find what I would consider the equivalent of VOO in Schwab's list of ETFs. – Jordan.J.D Oct 04 '17 at 15:29
  • SWPPX is theirs; it's not nearly as low of an expense ratio, though (0.09). You may still be able to trade VOO, depending on how your account is set up, from another brokerage; you just have commissions that you often wouldn't if you were trading their own funds. – Joe Oct 04 '17 at 15:47
  • I forget the ticker, but Schwab now has an etf far lower in cost and no fee to buy. You can't invest by the dollar, so $1000 might buy 23 shares with $27 left until you have the cash for full share – JTP - Apologise to Monica Oct 04 '17 at 16:18
  • @Joe Thank, I will look at it, I ended up going with VOO yesterday though. – Jordan.J.D Oct 04 '17 at 16:21
  • @JoeTaxpayer Let me know if you find the ticker so I can look. – Jordan.J.D Oct 04 '17 at 16:21
  • Traditional IRAs are not regular investment accounts. Contributions are pre-tax, which means the money you put in is tax-deductible when you file your income tax returns. You do pay income tax on it when it is withdrawn (but not capital gains tax as you would on a regular investment). A Roth IRA uses post-tax money. You don't get a deduction on those contributions, but the advantage is you don't pay any tax when you take it out. Both are subject to penalties if you withdraw the gains before you are 59 1/2 years old. – Seth R Oct 04 '17 at 18:14
  • @SethR They're regular investment accounts insomuch as you can invest money in them in similar ways to any other investment account. Note the "except" in my statement. My Vanguard IRA is in an investment account that's not very different from a non-IRA investment account, in terms of how it works on the site - I just don't pay taxes on it, and I am not allowed to trade options, but in general it's nearly identical to an investment account from a functionality point of view. – Joe Oct 04 '17 at 20:13
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    The ETF I was thinking of was SCHX, not quite S&P, it's the top 750 in the Dow Total Market index. That said, it has a .03% fee which was appealing for my Daughter's Roth IRA. – JTP - Apologise to Monica Oct 04 '17 at 21:14
  • @Joe just checked swppx it's expense is only .03 :-) – Jordan.J.D Oct 17 '17 at 01:31
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Investment account vs bank account

Anytime you invest in stocks, you do that inside an investment account - such as the type you might open at ETrade, Vanguard, Fidelity or Charles Schwab. Once you have the account and fund it, you can tell the system to invest some/all of your money in

  • mutual funds, such as an S&P 500 index fund
  • ETFs (Exchange Traded Funds), which are the same thing, except packaged as a stock, so you can trade it with no minimum investment, no wait-to-sell rules, and sell it instantly based on instant market pricing.

Cash account vs Roth IRA vs Traditional IRA

When you open your investment account, their first question will be whether this is a cash account, traditional IRA, or Roth IRA. The broker must report this to the IRS because the tax treatment is very different.

  • The cash account is not an IRA. You must painstakingly track each trade, report it to the IRS yourself on 1040 schedule D, and pay taxes on your gains.
  • IRA's they don't care about tracking each transaction and profits per transaction. On a Roth they don't tax you. On a traditional IRA they charge regular income tax when you withdraw.
Harper - Reinstate Monica
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  • Recently (beginning 2011 to 2016 depending on security type) for taxable accounts brokers are required to track basis and compute gain/loss and report them to the IRS and you on 1099-B at end of year, and even transfer info if you change brokers. They also now enforce the requirement on a partial sale you must select which lot(s) to sell, either specific or by rule like FIFO LIFO lowest-cost highest-cost etc, at the sale or in advance, not afterwards as you might get away with in older times. – dave_thompson_085 Oct 05 '17 at 00:07