Roth IRA all in one fund, or not? [duplicate]
In your case, you could very well leave it in something like FFFFX, which for readers is a self balancing fund with a target retirement date of 2040.  These funds are a conglomeration of other funds that tend to move more conservatively as time passes. However, I like to put no more than 10% of my portfolio in one fund with exceptions made for balances less than 20K.   So If I had 18K it really wouldn't matter if it was in FUSEX a S&P 500 index fund.  However by investing in FFFFX you pretty much meet that requirement.    So you are golden if that fund meets your goals.  For me, I kind of hate bonds and despite being of similar age, I have almost no money invested in bonds. First, you should diversify your portfolio.  If your entire portfolio is in the Roth IRA, then you should eventually diversify that.  However, if you have an IRA and a 401k, then it's perfectly fine for the IRA to be in a single fund.  For example, I used my IRA to buy a riskier REIT that my 401k doesn't support.   Second, if you only have a small amount currently invested, e.g. $5500, it may make sense to put everything in a single fund until you have enough to get past the low balance fees.  It's not uncommon for funds to charge lower fees to someone who has $8000, $10,000, or $12,000 invested.  Note that if you deposit $10,000 and the fund loses money, they'll usually charge you the rate for less than $10,000.  So try to exceed the minimum with a decent cushion.   A balanced fund may make sense as a first fund.  That way they handle the diversification for you.  A targeted fund is a special kind of balanced fund that changes the balance over time.  Some have reported that targeted funds charge higher fees.  Commissions on those higher fees may explain why your bank wants you to buy.   I personally don't like the asset mixes that I've seen from targeted funds.  They often change the stock/bond ratio, which is not really correct.  The stock/bond ratio should stay the same.  It's the securities (stocks and bonds) to monetary equivalents that should change, and that only starting five to ten years before retirement.  Prior to that the only reason to put money into monetary equivalents is to provide time to pick the right securities fund.  Retirees should maintain about a five year cushion in monetary equivalents so as not to be forced to sell into a bad market.   Long term, I'd prefer low-load index funds.  A bond fund and two or three stock funds.  You might want to build your balance first though.  It doesn't really make sense to have a separate fund until you have enough money to get the best fees.  70-75% stocks and 25-30% bonds (should add to 100%, e.g. 73% and 27%).  Balance annually when you make your new deposit.
The most important thing is to keep in mind the deadline. If you want to have it count for 2016, you need to open the account and transfer the funds by tax day. Don't wait until the last day to do it, or you could run out of time. Setting up the initial account, and them verifying your information and transferring the money could take a few days. First decide how much of a lump sum you want to invest  initially. This will determine some of your options because the mutual fund will have a minimum initial investment. Many of the funds will allow subsequent investments to be smaller.  The beauty of a IRA or Roth IRA is that if the fund you want is out of reach for this initial investment in a few years you can transfer the money into another fund or even another fund family without having to worry about tax issues. Now decide on your risk level and you time horizon. Because you said you are student and you want a Roth IRA, it is assumed that you will not need this money for 4+ decades; so you can and should be willing to be a little more risky. As NathanL said an index fund is a great idea. Many also advise an aged based fund. My kids found that when they made their initial investments the age based funds were the only one with a low enough initial investment for their first few years.  Then pick a fund family based on the general low fees, and a large mix of options. The best thing is that in a few years as you have more money and more options, you can adjust your choices. Yes, I have done this and did not feel a change in cash flow - but I didn't do it a the age of 23.  I did it at a time when it was comfortable to do so.  I should have done it sooner and I strongly encourage you to do so.   Another consideration:  Is your companies program a good one?  if it is not among the best at providing good funds with low fees then you should consider only putting 6% into your employer account to get the match.  Above that dollar amount start your own ROTH IRA at the brokerage of your choice and invest the rest there.  The fee difference can be considerable amounting to theoretically much higher returns over a long time period. If you choose to do the max , You would not want to max out before the end of the year.  Calculate your deferral very carefully to make sure you at least put in 6% deferral on every paycheck to the end of the year.  Otherwise you may miss out on your company match.  It is wise to consider a ROTH but it is extremely tough to know if it will be good for you or not.  It all depends on what kind of taxes (payroll, VAT, etc) you pay now and what you will pay in the future.  On the other hand the potential for tax-free capital accumulation is very nice so it seems you should trend toward Roth. My thoughts are your retirement investing priorities should be as follows: So in your case I would not put any money into your 401k until you have maxed out your Roth IRA. $10.90 for every $1000 per year. Are you kidding me!!! These are usually hidden within the expense ratio of the plan funds, but >1% seems to be quite a lot regardless. FUND X 1 year return 3% 3 year return 6% 10 year return 5% What does   that exactly mean? This is the average annual rate of return. If measured for the last 3 years, the average annual rate of return is 6%, if measured for 1 year - it's 3%. What it means is that out of the last 3 years, the last year return was not the best, the previous two were much better. Does that mean that if I hold my mutual funds for 10 years I will get   5% return on it. Definitely not. Past performance doesn't promise anything for the future. It is merely a guidance for you, a comparison measure between the funds. You can assume that if in the past the fund performed certain way, then given the same conditions in the future, it will perform the same again. But it is in no way a promise or a guarantee of anything. Since my 401K plan stinks what are my options. If I put my money in a   traditional IRA then I lose my pre tax benefits right! Wrong, IRA is pre-tax as well. But the pre-tax deduction limits for IRA are much lower than for 401k.  You can consider investing in the 401k, and then rolling over to a IRA which will allow better investment options. After your update: Just clearing up the question. My current employer has a 401K. Most of   the funds have the expense ratio of 1.20%. There is NO MATCHING   CONTRIBUTIONS. Ouch. Should I convert the 401K of my old company to Traditional IRA and   start investing in that instead of investing in the new employer 401K   plan with high fees. You should probably consider rolling over the old company 401k to a traditional IRA. However, it is unrelated to the current employer's 401k. If you're contributing up to the max to the Roth IRA, you can't add any additional contributions to traditional IRA on top of that - the $5000 limit is for both, and the AGI limitations for Roth are higher, so you're likely not able to contribute anything at all to the traditional IRA. You can contribute to the employer's 401k. You have to consider if the rather high expenses are worth the tax deferral for you. I don't think it has to be either-or. You can profitably invest inside the SIMPLE. (Though I wouldn't put in any more than the 1% it takes to get the match.) Let's look at some scenarios. These assume salary of $50k/year so the numbers are easy. You can fill in your own numbers to see the outcome, but the percentages will be the same. Let it sit in cash in the SIMPLE. You put in 1%, your employer matches with 1%. Your account balance is $1,000 (at the end of the year), plus a small amount of interest. Cost to you is $500 from your gross pay. 100% return on your contributions, yay! Likely 0-1% real returns going forward; you'll be lucky to keep up with inflation over the long term. Short term not so bad. Buy shares of index ETFs in the SIMPLE; let's assume the fee works out to 10%. You put in 1%, employer matches 1%. Your contributions are $500, fees are $100, your balance is $900 in ETFs. 80% instant return, and possible 6-7% real long term returns going forward. Buy funds in the SIMPLE; assume the load is 5%, management fee is 1% and you can find something that behaves like an index fund (so it is theoretically comparable to above). 1% from you, 1% from employer. Your contributions are $500, load fees are $50, your balance is $950. 90% instant return, and possible 5-6% real long term returns going forward (assuming the 6-7% real returns of equities are reduced by the 1% management fee). (You didn't list out the fees, and they're probably different for the different fund choices, so fill in your own details and do the math.) Invest outside the SIMPLE in the same ETFs or equivalent no load index funds; let's assume you can do this with no fees. You put in the same 1% of your gross (ignoring any difference that might come from paying FICA) into a self directed traditional IRA. At the end of the year the balance is $500. So deciding whether or not to take the match is a no brainer: take it. Deciding whether you should hold cash, ETFs, or (one of two types of) funds in your SIMPLE is a little trickier. "Whether you contribute to an IRA (Traditional or Roth) and whether you contribute to a 401k (Traditional or Roth) are independent. IRAs have one contribution limit, and 401ks have another contribution limits, and these limits are independent. I see no reason why you wouldn't maximize the amount of money in tax-advantaged accounts, if you can afford to. In your first year of work, especially if you only work for part of the year, you're likely in a lower tax bracket than in the future, so Roth is better than Traditional. Another thing to note is that the money in the Roth IRA can be part of your ""safety net"" -- contributions to a Roth IRA (but not earnings) can be withdrawn at any time without tax or penalty. So if there is an emergency you can withdraw it, and it wouldn't be any worse than in a taxable account. And if you don't need it, then it will enjoy the tax benefits of being in the IRA." "Not sure what your needs are or what NIS is:  However here in the US a good choice for a single fund are ""Life Cycle Funds"". Here is a description from MS Money: http://www.msmoney.com/mm/investing/articles/life_cyclefunds.htm" "One other thing to consider, particularly with Vanguard, is the total dollar amount available.  Vanguard has ""Admiralty"" shares of funds which offer lower expense ratios, around 15-20% lower, but require a fairly large investment in each fund (often 10k) to earn the discounted rate.  It is a tradeoff between slightly lower expense ratios and possibly a somewhat less diverse holding if you are relatively early in your savings and only have say 20-30k (which would mean 2 or 3 Admiralty share funds only)." I'd hazard that Jim is mostly worried that people are getting ripped off by high employer 401(k) fund fees. A lot of employers offer funds with fees over 1% a year. This sounds low-ish if you don't realize that the real (inflation-adjusted) return for the fund will probably average out to about 4%, so it's really something like a quarter of your earnings gone. With an IRA, you don't have to do that. You can get an IRA provider which offers good, cheap index funds and the like (cough Vanguard cough). Fund fees will probably be closer to 0.1%-ish. HOWEVER. The maximum IRA contribution in 2013 will be $5,500. The maximum for a 401(k) contribution will be $17,500. That extra capacity is enough to recommend a 401(k) over an IRA for many people. These people may be best served by putting money into the 401(k) and then rolling it over into a rollover IRA when they change jobs. Also, certain people have retirement plans which offer them good cheap index funds. These people probably don't need to worry quite as much. Finally, having two accounts is more complicated. Please contact someone who knows more about taxes than I am to figure out what limitations apply for contributing to both IRAs and 401(k)s in the same year. Can't see why would you need to track the sources of the original funds. Can't think of a reason not to consolidate, if at all it will only make the management of your IRA more convenient, and may be even cheaper (if the fees depend on the account value...). Failing some answers to my comment, I am going to make some assumptions: Based upon a quick review of this article I'd probably be in the Russell 2000 Value Index Fund (IWN).  Quite simply it gives you broad market exposure so you can be diversified by purchasing one fund. One of the key success factors is starting, not if you pick the best fund at the onset.  I can recall, 20 years ago being amazed (and it was quite a feat) at someone who was able to invest $400 per month.  These days that won't get you to the ROTH maximum and smart 20 somethings are doing just that. Yes you can rollover as many different 401ks into a single IRA account.  I have done it personally and it really cuts down on the overhead of keeping up with lots of different accounts.  Your brokerage or mutual fund company should be able to help you with it.  If you are using a company that just gives you forms and those forms don't mention an easy way to combine.  Then I suggest rolling over one 401k first then once that's finished you can rollover the other 401k into that same account. The other issue you could run into is that each deferred account is going to be subject to its own RMD's (Required Minimum Distributions) when you've retired or hit 70.5 years of age.  Roth's don't generally care about RMD's at first, but are still subject to them once the person that created the Roth has passed.  Having fewer accounts will simplify the RMD stuff, but that's really only a factor in terms of being forced to sell 'something' in each account in order to make the RMD.   Other than that, it's just a matter of remembering to check each account if you come to a decision that it's time to liquidate holdings in a given security, lest you sell some but forget about the rest of it in another account.  (and perhaps as Chris pointed out, maybe having to pay fee's on each account for the sale)  Where this really can come into play is if you choose to load up each individual account with a given kind of investment, instead of spreading them across the accounts.  In that case RMD's could force you into selling something that is currently 'down' when you want to hold onto it, because that is your only choice in order to meet RMD's for account X.  So if you have multiple accounts, it's a good idea to not 'silo' particular vehicles into a single account, but spread similar ivestments across multiple accounts, so you always have the choice in each account of what to sell in order to meet an RMD. If you have fewer accounts, it's thus a lot easier to avoid the siloing effect "You have several questions in your post so I'll deal with them individually: Is taking small sums from your IRA really that detrimental? I mean as far as tax is concerned? Percentage wise, you pay the tax on the amount plus a 10% penalty, plus the opportunity cost of the gains that the money would have gotten.  At 6% growth annually, in 5 years that's more than a 34% loss.  There are much cheaper ways to get funds than tapping your IRA. Isn't the 10% ""penalty"" really to cover SS and the medicare tax that you did not pay before putting money into your retirement? No - you still pay SS and medicare on your gross income - 401(k) contributions just reduce how much you pay in income tax.  The 10% penalty is to dissuade you from using retirement money before you retire. If I ... contributed that to my IRA before taxes (including SS and medicare tax) that money would gain 6% interest. Again, you would still pay SS and Medicare, and like you say there's no guarantee that you'll earn 6% on your money.  I don't think you can pay taxes up front when making an early withdrawal from an IRA can you?  This one you got right.  When you file your taxes, your IRA contributions for the year are totaled up and are deducted from your gross income for tax purposes. There's no tax effect when you make the contribution. Would it not be better to contribute that $5500 to my IRA and if I didn't need it, great, let it grow but if I did need it toward the end of the year, do an early withdrawal? So what do you plan your tax withholdings against?  Do you plan on keeping it there (reducing your withholdings) and pay a big tax bill (plus possibly penalties) if you ""need it""?  Or do you plan to take it out and have a big refund when you file your taxes? You might be better off saving that up in a savings account during the year, and if at the end of the year you didn't use it, then make an IRA contribution, which will lower the taxes you pay.  Don't use your IRA as a ""hopeful"" savings account. So if I needed to withdrawal $5500 and I am in the 25% tax bracket, I would owe the government $1925 in taxes+ 10% penalty. So if I withdrew $7425 to cover the tax and penalty, I would then be taxed $2600 (an additional $675). Sounds like a cat chasing it's tail trying to cover the tax. Yes if you take a withdrawal to pay the taxes. If you pay the tax with non-retirement money then the cycle stops. how can I make a withdrawal from an IRA without having to pay tax on tax. Pay cash for the tax and penalty rather then taking another withdrawal to pay the tax.  If you can't afford the tax and penalty in cash, then don't withdraw at all. based on this year's W-2 form, I had an accountant do my taxes and the $27K loan was added as earned income then in another block there was the $2700 amount for the penalty. So you paid 25% in income tax for the earned income and an additional 10% penalty.  So in your case it was a 35% overall ""tax"" instead of the 40% rule of thumb (since many people are in 28% and 35% tax brackets) The bottom line is it sounds like you are completely unorganized and have absolutely no margin to cover any unexpected expenses.  I would stop contributing to retirement today until you can get control of your spending, get on a budget, and stop trying to use your IRA as a piggy bank.  If you don't plan on using the money for retirement then don't put it in an IRA.  Stop borrowing from it and getting into further binds that force you to make bad financial decisions. You don't go into detail about any other aspects (mortgage? car loans? consumer debt?) to even begin to know where the real problem is.  So you need to write everything down that you own and you owe, write out your monthly expenses and income, and figure out what you can cut if needed in order to build up some cash savings. Until then, you're driving across country in a car with no tires, worrying about which highway will give you the best gas mileage." "Welcome to the 'what should otherwise be a simple choice turns into a huge analysis' debate. If the choice were actually simple, we've have one 'golden answer' here and close others as duplicate. But, new questions continue to bring up different scenarios that impact the choice.  4 years ago, I wrote an article in which I discussed The Density of Your IRA. In that article, I acknowledge that, with no other tax favored savings, you can pack more value into the Roth.  In hindsight, I failed to add some key points. First, let's go back to what I'd describe as my main thesis: A retired couple hits the top of the 15% bracket with an income of   $96,700. (I include just the standard deduction and exemptions.) The   tax on this gross sum is $10,452.50 for an 'average' rate of 10.8%. The tax, paid or avoided, upon deposit, is one's marginal rate. But,   at retirement, the withdrawals first go through the zero bracket (i.e.   the STD deduction and exemptions), then 10%, then 15%. The above is the simplest snapshot. I am retired, and our return this year included Sch A, itemized deductions. Property tax, mort interest, insurance, donations added up fast, and from a gross income (IRA withdrawal) well into the 25% bracket, the effective/average rate was reported as 7.3%. If we had saved in Roth accounts, it would have been subject to 25%.  I'd suggest that it's this phenomenon, the ""save at marginal 25%, but withdraw at average sub-11%"" effect that account for much of the resulting tax savings that the IRA provides.  The way you are asking this, you've been focusing on one aspect, I believe. The 'density' issue. That assumes the investor has no 401(k) option. If I were building a spreadsheet to address this, I'd be sure to consider the fact that in a taxable account, long term gains are taxed at 15% for higher earners (I take the liberty to ignore  that wealthier taxpayers will pay a maximum 20% tax on long-term capital gains. This higher rate applies when your adjusted gross income falls into the top 39.6% tax bracket.) And those in the 10 or 15% bracket pay 0%. With median household income at $56K in 2016, and the 15% bracket top at $76K, this suggests that most people (gov data shows $75K is 80th percentile) have an effective unlimited Roth. So long as they invest in a way that avoids short term gains, they can rebalance often enough to realize LT gains and pay zero tax.  It's likely the $80K+ earner does have access to a 401(k) or other higher deposit account. If they don't, I'd still favor pretax IRAs, with $11K for the couple still 10% or so of their earnings. It would be a shame to lose that zero bracket of that first $20K withdrawal at retirement. Again working backwards, the $78K withdrawal would take nearly $2M in pretax savings to generate. All in today's dollars."