You wouldn’t know it from the long lines of holiday shoppers vying for everything from Lalaloopsy Silly Hair dolls to iPads, but consumers still tremble at the state of the economy. The wise investor is the informed, astute investor. When it comes to CDs, money market accounts, and traditional versus Roth individual retirement accounts, there’s a lot to learn about where and how you should invest your money. Steven Dolvin, Ph.D., CFA, associate professor of finance at Butler University, explains what it means to trust your money to these different types of investments.
With the current economic situation, how safe are IRAs?
IRAs are in and of themselves, neither safe nor unsafe. When you have an IRA, you deposit money in it and then decide what to invest that money in. That decision — where to invest — determines how risky the account is. If I invest $5,000 in an IRA and put it all in a U.S. government bond fund, that’s much safer than an investor putting the same amount in a small-cap stocks fund. The IRA is just a platform. The investments themselves and the basic security of the IRA itself determine the level of risk.
Given the instability of the economy, is an individual better off investing in a traditional IRA or a Roth IRA?
Selecting a traditional versus a Roth IRA is determined by your individual situation. Two issues come up here: your tax rate and your age. The lower your tax rate and the younger your age, the more attractive a Roth looks. The younger your age, the more time you have for that money to grow and when you eventually withdraw the money, you will not have to pay taxes. The economy could play a role in terms of tax rates and returns, but your age and your tax rate determine (the best choice). More