Roth IRA/Investment Accounts

[mrchapel]

I recently came into an inheritance from a relative who passed on. Though the estate is currently being valued and will have to go to probate due to some unresolved matters with a property he owned, there was a lifetime annuity that was created and not included in the trust. What it boils down to is, for the next 12 years, I am to receive a monthly deposit of $500 (from the annuity). I want to do right by him, as he did a lot for my family and was a true gentleman.

His close friend and personal financial adviser has recommended that I put an amount towards a Roth IRA and he suggested opening a Money Market account. Here's the problem: I don't know how any of this works. Can someone be kind enough to explain what my best options are? He attempted to explain it, but I didn't quite grasp it. Any help is greatly appreciated!

 

[lawyerdad]

Originally Posted by mrchapel

I recently came into an inheritance from a relative who passed on. Though the estate is currently being valued and will have to go to probate due to some unresolved matters with a property he owned, there was a lifetime annuity that was created and not included in the trust. What it boils down to is, for the next 12 years, I am to receive a monthly deposit of $500 (from the annuity). I want to do right by him, as he did a lot for my family and was a true gentleman.

His close friend and personal financial adviser has recommended that I put an amount towards a Roth IRA and he suggested opening a Money Market account. Here's the problem: I don't know how any of this works. Can someone be kind enough to explain what my best options are? He attempted to explain it, but I didn't quite grasp it. Any help is greatly appreciated!

Do you not currently have an IRA? If not, establishing and funding one is a very, very good idea. (Roth IRA's have income cut-offs, but I assume your income level is below the cut-off, given your friend's advice. If you're above the cut-off, you should still have a regular IRA.) Currently, the annual IRA contribution limit is $4,000 per person, per year. So, the $500/mo is a bit more than you'd need to fully an IRA for yourself, a bit less than the amount you'd need to fully fund one for yourself and another for your wife (I'm assuming you're married, apologies if that's unfounded).
A money market account is basically just a "holding" account, where you can have the annuity payments deposited, and then transfer the money out to the IRA account at the appropriate time. Basically, it's equivalent to a checking account, but with a bit higher interest and a bit less convenience for everyday transactions (generally you can write only a limited number of checks against a MM, don't get an ATM, etc.) By way of example, with most brokerage accounts your "unused" cash that's not invested in stocks or bonds (your cash balance) is in a money market account.
Opening a money market account is easy, just like opening any other bank or brokerage account. All the big banks, Fidelity, Vanguard, T. Rowe Price, etc. can do it for you, often online. If you're going to follow your friend's advice and basically treat the annuity money as the primary funding source for an IRA, it might be easiest to have the money market with the same institution where you'll have the IRA, just to simplify record-keeping and the like.
Hopefully that's helpful. Was there something specifically you didn't understand that I didn't address? I can try to answer more specific questions, although there are plenty of folks here who are more expert than I am about such matters.

 

[mrchapel]

Originally Posted by lawyerdad

Do you not currently have an IRA? If not, establishing and funding one is a very, very good idea. (Roth IRA's have income cut-offs, but I assume your income level is below the cut-off, given your friend's advice. If you're above the cut-off, you should still have a regular IRA.) Currently, the annual IRA contribution limit is $4,000 per person, per year. So, the $500/mo is a bit more than you'd need to fully an IRA for yourself, a bit less than the amount you'd need to fully fund one for yourself and another for your wife (I'm assuming you're married, apologies if that's unfounded).
A money market account is basically just a "holding" account, where you can have the annuity payments deposited, and then transfer the money out to the IRA account at the appropriate time. Basically, it's equivalent to a checking account, but with a bit higher interest and a bit less convenience for everyday transactions (generally you can write only a limited number of checks against a MM, don't get an ATM, etc.) By way of example, with most brokerage accounts your "unused" cash that's not invested in stocks or bonds (your cash balance) is in a money market account.
Opening a money market account is easy, just like opening any other bank or brokerage account. All the big banks, Fidelity, Vanguard, T. Rowe Price, etc. can do it for you, often online. If you're going to follow your friend's advice and basically treat the annuity money as the primary funding source for an IRA, it might be easiest to have the money market with the same institution where you'll have the IRA, just to simplify record-keeping and the like.
Hopefully that's helpful. Was there something specifically you didn't understand that I didn't address? I can try to answer more specific questions, although there are plenty of folks here who are more expert than I am about such matters.

Thank you very much, your explanations just cleared up quite a bit of confusion on my part. On the contrary, I am not married. So basically, I could contribute around $300 ($333.33 per month to be exact, according to $4000/12) to a Roth IRA a month?

At this point, would you advice hiring my own financial advisor through one of the big houses like AG Edwards, etc. or someone on a smaller level?

I want to invest wisely, but I am trying to get educated about the best options for me. I really do not know much about this.

The stock market confuses me. I've been looking at CD's and high-yield savings accounts, but I am not sure how that works either. Does the interest, depending on when the interest is compounded and the corresponding APY, get deposited yearly, or is that tied to the interest compounding?

 

[brimley]

IRAs are primarily retirement accounts. Easiest thing to do is get ahold of one of the Vanguard Target 2040 funds (or whatever date you think you want to retire). Vanguard believes that low-cost, index based funds will outperform higher-cost, actively managed funds. If that sounds like a good philosophy to you, and you don't want to micromanage your stuff, just rock that. You can always play with hobby investing with the leftovers.

Roths are awesome. You pay taxes now so that they can accumulate tax free in the future. You can pull out the capital invested at any time. There are restrictions on when you can pull out the earnings without paying a penalty, but you can even do that for stuff like buying a house.

 

[lawyerdad]

I generally agree with nyf. Vanguard index funds or targeted retirement funds are a great way to go, especially if you're not confident of your ability to handle your own investments on a more complex level (and I don't mean that as faint praise - many people who are incredibly sophisticated about these things choose to put the bulk of their retirement/investment funds in such vehicles). And, if down the road you decide you want to take a more active hand in managing your investments, you can always move funds from the index fund to a brokerage account or wherever.
I'm not a big fan of investment advisors, but then I'm generally of the self-study-like-crazy and DIY mindset. If you need somebody to guide you until you feel like you've got your sea legs, make sure you get a certified financial advisor, and somebody who compensated on a fee-based basis (that is, you pay them by the hour our as a percentage of the amount of money they're handling for you, or by the hour) rather than someone who's making commissions or kickbacks that could influence how he/she steers your money. Better yet, go to Fidelity or Vanguard and have one of their folks walk you some of the basics, they'll do it for free if you're going to be opening an account.
Oh, and read this:
http://search.barnesandnoble.com/boo...56029634&itm=2
You can also learn a lot just by going to the website of Vanguard, Fidelity, E*TRADE, Schwab, or whatever and reading around - they all have glossaries that will explain terms like "IRA", "money market", etc.

Oh, and you could either fund your IRA in equal amounts every month, or just let the money accumulate there and make one $4000 investment at the end of the year, whichever you prefer. Many (including me) would recommend doing the regular monthly contribution if possible, because it allows you to practice what's known as "dollar cost averaging". (You can begin your self-study by googling that term

)