I am 52 years old. Should you invest in a Roth IRA or an index fund like the Dow or Nasdaq?
Dear MarketWatch,
I worked as a teacher in Missouri for five years and was able to receive a small pension (less than $400 per month).
Teaching wasn’t a good fit for me, and I could never go back to work and increase my pension, so I decided to cash out my pension and redistribute those funds to something that would pay me more.
I paid off some of my debt and then invested the maximum allowable amount of $6,500 into a Roth IRA. I’m 52 years old and don’t plan on retiring for at least another 20 years.
After paying taxes, I’m not sure whether I should put the remaining money in an IRA or invest it in an index fund like Dow or Nasdaq. What is your advice?
Related: I am 73 years old, retired, and taking RMDs. But what happens if I become incapacitated and miss it for years?
Dear readers,
Let me answer your question with a question. Why choose one over the other when you can have both? Index funds are a popular choice for IRA investors, so there’s no reason you can’t add them to your Roth IRA portfolio.
As the name suggests, index funds use indices such as the S&P 500 SPX.,
Dow Jones Industrial Average DJIA,
Nasdaq Composite, COMP,
Or any number of other things used as benchmarks. They’re especially useful for long-term investing, making them a good choice if you’re decades away from retirement.
If you’re interested in retirement investment planning but aren’t sure where to start, take a look at target date funds. Managers link these portfolio funds to specific retirement years (e.g., 2030 or 2055). If you’re 20 years away from retirement, you could look at a target date fund of 2045. (Watch the fees, also called expense ratios, carefully.)
I am not a financial planner. We do not provide specific investment advice, especially since we are not your financial planner. Any funds mentioned here are simply meant to explain and illustrate how they work and what to look for.
target date fund
Back to target date funding. Looking at Vanguard Target Retirement Fund 2045, VTIVX, half of the fund is invested in Vanguard’s Total Stock Market Index Fund VSMPX, another 33% is invested in Vanguard’s Total International Stock Index Fund VGTSX, and 10% is under “Holdings” displayed in . In the company’s bond market index fund VTBIX, 4% is in Vanguard’s international bond index fund VTILX and 1% is in liquidity. Going one step further, if we take an overall stock market index fund as an example, the top 10 holdings include Apple, AAPL,
Microsoft, MSFT,
Amazon, AMZN,
And NVIDIA. NVDA,
Vanguard isn’t the only company that offers target date funds or index funds. Other popular brands include Fidelity, Blackrock BLK,
T. Rowe Price TROW,
Schwab SCHW,
and American funds. You can spend your day researching options and comparing your holdings.
Another option is to invest in a traditional IRA now if you find yourself in a higher tax bracket than you expect in the future (but this doesn’t include an assumption about your tax bracket ending in 2025). Once your tax debt is reduced, you can transfer some of those funds to a Roth account. Having a Roth IRA is a great tool for retirement savings, and diversifying your investments and tax bases gives you stronger options for the future.
Do you have any questions about your super? Please send an email to: HelpMeRetire@marketwatch.com
