Dear MarketWatch,\u00a0<\/strong><\/h4>\nI spent five years as a teacher in Missouri, which made me eligible for a tiny pension (under $400 per month). <\/em><\/p>\nTeaching didn\u2019t work out for me, and since I will never be able to return to the profession and increase my pension, I decided to cash in my pension and reallocate the funds to something that would pay more.\u00a0<\/em><\/p>\n\nI paid down some debt and then invested $6,500 \u2014 the maximum allowable amount \u2014 into a Roth IRA. I\u2019m 52 but don\u2019t plan to retire for at least another 20 years.\u00a0<\/em><\/p>\nOnce I\u2019m done with my taxes, I am not certain whether I should put the remaining funds in the IRA or invest them in index funds like the Dow or Nasdaq. What is your advice?<\/em><\/p>\nRelated:\u00a0<\/strong>I\u2019m 73, retired and take my RMDs. But what happens if I become incapacitated and miss them for several years?<\/a><\/p>\nDear Reader,\u00a0<\/h4>\n
I\u2019m going to answer your question with a question. Why choose one over the other when you can have both?\u00a0Index funds are a popular choice for investors with IRAs, so there\u2019s no reason why you couldn\u2019t add them to your Roth IRA\u2019s portfolio.\u00a0<\/p>\n
For those who may be unaware, and as the name suggests, index funds use indexes, such as the S&P 500
\n SPX<\/a>,<\/span>
\n Dow Jones Industrial Average
\n DJIA<\/a>,<\/span>
\n Nasdaq Composite,
\n COMP,
\n +1.60%<\/bg-quote><\/a>
\n or many others, as benchmarks. They\u2019re particularly useful for long-term investing, which makes them a good choice when your retirement is a couple of decades away.<\/p>\nWhen you have your retirement investing plans on the radar, but aren\u2019t sure where to start, look at target-date funds. Managers link these portfolio funds to specific years for retirement \u2014 say, 2030 or 2055. If your retirement is 20 years away, you could look at a target-date fund for 2045. (Keep an eye on fees, also called expense ratios.)<\/p>\n
I am not a financial planner \u2014 specifically, not your financial planner \u2014 so I do not provide specific investment advice. Any funds I mention here are simply to illustrate and explain how they work and what to look for.\u00a0<\/p>\n
Target-date funds<\/h4>\n
Back to the target-date fund. If you look at Vanguard Target Retirement Fund 2045, VTIVX you will see under \u201choldings\u201d that half of that fund is invested in Vanguard\u2019s Total Stock Market Index Fund VSMPX, another 33% is in Vanguard\u2019s Total International Stock Index Fund VGTSX, 10% is in the company\u2019s bond-market index fund VTBIX, 4% is in Vanguard\u2019s international bond index fund VTILX, and 1% is in liquidity. Take it a step further, using the total stock-market index fund as an example, you\u2019ll see the top 10 holdings include Apple,
\n AAPL,
\n +0.41%<\/bg-quote><\/a>
\n \u00a0 Microsoft,
\n MSFT,
\n +1.56%<\/bg-quote><\/a>
\n Amazon,
\n AMZN,
\n +2.71%<\/bg-quote><\/a>
\n and NVIDIA.
\n NVDA,
\n +3.58%<\/bg-quote><\/a>\n <\/p>\nVanguard is far from the only company that offers target-date funds or index funds. Other big names include Fidelity, Blackrock
\n BLK,
\n +0.51%<\/bg-quote><\/a>,<\/span>
\n T. Rowe Price
\n TROW,
\n -2.37%<\/bg-quote><\/a>,<\/span>
\n Schwab
\n SCHW,
\n +1.44%<\/bg-quote><\/a>
\n and American Funds . You can make a day of searching their options and comparing holdings.\u00a0<\/p>\nAnother option you have is to invest in a traditional IRA right now if you\u2019re in a higher tax bracket than you expect to be in the future (though not including assumptions about tax brackets when they sunset in 2025). As your tax liabilities drop, you can convert some of those funds into your Roth account. Having a Roth IRA is a great tool for retirement savings, and diversifying your investments and your taxability will make any option you have in the future even more powerful.<\/p>\n
Have a question about your own retirement savings? Email us at\u00a0<\/em><\/strong>HelpMeRetire@marketwatch.com<\/strong><\/em><\/a><\/p>\n<\/p><\/div>\n<\/div>\n
Teaching didn\u2019t work out for me, and since I will never be able to return to the profession and increase my pension, I decided to cash in my pension and reallocate the funds to something that would pay more.\u00a0<\/em><\/p>\n I paid down some debt and then invested $6,500 \u2014 the maximum allowable amount \u2014 into a Roth IRA. I\u2019m 52 but don\u2019t plan to retire for at least another 20 years.\u00a0<\/em><\/p>\n Once I\u2019m done with my taxes, I am not certain whether I should put the remaining funds in the IRA or invest them in index funds like the Dow or Nasdaq. What is your advice?<\/em><\/p>\n Related:\u00a0<\/strong>I\u2019m 73, retired and take my RMDs. But what happens if I become incapacitated and miss them for several years?<\/a><\/p>\n I\u2019m going to answer your question with a question. Why choose one over the other when you can have both?\u00a0Index funds are a popular choice for investors with IRAs, so there\u2019s no reason why you couldn\u2019t add them to your Roth IRA\u2019s portfolio.\u00a0<\/p>\n For those who may be unaware, and as the name suggests, index funds use indexes, such as the S&P 500 When you have your retirement investing plans on the radar, but aren\u2019t sure where to start, look at target-date funds. Managers link these portfolio funds to specific years for retirement \u2014 say, 2030 or 2055. If your retirement is 20 years away, you could look at a target-date fund for 2045. (Keep an eye on fees, also called expense ratios.)<\/p>\n I am not a financial planner \u2014 specifically, not your financial planner \u2014 so I do not provide specific investment advice. Any funds I mention here are simply to illustrate and explain how they work and what to look for.\u00a0<\/p>\n Back to the target-date fund. If you look at Vanguard Target Retirement Fund 2045, VTIVX you will see under \u201choldings\u201d that half of that fund is invested in Vanguard\u2019s Total Stock Market Index Fund VSMPX, another 33% is in Vanguard\u2019s Total International Stock Index Fund VGTSX, 10% is in the company\u2019s bond-market index fund VTBIX, 4% is in Vanguard\u2019s international bond index fund VTILX, and 1% is in liquidity. Take it a step further, using the total stock-market index fund as an example, you\u2019ll see the top 10 holdings include Apple, Vanguard is far from the only company that offers target-date funds or index funds. Other big names include Fidelity, Blackrock Another option you have is to invest in a traditional IRA right now if you\u2019re in a higher tax bracket than you expect to be in the future (though not including assumptions about tax brackets when they sunset in 2025). As your tax liabilities drop, you can convert some of those funds into your Roth account. Having a Roth IRA is a great tool for retirement savings, and diversifying your investments and your taxability will make any option you have in the future even more powerful.<\/p>\n Have a question about your own retirement savings? Email us at\u00a0<\/em><\/strong>HelpMeRetire@marketwatch.com<\/strong><\/em><\/a><\/p>\n<\/p><\/div>\n<\/div>\nDear Reader,\u00a0<\/h4>\n
\n SPX<\/a>,<\/span>
\n Dow Jones Industrial Average
\n DJIA<\/a>,<\/span>
\n Nasdaq Composite,
\n COMP,
\n
\n or many others, as benchmarks. They\u2019re particularly useful for long-term investing, which makes them a good choice when your retirement is a couple of decades away.<\/p>\nTarget-date funds<\/h4>\n
\n AAPL,
\n
\n \u00a0 Microsoft,
\n MSFT,
\n
\n Amazon,
\n AMZN,
\n
\n and NVIDIA.
\n NVDA,
\n
\n BLK,
\n
\n T. Rowe Price
\n TROW,
\n
\n Schwab
\n SCHW,
\n
\n and American Funds . You can make a day of searching their options and comparing holdings.\u00a0<\/p>\n