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Starting a Roth IRA
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February 28, 2000: 4:10 p.m. ET
Putting your after-tax dollars to work with a much greater selection of funds
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NEW YORK (CNNfn) - While there is usually a narrow choice of investments in 401(k), a Roth IRA can offer a much wider choice of funds and is tax-free when withdrawals begin.
In response to a reader's question, Barbara Steinmetz, a certified financial planner from Burlingame, Calif., and a member of the Financial Planning Association, goes through the ins and outs of the Roth IRA.
Ask the expert a question.
I recently graduated from college and started a new job. The company that I work for has a 401(k) plan. I also want to start a Roth IRA. How do I coordinate the investments in both? I also don't know how to choose a Roth IRA.
It is fantastic that you realize the importance of making contributions to your 401(k), not only will these contributions help you save for your future retirement goals; they will reduce your tax liability. In 2000 you are allowed to contribute the of lesser of 15 percent of your salary or $10,500. This represents a $500 increase over prior years. If your employer also contributes a matching amount (up to a certain percentage), you will want to be sure to spread your contributions throughout the entire year to maximize this match. You should maximize your 401(k) contributions and then plan on placing up to $2,000 annually in a Roth IRA.
It is important to remember that there are differences between Roth IRA and other IRA forms. The Roth IRA contribution is made with after-tax dollars, which grow tax-free. There is no required minimum distribution age (April 1 of the year after you turn 70-1/2 applies to other IRAs, 401(k)s, etc). When you begin to make withdrawals after the age of 59-1/2, the entire amount is tax-free.
There are some income limitations associated with allowable contributions: A single person will find his $2,000 contribution limit phase-out with an Adjusted Gross Income (line 33 on your federal tax return Form 1040) of between $95,000 and $110,000; for married filing joint the phase-out is between $150,000 and $160,000.
Your choice of investments for the money in your 401(k) will be made from a list of funds (often numbering from three to 12) provided by whomever your employer has selected to be the plan's custodian. The selection of funds which can be used in your Roth IRA are much greater as many of the mutual fund families or the brokerage houses offer a very large universe from which to select.
It is important that you think of the entire pile of money (your 401(k), your Roth IRA, and any other investments) as a whole. If your plan has a great large cap fund, a good mid-cap fund, and not such a stellar performer in the foreign arena, for example, you might want to look to your Roth IRA investments to provide this exposure.
It is especially important to remember that you have a long time horizon until you will need to use the money that you are saving. Do not focus on the volatility in the short-term, but remember your time horizon and the importance of ongoing contributions. You will also want to pay any fee associated with the maintenance of your Roth IRA outside the account and not have it deducted from your contributions. You will not be able to replace money taken out in this fashion. 
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