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I am currently a sophomore in college and will earn about $4000 from a part-time job in the spring. I was hoping to open up a mutual fund via a Roth IRA from Fidelity after I get all my money since the minimum deposit for their mutual funds is $2000.

However, I currently have about $1000 at hand (after taking into account for textbooks, emergency fund, utility bills, housing, pocket change, etc). I was wondering if it would be a good idea to open up a regular account and then invest in something like, S&P 500 ETFs with the same brokerage while I wait for my opportunity to open a mutual fund. I'm not sure what or how many to buy, except that I feel like I should at least be doing something beneficial with the money instead of letting it sit there idle until the earned $4000 comes along. Fidelity also provided a list of commission-free ETFs, which makes me wonder if I should buy a couple ETFs in a regular (not retirement) account, in case I want the compounded money later on in mid-life (to buy a car or house, for instance to minimize mortgage).

Basically, is there any advantage of putting the $1000 into a regular account right now instead of holding onto it to combine with the Roth IRA I will open up at the end of the spring? What if, for instance, I want to buy a car about 10 or 15 years down the road?

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    I think with all your edits, you reduced your question to a completely off-topic "Where should I invest". Its way too broad to answer. – littleadv Jan 20 '12 at 22:06
  • Not necessarily "where to invest", but whether the benefits outweigh the drawbacks of having a long-going regular trading account along with your Roth IRA :) – onaboat Jan 20 '12 at 22:22
  • Say you need to buy a car or a house in your mid-life, for instance. I'm sure that there's a hefty penalty for pulling out the money you've managed to accumulate from letting your Roth IRA sit there. But if you pull out from a regular account, I'm assuming it's not anywhere near as bad? – onaboat Jan 20 '12 at 22:23
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    @onaboat But that's what people were telling you. You said you already took that into account - now it appears that you didn't. – littleadv Jan 20 '12 at 23:01
  • Well, I mean, wouldn't the $1000 be worth more than just $1000 in about 20 years down the road in ETFs (as opposed to just a savings account)? Or if we say that it was actually $10,000 we were dealing with, not $1000, if that makes a difference – onaboat Jan 20 '12 at 23:55
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The plan doesn't make sense.

Don't invest your money. Just keep it in your bank account. $5000 is not a lot, especially since you don't have a steady income stream. You only have $1000 to your name, you can't afford to gamble $4000. You will need it for things like food, books, rent, student loans, traveling, etc. If you don't get a job right after you graduate, you will be very happy to have some money in the bank. Or what if you get a dream job, but you need a car? Or you get a job at a suit & tie business and need to get a new wardrobe? Or your computer dies and you need a new one? You find a great apartment but need $2500 first, last & security?

That money can help you out much more NOW when you're starting out, then it will when you're ready to retire in your 60's.

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    And it is better to use that money as MattMcA says instead of investing to get an 8% to 10% return, then having to use a credit card for your purchases and be charged 20%+. Plenty of time to invest when you get a regular job. – Victor Jan 20 '12 at 2:48
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    I clearly stated in the question that all these things are taken care of, and the figures mentioned correspond to what I have after everything-you-can-think-of has been taken into account, with much conservatism.... thank you – onaboat Jan 20 '12 at 3:54
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I'm not following what's the meaning of "open a mutual fund". You don't open a mutual fund, you invest in it. There's a minimum required investment ($2000? Could be, some funds have lower limits, you don't have to go with the Fidelity one necessarily), but in general it has nothing to do with your Roth IRA account. You can invest in mutual funds with any trading account, not just Roth IRA (or any other specific kind).

If you invest in ETF's - you can invest in funds just as well (subject to the minimums set).

As to the plan itself - buying and selling ETF's will cost you commission, ~2-3% of your investment. Over several months, you may get positive returns, and may get negative returns, but keep in mind that you start with the 2-3% loss on day 1. Within a short period of time, especially in the current economic climate (which is very unstable - just out of recession, election year, etc etc), I would think that keeping the cash in a savings account would be a better choice. While with ETF you don't have any guarantees other than -3%, then with savings accounts you can at least have a guaranteed return of ~1% APY (i.e.: won't earn much over the course of your internship, but you'll keep your money safe for your long term investment).

For the long term - the fluctuations of month to month don't matter much, so investing now for the next 50 years - you shouldn't care about the stock market going 10% in April.

So, keep your 1000 in savings account, and if you want to invest 5000 in your Roth IRA - invest it then.

Assuming of course that you're completely positive about not needing this money in the next several decades.

  • Ah, I forgot to mention that Fidelity provided a list of some commission-free S&P 500 ETFs.... it looks like your response is mainly based on the fact that I should avoid whatsoever commissions possible. – onaboat Jan 20 '12 at 21:51
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    @onaboat - comission-free trades usually require holding period (90 days or such), check it. Anyway, that doesn't change my answer by much - you still have unpredictable results that on the short term are likely to cause you losses. Also, selling ETF has tax consequences (unless you buy and sell the ETF inside the Roth IRA account as well). – littleadv Jan 20 '12 at 21:57
  • Hmmm I might have given the impression that I'm trying to do the ETF, and then sell them when I'm ready to open a mutual fund in a couple months... I think what I meant was that I'm trying to keep two things going: just a regular account on the side of having a Roth IRA. The regular account would be so that I can pull compounded money out (during, for instance, mid-life and not retirement) when I need to buy a house or a car for instance. I wasn't sure if that was still the right way to go, so hence the question. (But I guess it was badly phrased if it was interpreted otherwise...) – onaboat Jan 20 '12 at 22:18
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I would wait, and invest that money in a Roth IRA. Because taxes are paid on the contributions to a Roth IRA, you can withdraw the contributions at any time, tax and penalty-free. In addition, you can withdraw contributions and earning to purchase your first home.

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I think it's great idea. Many large brokerages give customers access to a pretty sizable list of zero commission, zero load funds. In this list of funds will certainly be an S&P 500 index. So you can open your account for free, deposit your $1,000 for free and invest it in an S&P index for no cost. You'll pay a very negligible amount in annual expense fees and you'll owe taxes on your gain if you have to use the money. I don't follow the school of thought that all investment money should be in retirement account jail.

But I think if you have your spending under control, you have your other finances in order and just want to place money somewhere, you're on the right track with this idea.

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