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I am a 24 year old high school teacher. Currently, I don't have that much capital to open two accounts. I would rather focus on one at a time until I gain more capital.

Should I start with a Roth IRA and max out $5,500 every year, or invest in the S&P 500 (I have $3000 to open an account) and build that up?

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    These options are not mutually exclusive. – mattm Oct 4 '17 at 14:04
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    Your question does not exactly make sense. You could invest in the S&P 500 inside a Roth IRA. The two are not opposites. – Grade 'Eh' Bacon Oct 4 '17 at 14:05
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    Put another way - a Roth IRA is a 'tax vehicle' that gives you certain tax advantages. Anything you invest in an account listed by your financial institution as a 'Roth IRA', can get those advantages. It's like saying, "Should I open an investment account with Bank of America, or should I buy stocks?" When really, opening an investment account could be one of the steps to buying stocks. – Grade 'Eh' Bacon Oct 4 '17 at 14:06
  • Could someone explain how to invest in the S&P 500 inside a Roth IRA? – YungAznBeast Oct 4 '17 at 14:22
  • Related: Best starting options to invest for retirement without a 401k – Ben Miller - Remember Monica Oct 4 '17 at 14:27
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Your question indicates confusion regarding what an Individual Retirement Account (whether Roth or Traditional) is vs. the S&P 500, which is nothing but a list of stocks.

IOW, it's perfectly reasonable to open a Roth IRA, put your $3000 in it, and then use that money to buy a mutual fund or ETF which tracks the S&P 500.

In fact, it's ridiculously common... :)

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    The "A" stands for "arrangement" not "account". There are questions here whose answers use this fact as part of the answer. – JTP - Apologise to Monica♦ Oct 4 '17 at 16:16
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    @JoeTaxpayer while the IRS calls them Arrangements, brokerages call them Accounts, since they are a kind of account in their systems. – RonJohn Oct 4 '17 at 16:37
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    @Sam what I originally wrote was "mutual fund which tracks the S&P 500". VFIAX has a 0.04% expense ratio, and so does VOO. So why should I bother with VOO, which -- as of yesterday -- forces me buy in units of $232 when I can buy any dollar amount of VFIAX? – RonJohn Oct 4 '17 at 17:50
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    @RonJohn Well, in this particular case, VFIAX requires a $10k minimum, and the OP only has $3k, exactly enough to meet the minimum for VFINX, the investor-class version, which has an expense ratio of .14%–3.5x that of VOO, which has no minimum. – Kevin Oct 4 '17 at 18:26
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    @Sam whether a fund is "mutual" (how it's legally organized) or not has nothing to do with how it decides which securities to buy & sell (track an index, or be actively managed). – RonJohn Oct 4 '17 at 19:52
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A Roth IRA is simply a tax-sheltered account that you deposit funds into, and then invest however you choose (within the limits of the firm you deposit the funds with).

For example, you could open a Roth IRA account with Vanguard. You could then invest the $3000 by purchasing shares of VOO, which tracks the S&P 500 index and has a very low expense ratio (0.04 as of last time I checked). Fidelity has a similar option, or Schwab, or whatever brokerage firm you prefer.

IRAs are basically just normal investment accounts, except they don't owe taxes until you withdraw them (and Roth don't even owe them then, though you paid taxes on the funds you deposit). They have some limitations regarding options trading and such, but if you're a novice investor just looking to do basic investments, you'll not notice.

Then, your IRA would go up or down in value as the market went up or down in value.

You do have some restrictions on when you can withdraw the funds; Roth IRA has fewer than a normal IRA, as you can withdraw the capital (the amount you deposited) without penalty, but the profits cannot be withdrawn until you're retirement age (I won't put an actual year, as I suspect that actual year will change by the time you're that old; but think 60s).

The reason not to invest in an IRA is if you plan on using the money in the near future - even as an "emergency fund". You should have some money that is not invested aggressively, that is in something very safe and very accessible, for your emergency fund; and if you plan to buy a house or whatever with the funds, don't start an IRA. But if this is truly money you want to save for retirement, that's the best place to start.

**Note, this is not investment advice, and you should do your own homework prior to making any investment. You can lose some or all of the value of your account while investing.

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  • Oddly I was looking at this yesterday, but couldn't find what I would consider the equivalent of VOO in Schwab's list of ETFs. – Jordan.J.D Oct 4 '17 at 15:29
  • SWPPX is theirs; it's not nearly as low of an expense ratio, though (0.09). You may still be able to trade VOO, depending on how your account is set up, from another brokerage; you just have commissions that you often wouldn't if you were trading their own funds. – Joe Oct 4 '17 at 15:47
  • I forget the ticker, but Schwab now has an etf far lower in cost and no fee to buy. You can't invest by the dollar, so $1000 might buy 23 shares with $27 left until you have the cash for full share – JTP - Apologise to Monica♦ Oct 4 '17 at 16:18
  • @Joe Thank, I will look at it, I ended up going with VOO yesterday though. – Jordan.J.D Oct 4 '17 at 16:21
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    The ETF I was thinking of was SCHX, not quite S&P, it's the top 750 in the Dow Total Market index. That said, it has a .03% fee which was appealing for my Daughter's Roth IRA. – JTP - Apologise to Monica♦ Oct 4 '17 at 21:14
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Investment account vs bank account

Anytime you invest in stocks, you do that inside an investment account - such as the type you might open at ETrade, Vanguard, Fidelity or Charles Schwab. Once you have the account and fund it, you can tell the system to invest some/all of your money in

  • mutual funds, such as an S&P 500 index fund
  • ETFs (Exchange Traded Funds), which are the same thing, except packaged as a stock, so you can trade it with no minimum investment, no wait-to-sell rules, and sell it instantly based on instant market pricing.

Cash account vs Roth IRA vs Traditional IRA

When you open your investment account, their first question will be whether this is a cash account, traditional IRA, or Roth IRA. The broker must report this to the IRS because the tax treatment is very different.

  • The cash account is not an IRA. You must painstakingly track each trade, report it to the IRS yourself on 1040 schedule D, and pay taxes on your gains.
  • IRA's they don't care about tracking each transaction and profits per transaction. On a Roth they don't tax you. On a traditional IRA they charge regular income tax when you withdraw.
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  • Recently (beginning 2011 to 2016 depending on security type) for taxable accounts brokers are required to track basis and compute gain/loss and report them to the IRS and you on 1099-B at end of year, and even transfer info if you change brokers. They also now enforce the requirement on a partial sale you must select which lot(s) to sell, either specific or by rule like FIFO LIFO lowest-cost highest-cost etc, at the sale or in advance, not afterwards as you might get away with in older times. – dave_thompson_085 Oct 5 '17 at 0:07

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