What is the best investment for a new retirement account?

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Q. My daughter now out of college works but her company doesn’t offer a 401(k). She would like to start saving for her retirement and wants to open a Roth IRA. She has $1,000 to start with and then would contribute a small amount each month. She doesn’t know what investment it should go into. Do you have any suggestions?

– Dad

A. Congratulations to your daughter on her new job and for thinking about retirement.

It’s never too early to start saving, and she’s wise to consider an IRA without a 401(k) in her business.

Before we get to investments, let’s first consider what type of IRA she should choose.

The main difference between a traditional IRA and a Roth IRA is the tax treatment, said Claudia Mott, certified financial planner at Epona Financial Solutions in Basking Ridge.

The appeal of a traditional IRA for many is the ability to deduct the contribution from earned income when filing taxes each year, Mott said.

“Traditional IRAs require (RMD) distributions to begin at age 72, while Roth IRAs have no such rule,” she said. “RMDs are considered income and must be reported on your tax return if the contributions were deductible in the year they were made.”

In contrast, with a Roth you cannot deduct the contributions, but when you withdraw the money it is completely tax exempt.

Mott said the decision to open a traditional IRA or a Roth is often based on whether the investor believes future tax rates will be higher than they are now.

“For a recent college graduate, at the start of a career, the income tax bracket today is likely to be lower than it will be in the future,” Mott said. “That would tip the scales in favor of a Roth IRA.”

Mott said your daughter might consider investing her contribution in a target date mutual fund. These are also called lifecycle funds.

She said the funds are designed to be well-diversified by holding both domestic and international equity funds as well as fixed-income bond funds, she said, noting that some families of funds may also include other specialist investments such as REITs or commodities.

“The appeal of these investments is that the allocation is managed by the fund company and will become increasingly conservative as the retirement date gets older,” she said. “For those who are not comfortable with the allocation between equities and bonds for their retirement date, a more conservative version of the fund can be purchased.”

She said that for a young investor, a typical target date fund that corresponds to a retirement date of 2060 or 2065 will be 90% invested in equity investments and the rest in fixed income securities.

They’re offered by just about every mutual fund custodian and company that works with individual investors, she said.

Send your questions to [email protected].

Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.

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