What is more effective of the 3 investment options?

Question

Mutual Funds, REITs, or a Roth IRA? I know that some of these investments can actually fall into the other as well. Example: You can have Mutual Funds as a part of your Roth IRA, and REITs as a part of your Roth IRA as well or a Mutual Fund consisting of REITs. Anyway, though what's the most effective way to go to make your money work for you instead of you working for your money with these 3? What would be the best choice if all 3 of these were in your plans to create a little wealth for the long term and where it can compound interest?

Answer 1

Good question.

Mutual Funds and REITS are investment choices, whereas a Roth IRA is type of a retirement plan. (The funds and REITS go in the Roth IRA)

You can contribute up to $5000 to a Roth and that money will grow tax free.  You can start withdrawing at age 59.5.

Perhaps you open up a Roth and put 2000 in an index fund like the S&P500, 2000 in a good growth fund, and 1000 in a solid REIT.

Good Luck!

Answer 2

Mutual funds can earn higher returns.  But in such falling equity markets, it is very difficult to select the funds which outperform

Answer 3

First, it depends on your personal situation, your income, your tax rate, you age, your goals.

I could write a book trying to answer your question giving all the situations and criteria. There are plenty of books out there.

But you did ask about my plan.

Surely, for long term wealth if you are very young, locking your money away in a tax deferred account for decades provides the best returns "FOR THAT MONEY".  

But is that the best for overall wealth? I say not exactly. You will earn and have to live between now and retirement.

For me, my thinking was the biggest thing you want to manage, and will provide the greatest wealth accumulation is to manage your taxes. The difference between paying 15% or 25% in income taxes is HUGE.

Starting out, I assumed I would making more money later in life, certainly if I invested my money.

But I was not in the 25% bracket starting out. So I invested AFTER tax wanting to create MORE income to help maximize the money I was making in the 15% bracket. Not until I reached the 25% bracket did I shift to the retirement funds.

Afterall, you have to pay taxes on that money at some time. And since you are considering a Roth, this is money that is already been taxed.

The main reason was to maximize the value of my deductions. It might take a while, if you are not higher income, to reach the 25% bracket if you are deducting home mortgage interest, have a spouse and dependants or other deductions.  I wanted my deductions to be having an effect at keeping me out of the 25% bracket. I saw that as a 10% return on my money (25%-15%=10%).

And stocks held over a year are only taxed at 15% as capital gains. So I used high yield stocks, high dividends to boost income.  As my income rose, I avoided the high yield.

So where you are in your life, career, and living situation (deductions) makes a difference.

But I will say a Roth is nice and a great benefit if you plan to be higher income in retirement. Plus I believe you can pull out deposts (but not returns) without penalty, that have been in there for at least 5 years.  

So you can consider the Roth as your emergency money after a time.

So learn, consider, and Good Luck