RK asks,

I need to roll over a state educator’s retirement fund of $18,000 into an IRA when I move from MS to CO. Should I roll over this money in a traditional or Roth IRA? Which one makes the most money?! How much should I contribute each year? What investment company do you recommend?

I believe you are only eligible rollover your state plan into a traditional rollover IRA.   You can later choose to rollover that money into Roth IRA, but would have to pay income taxes at that point.  Currently if you make more than 100k, adjusted gross, you would be ineligble to rollover to a Roth IRA, however that requirement will be dissapearing in a few years.  The contributions to your state retirement fund were untaxed. A traditional rollover IRA allows keep your money in its untaxed state.

As for which one makes more money, it’s a matter of what investment you purchase within the IRA account. The IRA account is just holding account in which you can choose to invest in anything you want. Stocks, CDs, Mutual Funds, Bonds, and even Real Estate (though it gets complicated investing non traditional investments). What an IRA allows you to do is avoid some taxes. In a traditional deductible IRA, you’ve avoided paying taxes on the outset but do need to pay taxes at withdrawal.  With a Roth IRA, you pay taxes on the outset since it’s funded with post income tax money, but avoid paying taxes at withdrawal.  During the time investments are held in either type of IRA, there’s no need to pay taxes on earnings within the account.  Typically in a taxable account, you would have to pay taxes every year on interest payments, dividends, and other periodic incomes which then reduces what you have available to reinvest.  IRAs allows you to avoid that yearly skim and therefore increase your overall return. That tax deferral can make a large difference over extended time period.  Assuming a 6% rate of rate return, a marginal income tax rate of 30%, and 30 year time frame that $18,000 would grow into $77,768 after paying taxes in a tax deferred account like a rollover IRA vs. $61,845 in a regular taxable account.  In reality the tax benefits are more complicated depending on the types of investments you held in the account.  I have posts here and here that discusses what types of investments are best held in different holding accounts for tax reasons.

As for what company I would open account with, I’m familiar with E*Trade, Ameritrade, and Fidelity. I think all three offer the basics of what you need.  I haven’t done a thorough comparison of the different brokerages at this point, so I can’t make a recommendation of any one particular brokerage with a great deal of confidence.  Fool.com has this handy comparison table.  Smartmoney has a much more thorough survey that I would definitely take a look if you’re inclined to do a little more reading.  I think with whom you open account is less important than just opening account and making contributions.  Open an account to rollover your retirement plan, and then open another account, a Roth IRA account, at the same brokerage.  As long as you make less than 95,000, gross adjusted, you qualify to contribute to a Roth IRA. It’s my belief that the Roth IRA is the first place you should be putting money into after whatever minimum amount you might contribute to get a company match in a 401K or 403B.  You should always contribute to get the company match otherwise you’re basically refusing a portion of the salary you’re entitled to.   Contribute the max you can to the Roth IRA which is 4000 even if it means making adjustments to your budget.   However whatever contribution you can make is good.

Also when rolling over the state plan, be careful.  You should be making a direct rollover from the state plan to the rollover IRA.  For this reason open the rollover IRA first without funding it, and then follow carefully the steps from the brokerage and your state plan for a direct rollover.   If you don’t do a direct rollover, an automatic 20% withholding takes place,  and you would have to make up that 20% out of your own pocket to properly fund the account.   Eventually you would be refunded that 20% if you do properly rollover the full amount, but it’s best to avoid that entire situation altogether.

I recently answered a similar question about where one should be investing money, and would suggest a similar course of action for you.  Put the bulk of your investments into an U.S. Market Index Fund and another portion into a international fund such as DODFX or invest in a target retirement fund.  Given that you have 18,000 to invest and I assume this is the majority of your savings, I’d consider potentially breaking down your purchase into a few blocks so you’re not timing the market at any particular instance.

 Disclaimer Below:

Any investment decision lies in the scope of a greater context, and should reflect your complete financial situation. Again, I’m not a financial advisor – just a friendly guy with friendly advice. This answer should not be construed as anything but that.