comments
Go Open A Roth IRA Right Now!!!
Email
 Print
|
Do you have a Roth IRA? If so, excellent job, you’ve already done one of the best things you could probably do to ensure you have a financially viable retirement. If not, why not? If your excuse isn’t, I make more than $110,000 and thus am not allowed to contribute, then your excuse is not good enough.
Don’t have enough time? It takes literally fifteen minutes. Do it while you’re watching American Idol or CSI: Saturn. Fifteen minutes. You spend more time getting dressed in the morning. Go to Vanguard, or Fidelity, or TD Ameritrade, or Etrade or your favorite brokerage firm. (I even linked to the Open Account page to save you a few seconds)
Don’t have enough money? Did you know that if you contributed $4,000 (max for 2006 and 2007) right now and it appreciated at a mere 7% for the next twenty years, you would have $15,478.74? While that doesn’t sound like a lot of money, 7% is a relatively conservative number for your investments. If you were to instead use 11%, you’d have $32,249.25. If you were to stretch the time out thirty years at 11%, you’re talking $91,569.19 – all from a single $4,000 contribution right now.
Now, ignoring all those crazy appreciation numbers, remember that you don’t have to contribute all $4,000. You can contribute $1,000 or $100, but you need to contribute something. (I’d argue that you want to contribute as much as you can to avoid low balance fees but $1,000 is better than $0)
Afraid you’ll need the money? Since your Roth contributions are after-tax contributions, you can withdraw those contributions whenever you want. Dire emergency and you have no choice but to raid the Roth? You can still do it. You can still change your mind.
Opening a Roth IRA is ridiculously easy and it’s not something to be afraid of. Don’t be afraid you don’t have enough money and instead challenge yourself to find a way to save a hundred bucks a month and at the end of the year you’ll have $1,200 saved away (worth $27,470.76 in thirty years at 11%) that you didn’t think you had. You have until April 16th to file your taxes this year so you have until April 16th to open up a Roth IRA and contribute to it for 2006. Go! Do it!
{ 119 comments, please add your thoughts now! }
Related Posts
 By Jim |
 Stumble It! Bookmark reddit.comTags: ETrade, Fidelity, Retirement, Roth IRA, TD Ameritrade, Vanguard Jan 18, 2007 | Read more in Investing, Retirement |
Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.
how does the irs tax the ira account????????
The IRS doesn’t tax the Roth IRA right now because you are contributing money after you’ve already paid income taxes on them. You are only penalized if you withdraw earnings before retirement age.
I agree–there’s no reason for anyone eligible not to have a Roth. Especially for young people, and especially for young people who may change jobs to seek fulfillment or may be self-employed, its simplicity and accessibility make it absolutely the best retirement vehicle there is.
I even did a walkthrough for those interested in opening a Roth online–I often find that one of the biggest barriers to any financial decision is lacking a full knowledge of the process of making the decision.
Funny coincidence, I tried opening myself an Roth IRA yesterday with Vanguard. I chose a mutual fund IRA, chose the fund with one of the lowest minimum initial investment. Problem was, when it came to the point of entering yearly contribution, it would not let me enter an amount less than the minimum investment. And I don’t have $3,000 to put up front like this.
I like my TRowe Price Roth IRA, you dont need an minimum deposit as long as you sign up for a $50 a month direct deposit. I have done this since I started working a “real” job and have upped the amount to $165 a paycheck, but when I started I never missed the $25.
I will not open a Roth IRA until I have maxed out my legal limit on 401(k) contributions, which is $15,500 for 2006. If I am going to increase my retirement savings (which I do every time I get a raise), I want to do get that 401(k) tax deferrment. When I reach the legal limit, I will open a Roth.
@Lau-
Note: A Roth IRA is not the same as a mutual fund. A mutual fund is an investment decision, while a Roth IRA is merely a type of account. If your brokerage will only let you invest in something specific (like a mutual fund with a $3000 minimum) you can easily (should) find another brokerage. Your brokerage should let you make your own investment decisions.
eTrade, for example, will even let your contribution sit in the account as cash, earning money market interest rates, should you so choose and assuming you meet the account balance minimums. Cash/Money Market is not a recommended retirement account investment decision, but it is an option.
Tiny -
Maybe I wasn’t specific enough. During the process of opening a Roth IRA at Vanguard, you are prompted to choose for an investment type: Vanguard® mutual funds or Stocks, bonds, non-Vanguard mutual funds, and other securities. I chose the first one. This is where the minimum investment comes into account.
Lau – The STAR fund has a minimum investment of only $1,000 with an expense ration of only 0.35%, you should consider that.
I’ve got a standard IRA, which I chose over a Roth because of the tax benefits. I can build up money pre-tax, and my yearly income tax is lower because it’s taken off my income. Is this not correct?
To give more details: I contribute the maximum, I’m 30 and I make about 45K/year. The ability to take money out of a Roth is a negative for me – I want no temptation to touch my retirement savings.
The idea behind a Roth is that your earnings are tax free, something that a Traditional IRA does not have, but your pool of resources is smaller since the bite of the tax has already been taken out. It is generally recommended that one pursue the use of a Roth IRA because of this tax-free earnings benefit.
Tax reasons alone should not be the primary factor in starting a Roth IRA. The government can (and in my opinion probably will) change the rules at any time. For now the earnings on a Roth are tax free, but in the future they might not be. I have my retirement funds divided up between my 401K, trad IRA and Roth IRA.
Jim -
You spoke and I listened ;o)
My Roth IRA is officially opened with Vanguard…
Keep up the great work on your blog, I truly enjoy reading it every day.
Well, don’t do it just because I said to!
Research your options first! I only listed some of the popular options out there.
As for the government changing the rules, sure they can change the rules but I’d like to see some justification as to why you think they will and on what grounds they wouldn’t grandfather people in. I could see them removing Roth as an option but I don’t see them going back and opting to tax the earnings.
I didn’t just do it because you said so. Although the little extra push was helpful. As I mentioned, I was going to do it yesterday, but the min. investment had stopped me. I didn’t notice the STAR fund then somehow.
I chose Vanguard because my husband’s 401(k) is with them and he’s very happy with them.
I congratulate all of you on getting an important retirement account set up.
Assuming I don’t misunderstand, I’m not comfortable with a brokerage who dictates what investment decisions I am able to make with MY money. Obviously every firm wants you to invest in their funds, but I believe that you should have as much flexibility as possible.
JR’s tax-reduction strategy is a valid one, especially if he has no/few other deductions and/or his investment timeframe is shorter. As Jim points out, you may save a couple hundred off your taxes today in a Traditional IRA, but not paying taxes on the compounded growth 30 years from now may be more valuable. It depends on your personal circumstances.
I’m a college student right now and last year I made enough to contribute the max amount ($4K).
I know that Vanguard has less fees for accounts over $5K.
I don’t start my on-campus job until February.
Does anyone know if I can open the account with 2006 and 2007′s contributions even though I have not made enough to put in the entire $5K?
(I will eventually make enough, but it would be nice to just put in $5K to avoid the fees).
Thanks for any advice!
Even if you make over $110K (or $150K if you’re MFJ), you can “pre-fund” a Roth by taking advantage of the 2010 removal of the Roth upper limit. You can make a nondeductible contribution to a Traditional IRA and roll it into a Roth in 2010 without tax penalty, so you can “pre-fund” Roth contributions for the 2006 tax year and following years by doing this. You’ll only have to pay taxes on the appreciation until 2010 if you choose to roll the appreciation over…
(As always, I Am Not A Tax Guy, talk to tax pros about your situation, etc…)
Tinyhands – With Vanguard, you only have their mutual funds to choose from if you select for their mutual fund account. You can select an account where you buy stocks, bonds, non-Vanguard accounts, etc. So they don’t dictate where you can invest.
Rem – You can contribute before you make the money but if you don’t make that money then you have to take it out or re-categorize it (which isn’t hard but still a pain).
Dumb Question: Can I have SEVERAL Roth IRA’s????
I already have one – with Morgan Stanley. Can I open one that is online like your suggestions and Fund this monthly?
Seems this would be easier to fund each paycheck than to come up with 3K+ come April 16th.
Noble, As long as the sum of your contributions does not exceed the limit, you can open as many Roths as you would like.
So, I read there is no excuse for some to NOT have an IRA account…So what if I open one now but loose my job in like 3 months? Can the money just sit in there until i get a new job or will have to find a way to contribute?
That was my only set back. I surely don’t have the min $3000 max but did want to do the automatic payments because my job isn’t that secure.
If someone has any t houghts let me know.
ksg, when I first created my Vanguard account, I had to pay the fee for low balance (anything less than $5000 at Vanguard). It sucks, but it’s only $10, and it’s well worth the cost of lunch to get started saving toward retirement, regardless of how much you can put away.
Vanguard has a great service where they split the payments up for you to meet the maximum. For me ($4000 max), it’s about $76 per week.
Glenn on January 18th, 2007 at 1:22 pm
I will not open a Roth IRA until I have maxed out my legal limit on 401(k) contributions, which is $15,500 for 2006. If I am going to increase my retirement savings (which I do every time I get a raise), I want to do get that 401(k) tax deferrment. When I reach the legal limit, I will open a Roth.
I don’t think that is the best option. If you expect your income and/or tax rate to go up between now and retirement, you should max out your Roth IRA before maxing out your 401K. You’ll pay lower taxes on the contribution now than after you max out your 401K.
Secondly, it’s always good to have multiple sources of retirement income.
Lastly, personally, I use my Roth IRA as a trading account. I can make short term trades without paying the short term capital gains.
Another point: if you have a Roth 401K option, it may well be worth it to fund, especially if you’re young and are in a lower tax bracket. Roth 401K’s allow your entire employee’s contribution to be treated similarly to a Roth IRA. (The employer’s share goes into a separate account that’s treated more like a Traditional IRA if you roll it over) You won’t get the immediate tax savings, but your profits compound over the years, tax-free, and can eventually be rolled into a Roth IRA without any tax hit if/when you get another job.
I suspect that Roth 401Ks will become more popular.
I apologize for my use of the word “dictate” as that is obviously a loaded word.
I just want to reiterate that there are MANY other brokerages that can open a Roth IRA account for you and they don’t all require you to choose between “our funds” and “everything else”. My brokerage allows me to invest in 134 Vanguard funds from among the 7,000 mutual fund choices available to me.
Until proven otherwise, I see nothing special about opening an IRA through Vanguard (regardless of the specific investment decisions), and it appears to be more limiting than some other brokerages.
Glenn on January 18th, 2007 at 1:22 pm
I will not open a Roth IRA until I have maxed out my legal limit on 401(k) contributions, which is $15,500 for 2006. If I am going to increase my retirement savings (which I do every time I get a raise), I want to do get that 401(k) tax deferrment. When I reach the legal limit, I will open a Roth.
______________________
This is actually a very foolish thing to do. When you pull out the money from that 401k in 50 years, you will be taxed on every cent. You might not get the upfront tax break, but the government doesn’t get one sent of what you make in your Roth. Plus, 401k plans usually restrict the number of funds you can invest in. You can put almost anything in your Roth account.
Hey Bill, you are absolutely correct. Glenn keep in mind that you want well diversified portfolio. Don’t put all of your eggs in one basket.
Do you pay the same fees on the Vanguard funds as you would if you invested through Vanguard?
Tinyhands – Ahhhh, I understand what you’re saying now. I believe the difference is that when you buy into a Vanguard fund outside of Vanguard, you have to pay fees to purchase them. When you buy them within that account, I believe you can move them around freely (there are some restrictions on some funds) without any additional costs. It’s like a 401k in that respect, you can shift your allocation around.
Bill,
“This is actually a very foolish thing to do. When you pull out the money from that 401k in 50 years, you will be taxed on every cent. You might not get the upfront tax break, but the government doesn’t get one sent of what you make in your Roth. Plus, 401k plans usually restrict the number of funds you can invest in. You can put almost anything in your Roth account.”
Are you taking into account employer matching? My company 401(k) matches 3% on my first 6%. That’s a tax-free guaranteed return above and beyond the tax-free earnings. Also, I find loads and fees are generally lower for company accounts vs. indivual investing. 1% vs. 1.5% can make a big difference over 50 yrs. A lot of companies also allow you to purchase company stock thru their 401(k) without fees.
I stand corrected. 133 of the 134 Vanguard funds have some additional fee associated with their purchase via my brokerage. (Network problems are preventing me from going in right now to quantify those fees.)
This does not change the fact that signing up for a “Vanguard Mutual Fund Roth IRA” limits your choices to less than 2% of the mutual funds available for purchase and does not include ETFs or individual securities. That is, as far as I can see. If I’m mistaken, please explain.
If I seem a little touchy about this, I don’t mean to be. I’m not trying to push my brokerage on anyone or dissuade them from signing up with another, but at the same time I don’t like people being misinformed about their choices or thinking that a certain type of account necessarily means one company or another.
Tinyhands – You don’t come off as touchy whatsoever and I was trying to be as open as possible myself and not pushing Vanguard (my Roth is actually with TD Ameritrade because I dabble in individual stocks there). I don’t think anyone thinks you have to open a Roth IRA at Vanguard and I did list three other popular brokerage firms out there just to avoid that confusion (I hope I succeeded).
You are definitely correct in that selecting a Vanguard mutual fund account is a very restricting option but totally worth it if you plan on just buying Vanguard mutual funds. I do believe that Vanguard ETFs are also available through that same plan.
Where is the best place to open a Roth?
Okay, so here is my problem: I have about $1800 per month to invest (about half my net pay) I’m 24 and have plenty of years to until I want to retire(age 42) so 18 years. My income in the military will continue to rise in the near future and so will my savings rate. My plan right now is to put $1000 away each month with my brother(so $2,000) into a C corp that buys real estate. And the other $800 into a roth IRA each year (5,000 per year starting 08′) but my max is 5,000 but I want to put in 8,000. I hate the TSP. Yuck. I can do so much better than 9%. I’m excellent at picking my own stocks. I pegged TM, O, and DRYS last year. All good companies. This year it looks like HERO is the underdawg. Might want to keep your eye on a company that’s been underlooked recently. Anywho, I guess my plan is to be a millionaire as soon as possible. Should I just put all my money into buying a house per year? (24,000 + my extra 8,000 + the renters 15,000? not to include subtraction of depreciation, expenses, then addition of appreciation, priniciple payments and one gigantic like credit card?) or never waiver from funding my roth which will grow tax free forever and avoid the social security and medicare taxes and income taxes (7.5% plus say 30% —– 37.5% savings when i’m 59 1/2) I’m just so mad the ROTH IRA contribution limits are so low. Why does congress always ruin a good thing?
Anywho….. the question is: Do I focus attention on a C corp focused on Real Estate ( a C corporation is not a pass through entity unlike the famous ‘LLC’ or ‘S’ Corps. In other words: when we experience a paper loss during our first few years, the C corp can carry that loss forward indefinitely so when we finally have a year with a $50,000 gain someday, our previous losses from depreciation ( (Improvements-Land) / 27.5years) ) will dissolve any tax liability.
I just love the Roth because the Government never gets to rake in your spoils. Consider this: If my Roth reaches 1,000,000 in assetts your Traditional IRA or 401k needs to be about 1.4 million to get the same after tax benefit that I do. I really don’t like the idea of giving $400,000 to the government after 35 years of working for it. But it’s really how you do the math and taxes. Yes 401(k)s match some, and thats awesome. But the really really big key is to save. 5% return, 12% return. Just keep saving. Ya’ll have a great week. Support the troops!!! Auf Wiedersehen
You stated, ‘I hate the TSP. Yuck. I can do so much better than 9%. I’m excellent at picking my own stocks.’
Listen, if you can’t pick from among the 5 TSP funds to get better than 9%, then I wouldn’t trust you to pick a single stock as my broker or fund manager. A simple split between C, S, and I funds over the past 5 years has been 12.5%, which includes the tail end of the 2000-2002 recession in which the stock market lost more value (on an adjusted basis) than the Great Depression. The facts are that very few hotshot fund managers can beat index funds, so if you’re that good at picking your own stocks, quit your day trading and start up your own fund. If you really understood the stock market, you’d know that the C & S funds track indices whose CONSISTENT LONG-TERM gain is over 10%. If you can CONSISTENTLY get better LONG-TERM gains than these indices by picking individual stocks, you need to write a book about it and start touring the country giving seminars. By LONG-TERM, you have to go back past 1995, because the 8 years following Jan 1 1995 were the most turbulent in over 50 years. Remember, too, that with individual stocks you have to put in a lot of time watching the levels and make sure you buy low and sell when it’s high. If you just keep sitting on a stock, you’ll miss the highs and then you won’t get great gains. With a fund, you simply hold on to the fund and watch it grow as stocks in the fund are bought/sold on your behalf. This gives you the time to live your life instead of spending your life’s most precious resource (time) chasing an extra 1 or 2%.
Kwame, I’m afraid there is no right answer for that. If you want to buy stocks, I’d recommend going to where the costs are going to be cheapest per transaction. If you want to focus on some mutual funds from a specific brokerage, it’s best to with that brokerage. No one place is the absolute #1 best.
Bill says:
This is actually a very foolish thing to do. When you pull out the money from that 401k in 50 years, you will be taxed on every cent. You might not get the upfront tax break, but the government doesn’t get one sent of what you make in your Roth. Plus, 401k plans usually restrict the number of funds you can invest in. You can put almost anything in your Roth account.
Johnnie says:
I don’t think that is the best option. If you expect your income and/or tax rate to go up between now and retirement, you should max out your Roth IRA before maxing out your 401K. You’ll pay lower taxes on the contribution now than after you max out your 401K.
Secondly, it’s always good to have multiple sources of retirement income.
Lastly, personally, I use my Roth IRA as a trading account. I can make short term trades without paying the short term capital gains.
_______________________________________
Bill/Johnnie: I’d rather invest pre-tax funds now, and pay the taxes when I’m retired because my tax rate will be lower at that time (if I even live that long!). The government may not get one cent from a Roth, but I’m putting after-tax $$ in now, which is not as attractive as the 401k alternative. Plus, my company matches 8% as long as I’m investing 8%.
I don’t see the point in multiple sources of retirement income. To me, it doesn’t matter if the total amount is in one account or ten.
Lastly, I would not use a retirement account for short term trades. That just adds to the cost and reduces your return. I prefer to stick with market-tracking index funds and rebalance once a year.
Glenn
You really should care about having all of your funds in one place whether it be retirement or non-retirement funds. Even your 401k has risks even though it is a good savings tool. And you should definitely contribute to it, but don’t use it as your only source of retirement funds. That’s not a smart thing to do. Think about Enron.
2 things I’d like to say:
1. For those of you looking at what do with minimum requirements and fees and all that, I opened mine at Firstrade and have been very happy. They have no fees associated with Roth IRAs (that might be any IRAs, but definately Roth), and there is no minimum amount to open an account with them. Minimum amounts still exist when imposed by a mutual fund, but not to open the account and be in their MMF.
2. Those of you who believe you will be in a lower tax bracket when you retire, please keep in mind we are at a historically low tax period right now. And given our government’s tendancy to spend money it doesn’t have right now, I believe there will be a substantial increase in tax %s before I hit retirement. Not claiming crystal ball or anything, just don’t see how we can continue like this with no increase.
Personally, I’m maxing my employer’s contribution in my 401(k), maxing Roth’s for my wife and I, and then starting to go up and up my percentage in my 401(k) as I can.
I have two questions for you:
1) Can I have a ROTH and a Traditional IRA? So two accounts?
2) Every time that I file my taxes I am asked if I want to contribute more to my IRA for last year which will deduct more from my tax return. Is there a quick way to contribute to my IRA for last years right now and not have it count toward this years amount.
I don’t believe the US government will ever tax Roths. They may play with the contribution limits a lot. The government likes the Roth as they get tax now instead of later in the case of traditional IRAs and 401ks.
It almost always makes sense to invest in a 401k or 403b up till the employer match unless you are desperately short of money. You can always cash out when you leave your employer and pay the tax and penalty and still be ahead. Or take a loan against it.
My present plan is contributing $15k per year to my 403b (and my employer also contributes 8%). I also max out my Roth IRA. When I leave my job I intend to roll the 403b into the Roth. Yes I’ll pay taxes then but I’ll get to stuff a lot more money into my Roth. And after 5 years you can withdraw the contributions tax and penalty free if you want to like regular Roth contributions.
Dustin – yes you can have both types of account. You can make contributions for the previous year up till April 15.
I earn minimum wage and have no disposable income. Does anyone wish to tell me that is NOT a good reason to NOT have a Roth IRA?
Terry,
You can’t contribute what you don’t have but the fact that you are reading this info and considering any IRA is great. Hopefully, in time, you will be able to squeeze a bit out of your paycheck. What’s most important is to strive to live as debt free as possible. As soon as you can, get started.
Hey. I have one Roth IRA with Dodge & Cox funds. I’d like to open another one with them (a different fund). I know the contribution limit to a Roth IRA for 2007 is $4,000.
But my question is, Can you put $4,000 into *each* account, or is it $4,000 *total*, i.e, 3K into one account and 1K into the 2nd account?
Thanks very much for any responses!
Jonathan: It’s $4,000 total.
Hey,
I have a considerable amount I want to put away at least 2,000 dollars and not touch it. I want to invest into a Roth IRA, it sounds like the best for me. Im a senior in College I will graduate in one year i want to invest the money and also contribute to at least $250 a month to this to let it grow and everything good like that. What Should I do to get started? Who should I go through? I looking to do this before the year is up or April 1st.
thanks for the help!
F.Barnes
dumb question!!
I know that a Roth IRA is a type of account but I am wondering if I HAVE to invest the money that I put in or can I have it sit there and not invest it?
I am 38 years old.
I have $222. worth of stock in e-trade – losing money there
I chose the stock myself and didnt do a good job as you can see.
I have $7197. in a roth ira in navy federal- only earning 1.5% . i plan on putting another 4,000 before april 16
I have $17,000 in a 401K plan at TIAA-CREF that i no long contribute to as i have changed jobs. (78% equities 12% real Estate 9% guarantee)
I have $2500 in a Simple IRA from my new job. I put it in a target returment 2035 plan.
please advice on where i should put move my roth ira to earn a better interest rate.
any advice would be great.
I only make on paper $31,000 a year. but in fact i probably make $800 x 52 take home.
thanks SO much
I know the limit is $4000 for an IRA. My question is can my wife and I each make that contribution, i.e., can we make an $8000 contribution? Or are we limited to $4000 for both of us?
Thanks
J.O.
J.O.: Yes, you can both deposit $4k each into an IRA. Even if one of you is not working, you can still deposit $4k each into an IRA so long as the income earner makes enough money and, if you both work, you aren’t earning over $150k AGI.
So I have learned quite a bit just reading through everyone’s questions and now I have one of my own. I am looking into Fidelity for my Roth. With automatic withdrawals there is absolutely no min. required also they give a lot of free advice coupled with lower than average fees it all sounds pretty good.
On to the question: I would like to be more aggressive than average when it comes to selecting where my $ goes within my R-IRA. What I don’t know is can you mix it up; stocks, mutual funds, and bonds all within the Roth? If I can what percent of my contribution do you think should be going to each of these – be aggressive?