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Go Open A Roth IRA Right Now!!!
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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!
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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.
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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.
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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?
My girlfriend had a 401k. She invested in the stock market. When the World Trade Center was wiped out, so was most of the funds in her 401k. She called the Bank to locate her 401k to get what little in she had out. The bank lost her funds, but eventually found what little was left. My question is what company is really good and safe to invest in. Nobody wants that to happen to them!
I should have mentioned that I want to open a Roth IRA and that I am 40 years old.
What investment firm should I use, and what type of account should I invest in? Real Estate, Stocks, etc.? My girlfriend ask me to research which would be safe after her experience with a 401K. I thought of T Price because of the fact I only need $50.00 to get started. I really wanted to go with Smith, Barney but they want much more to put down and charge a $40 a year fee. T Price only charges $10.
I thought about starting out with T Price and then switching. Any suggestions on what is safe? Thanks
I am 38. My husband is 40. We both are school employees with a combined income of 115K.
I contribute 7K per year to a 403b through axa-equitable. Total account value is 40K. Earnings appear to have been so-so over the past 6 years.
I was wondering if I should rollover this account to a Traditional IRA through a company such as Vanguard or American Century in order to take advantage of a wider selection of funds. Or should I continue as is and open a Roth IRA for both my husband and myself?
I’ve noticed both companies have retirement funds which target your estimated retirement year (2025, 2035, etc.)
Any suggestions would be much appreciated.
I had one Question about ROTH IRA for 2006..
I have maxed out on 401K ($15000) thru my employment (tax Deductible) for 2006. And our joint income (married file joint) is approx 113K. My husband didnt have any retirement plan from his work. So we are planning to open ROTH IRA of 4000$ for my husband. I was wondering if I can open ROTH IRA of 4000$ for myself too considering I have maxed out on 401K???
any help is appreciated.
I love the Roth IRA and contribute $150/month (automatically) into one with occasional extra payments when I come into extra money. I go with Vanguard and can’t be happier. Their fees are the lowest and it’s very convenient to open up with, most of which can be done online. Not sure of their minimum’s anymore since I have an established account. As my kids approach college-age, one of the best benefits of a Roth is that, for financial aid formula purposes, the Roth account is off the radar. However, if you need the money for college (or whatever else), you can withdraw your contributions with no penalty.
I still maintain a 401K account as well as a regular IRA which I feel is good diversification. Some tax breaks now with them as well as tax breaks later with the Roth.
Emma, yes, most companies, especially Vanguard will offer you more choices (which, in itself can be a negative sometimes). With Vanguard there is no pressure (phone calls or too many letters) and usually lower fees. I go with Index funds but I hear the Target funds are also very convenient and easy. Maybe reduce your traditional contributions just a bit and start that Roth.
MetalAngel: No investment (even cash stuffed in your mattress) is 100% safe, however, I believe the key is diversification. The trouble with just starting out is that there are minimums for each fund so it’s not easy to diversify right away. 40 years old is still “young” in my book (I’m 44) concerning investments. I put about 75% in stocks with the rest in bonds and stick to index funds for both. Unless I read an investment graph wrong, there has never been a negative return in the 10-year rolling average of the S&P 500. Don’t do individual stocks no matter which company you go with. Again, I love Vanguard but the minimums might be burdensome.
To JimmyInGreatLakes: Thank you so much for your advice. I was leaning toward your suggestion of having a balance of tax advantage now as well as later on. Thanks for the reassurance.
Can I contribute to a Roth IRA from savings, if I have a currently low income, but a portfolio with some cash in it? Is there a limit? I have a regular IRA but my income has been very low the past few years and I have not been able to contribute from income, so all growth is just interest. But I would like to put some of my regular portfolio toward an IRA… is this possible?
I currently have a Roth at one company and would like to move it to a different company (perhaps Vanguard). Is there a penalty for moving a Roth for one company to another?
The company might charge you a fee to do the transfer but there is no federally mandated penalty for moving.
Good post. The tax free benefits cannot be ignored, especially since fees and taxes are the two most things that kill investment returns the most. I also covered a bunch of financial institutions that offer the best Roth IRA accounts. Feel free to check it out and leave your opinion on which is the best for your retirement.
You should still save up to open a Roth. If you aren’t saving anything, then you can never retire. It’s as simple as that.
I can’t find this answer anywhere:
For years, I’ve been hearing “get a Roth, get a Roth.” I finally scrounged up 3 grand and put it in a fidelity Roth IRA. Now it’s tax time, and no one told me I’d be charged 6% on that money I just put in. How much income do you have to make for that to go away? I didn’t know I’d get slapped with $180 fee just for putting that money in an account! I could really use that money to go towards my NYC rent.
Who is charging you the 6%? The IRS? Fidelity?
It shows up in Turbotax, I believe the IRS because I didn’t meet a minimum income level (self-employed w no 1999s or W2s). I don’t know what the income level is though. I can’t find that number anywhere, they all talk about the maximum income level, over $100K or something like that, I’m not close to that though.
Well, you can only contribute income that you have so if you contributed $3k you had to have made $3k in earnings that year. Also, Roth IRA contributions are not tax deductible, so you’re still paying tax on that income. Anything you earn on that Roth IRA will grow tax free.
In turbotax, it has me putting my income under Other Income or something like that, but not under the 1st category where it says you need a W2, which I don’t have. My income is, of course, over 3K- not a whole lot over it though, but it still is charging me this tax. It’s saying, go and withdraw the money you put in the IRA, because you put too much in. That seems kind of counterproductive considering I was so proud that I finally started a Roth. Are all of you being charged this 6% tax?
Is your AGI over $3k? It’s probably because you contributed more than you earned.
IF you could give me some input, I’d appreciate it.
My ROTH IRA ACCT is being switched from CITIBANK to their affiliate, SMITH BARNEY. IF I decide I do not want SB to be the holder of my account, it’s up to me to do all the leg work to switch institutions.
I’m not thrilled about this & have been doing some research, but still feel at a loss.
We’re not talking about a lot of money, but I’d like the little I have to grow. My income at the moment is also not steady.
Thank you.
May thanks.
Scorch – Moving your funds from one brokerage to another is pretty painless except for a transfer fee, I’d probably not sweat it because it’s not like your money is going to a no-name company. What exactly were you concerned about?
Funny coincidence… because you picked a fund with a $3000 minimum investment… duh. A correction to make with respect to this article:
“It takes literally fifteen minutes. Do it while you’re watching American Idol or CSI: Saturn If however, you are someone who watches American Idol or cannot follow directions and identify fund contribution minimums, then it may take you longer than fifteen minutes. “
I have money in a ROTH and wonder if one should make a point of having an income fund as opposed to a growth fund. It seems that if it is growing tax free, this makes sense. I’m not a rocket scientist when it comes to investing though, so help…
Diane – The difference between an income fund and a growth fund is the types of companies that primarily make up the investment pool.
Income funds tend to hold more mature companies that pay dividends (in other words, they pay an “income” to the stockholder) and growth funds tend to hold the stocks of companies that take their profits and plow them back into the company instead of paying them out, in order to encourage .. “growth” of the company.
If you didn’t hold either of these types of funds in a tax free or deferred account, you’d have eiter taxable income from dividends or from capital gains (and in reality, probably both – it’d just be a different mix of how much taxable income was from one source vs the other).
Your decision as to which type of fund to hold, or what percentage of each if you decided to get both, has less to do with the fact that it’s a Roth and more to do with how much risk vs reward you’re willing to take. Income funds theoretically tend to have less risk because they hold stocks of more mature companies.
You’ll just have to find a fund family that you’re comfortable with and start doing some research. Most of the fund companies offer some tools to help you figure out a good allocation for your time horizon and risk tolerance.
This may sound like another dumb question, but what is the better use of the money: to pay off the house witin the next 5 years, or to first open and max out an IRA?
Keep in mind that:
-The balance on the house loan (principle) is around $73,000, 30 yrs loan at 6.35%
-To pay it off in 5 years, we would have to send $1000 each month toward principle. That would save us about $72,000 in interest payments over the life of the loan
- My husband is self-employed (a contractor in electronics industry).
- He has been unemployed 3 times over the last 4 years, each time for about 4-8 months.
- He is 56 years old with only $14,000 in retirement savings.
- He hopes to incorporate and get his own design company going to pay for his retirement, because he is at the age when people prefer younger workers. In short, the start-up costs would need to be funded, with no guarantee of sucess
- His health is declining, so we do not know how long he will be able to work, which means that we do not know how soon his income will stop coming in.
Any suggestions or ideas? Seems to me that given the uncertainly of our financial situation (he can go unemployed again any time and his own business prospects are uncertain), paying off the morgage seems like a good idea while we still can afford it. Saving $72000 in the process is a bonus, I guess. He also wants to get an IRA, but we have too many competing goals: the morgage, the new car (his is on his last wheel), saving up money to start the company…
Any suggestions?
Elena, given the very small amount of retirement savings, I would not recommend that you contribute to a Roth IRA or pay ahead on the mortgage until you had maxed out the possible contribution to tax-deferred savings. Considering the standard deduction and personal exemptions for a married couple, you could withdraw over $17000/year when fully retired without paying _any_ federal income tax. Also, being at the age of 56 he is close to the age of 59 1/2 when he can withdraw the money without penalty should he no longer be able to work.
And you are not limited to the small amount of a traditional IRA. If your husband has no employees, then with a SEP-IRA he can defer taxes on up to 25% of his income. If he does have employees, then look into a SIMPLE IRA.
I would put zero money extra into the house payment until you’re on firmer financial footing. If you pay the mortgage down to where you only owe $1000 and find you can’t make payments, the mortgage company will still foreclose on you. Probably they will foreclose on you even faster because they know they can get there money back and then some. And if you manage a sale before you get foreclosed, then what was the return on your investment of paying ahead? Only 6.35% which is a measly return for your risk of losing it all compared to the ~5% you can get from an online bank in an FDIC insured account.
So if you managed to increase tax-deferred savings to $100,000 and he retired due to illness at 62, you could supplement the Social Security for several years with tax-free money if you keep your annual distributions low. And continue to make your house payments for awhile. In the same situation with no retirement savings and an almost-but-not-quite-paid-for house you could find yourself on the street a lot sooner.
Do you have $1000? If so, you can invest it in the Vanguard Star Fund.
I sure do have $1000. But would it be wiser to put it that sum paying off the house first?
Elena, this may be too late, but I’d recommend starting the savings account.
It’s simple enough, really. Interest for a home is tax deductable, which decreases that 6.35% interest to something a little less(effective). Meanwhile I’ve been earning at least 10% on average on my investments.
A thousand dollars invested will earn(on average) a hundred dollars over the course of a year. A thousand dollars of loan will only cost $635. You’ll be $365 ahead at the end of a year per thosand dollars invested, discounting any tax savings.
Meanwhile, due to tax code, you’re limited in the amount you can invest in tax advantaged retirement plans. Roth IRAs are limited, for example, to $4,000/year.
Being self employed, I’d suggest seeing an accountant, as there are different rules there.
Smart choice F20. I have my retirement funds divided the exact same way. I even have a bank IRA which only earns 3.30% right now, but I don’t have the risk of losing anything. It keeps my portfolio balanced.
Una,
Because you have that money in a bank IRA, I’m assuming you don’t want to invest those funds in the stock market but you’re looking for a better rate of return. If that’s the case, I suggest that you buy a Roth IRA CD earning interest at 5.05% on average. However, if you are interested in the stock market, I would do a No Load Roth Rollover IRA with T.Rowe Price. But please check the laws (income levels) regarding a Roth IRA vs. a Traditional IRA before choosing your account type.
I am 44 now and have not done much for my retirement (I’m a self employeed commercial photographer), but that has changed, now that I’m out of credit card debt (ok, I stil owe about $800 but it’s at 0% til may 2008, so it will be paid off completly by then).
I opened an Etrade IRA back in 2001 and only funded about 5K before this year as my work was slow, but 2007 has been a pretty good year, and have put in almost the full 4k for 2007 already.
I just opened up a Roth IRA this week with almost $2,200 ($1,085 from an ING stock mutual fund I had since 1996. I originally invested a total of $1,023, so you can see it didn’t even keep up with inflation over the past 11 years, and $1,107 form some bonds my mom left me when she died in 2002. They fully matured, so I figured I’d be better off putting them in the Roth IRA as my mom paid taxes on the money before buying the bonds so the government would be paid twice if the money went into the regular IRA.
So finally, my questions are:
1. Am I allowed to put 4K into each IRA (the regular and the ROTH) and why is there a limit anyway if the government is encouraging people to save?
2. Why not just make the first 4K deductable and let you put in as much as you want to?
Hi Dan,
1. You can only put 4K total, if you’re self-employed you should look into a SEP-IRA as well. It’s like a traditional IRA from a tax perspective but you can contribute to it as an employer up to 25% of your earnings (up to like 45k or something like that), which can get you around the 4k limit.
2. I have no idea, I don’t think the limits make sense either.
Thanks Jim,
So it looks like I need to contact Etrade and have them convert my traditional IRA to a SEP-IRA. Hopefully they can help me with it and make it as painless and cost effective as possible. I’m self employeed like I said, but I’m the only employee — I hire freelance photo assistants per job if they are needed.
Can I still put 4K into the Roth in addition to 25% of my earnings in the SEP-IRA?
I just spoke with Etrade (amazing, they answer the phone on Sunday AM) and the rep. says the limit is 4K per IRA – Traditional and Roth, so I have about $1900 left before I hit the total of 8K. If I’m close to that (and I hope to be) I’ll look at converting my Traditional IRA to a SEP-IRA.
Dan, Their limits are both 4k but you can contribute a total of 4k across the two, so if you put 2k in your Roth, you can only put 2k in your Traditional.
I am a college student. A baby really. 18 years old.
I have been reading up on a lot of things money wise…and I wanted to know number one, am I too young to get an IRA?
I have a job on campus now, and I have worked every summer before this so I had wanted to know.
Also, is there any place that can explain to me in detail the IRA? I have the general idea but I think my knowledge is not where it needs to be.
I want to save money for reitrement. I figure the time is now.
I just read a bit more, on Vanguard’s site. I know that I can start one because of the any age policy. But I only have $500 right now to put into anything. I feel like everywhere has minimum investments and I cannot start any Roth IRA without more money.
Is there any possible way I can start a Roth IRA, or some type of retirement account or something that will help save and gain besides a savings account with only $500 to start?
It’s hard with only $500 because transaction fees and custodial fees alone will start eating into your funds very quickly unless you can plan on putting more money towards your Roth IRA as the months go on. You have until April 15th next year to contribute towards this year’s maximum so I would wait until you collect as much as you can before opening an account anywhere.
The least you can have to open a Vanguard mutual fund account is $3,000 with their STAR fund. I’m going to write up an article on what I would do if I had $500 for a Roth, keep an eye out for it Nashawn.
Actually, the Star Fund only takes $1000 to start up.
I have a Roth but don’t understand the fees that the company charges to handle it. It’s with Ameriprise. I never talk to the advisor and they charge for me to just have an account with them. Is that normal? Are there companies/websites that do it for free? The account has not made any extra money in the 7 seven years it’s been open, is that normal?
Hug, this isn’t normal to be at break even after 7 years. The fees Ameriprise charges have eaten into any return thus why you’re at even. Depending on how much you have, you should be able to find a free IRA. You’ll want to move it ASAP.
See http://www.ameriprisesuck.com
I am 75 years old when I was working they only had ira accounts. I make about 50 to 55000 per year. I have about 130 000 in my ira account. what will it cost me to swich from an ira account to a roth account.
Thank You
Help!
I want to open a Roth IRA account with Vanguard. I want to start with one for $5,000 for my wife and $5,000 for me. I’m 55 years old
and won’t be retiring until I’m 62 or older. I’m not planning on touching the money but you never know if I’ll be needing it for an emergency. I don’t know what kind of IRA I should go for,
I really don’t want to loose my money with a risky investment since I don’t have a lot of time to save (I wish I had started a lot younger!).
I would appreciate any help from you experts in Roth IRA’s.
Thanks a lot!
I am 57 and want to retire in 3 years. I am having the maximum taken out of my check till I retire. (20K annual I think) I also have some inheritance money sitting in a money market account which I am going to put in a CD. About 100K. I know very little about investing and am NOT a risk taker at all. Should I have a Roth Ira? Should I put some of this money I have into one?
I also have an employer paid retirement plan. Help me please.
Thanks
Quick Question…If I have a traditional IRA now and I want ot open up a Roth IRA as well, can I put $4k into each, or together I can only put in $4k?
thanks in advance.
Adam: You can’t put $4k into each, unfortunately it’s $4k total.
Can someone answer this question please?? I quit work last September, 2007 and moved to Nevada and haven’t gotten a job as of yet. My mother lost her husband, so I’ve been spending time with her.
I just cashed out my 401k from my previous employer, about 50k. I realize the taxes and penalities, but needed the money to live on. I don’t have the check as of yet, and it will be made out to me.
Question – Can I open a Roth IRA for 2008 even though I haven’t earned any money this year? Can it still be considered a type of roll over from earnings of my old job? I don’t want to open it for 2007 and 2008 because I want to avoid filing taxes in both my old state and Nevada IF they would make me. Can I reduce the 5k from my earnings next year at tax time and subtract the 5k from the 10% penalty?
Thanks!!!! Nice website!
You can probably scratch that thing about filing taxes in Nevada….as there’s no state income tax.
Which brings up the next question. If say I want to “roll over” 10k from my old 401k can I? With the Roth, I’d have to pay taxes on the full amount I received from the 401k I know on my 2008 tax return. But then I think I can deduct the 10k from my 10% penalty?
Even though the check is made out to me, I think I have 60 days to do something with it right?
If you lose your job or switch jobs, you (depending on your company’s 401k policy) can either:
a) leave your money in your existing 401k or
b) Complete a roll over into a Traditional IRA and, from there you could…
c) Convert your Traditional IRA into a Roth IRA, but you will have to pay taxes on the $10K. If you are in your 20s or 30s, that is a smart move.
FYI, you can never roll over 401k money into a Roth IRA, only Traditional IRAs.
I’m a 25 year old grad student. I haven’t worked in a year to devote all my time to school, but have plenty of money saved up (10k) from my family and trust in a savings account. What should I do in order to put my money away for long term without filing taxes? Can i still open a roth ira and deposit the max for this past year and next year. I do have a w2 from 06-07 that i could file but i stopped working last spring before school started. If not whats the best thing to do with my money? Thanks in advance for all your help.
Londyn
additionally, if i havent filed but worked in the last 3 years can i contribute based upon those unfiled earnings…?
Londyn
Thanks for your answer Mark! I did a lot of research since I asked that question, and I did open a Roth IRA rollover with Vanguard. (The law changed in 2008 allowing you to rollover a 401K directly into a Roth.) I am in my early 40s but felt it best to take advantage of the low taxes now, rather than hate myself when I retire. Besides, I think I’ll really enjoy watching my money grow tax free.
I only rolled over 9K of my 401K. I realize I will have to pay taxes on all the money that was orginally in my 401K and pay the 10% penalty on all the money less the 9K.
Again, thanks for your response! It’s nice sites like this that get us moving….
I just found your website recently and I love it! Thanks for the info. I’m 36 years old and have been with my current job since I was 22. I have Teacher’s Retirement (TRS) with them since I started (they sign you up automatically with 100% matching contribution which is 6% of employee salary). Aside from the traditional 403b (TSA) and Deferred Compensation Plan 457(b), they are now offering Roth 403b which I think is awesome!!! Now that I’m debt free and have $2000 to save per month, I recently opened a Roth 403b (chose a top-rated mutual fund from Fidelity) and will religiously contribute $500 per pay (I get paid Bi-weekly). I also opened a Roth IRA with Fidelity and set up automatic withdrawal from my bank. I intend to max it. I’m also funding an emergency fund with a reputable online bank which is currently offering 4.05% APY (used to be 5.15%). I will try to save as much as I could. Nowadays, I get really excited with investing and looking forward to retiring comfortably. I promise myself that I will be more proactive with investing and more in control of my money. I hope I’m on the right track to a comfortable retirement.
I am 52, ex and I put all our retirement into a home that he lost after the split. I am having to start from square one, new location, new job, that offered nothing….and thats where I sit today, Im scared to death and dont know what to do.
We recently did it, and fully funded one as well. It really is the easy, at least with Vanguard.
Jim your responses to the questions were very explain, i have a question, once you get a Roth IRA account open, what do you think is the best thing to invest in, STOCKs ? Mutual Funds ? CDs ??
John Bogle, of Vanguard fame, recommends index funds, I agree with him.
I tried to open a Roth IRA with Scottrade, but was denied based on my credit score. What does this have to do with trying to save?
I earn 57k yr. credit score lowered due to running from a bad marriage. Working on rebuilding my life!
Any other co that opens regardless of score?
^^^^^^^
I’ve never heard anything so crazy! Who wouldn’t want to take your money? When I opened my Roth with Vanguard, it was extremely easy, and I’m almost certain they didn’t run a credit check.
Go somewhere else!! Good luck!
p.s. If I’m wrong about a credit check then sorry….but how dumb would that be? Half of America wouldn’t be able to save for retirement if a high FICO score determined their participation ability.