Investing, Retirement 
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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!

{ 119 comments, please add your thoughts now! }

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119 Responses to “Go Open A Roth IRA Right Now!!!”

  1. MetalAngel says:

    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!

  2. MetalAngel says:

    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

  3. Emma says:

    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.

  4. MP says:

    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.

  5. JimmyInGreatLakes says:

    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.

  6. Emma says:

    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.

  7. aimee says:

    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?

  8. Eric says:

    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?

  9. jim says:

    The company might charge you a fee to do the transfer but there is no federally mandated penalty for moving.

  10. TJP says:

    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.

  11. TJP says:

    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.

  12. 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.

  13. 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.

    • jim says:

      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.

  14. 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?

  15. SCORCH says:

    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.

    • jim says:

      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?

  16. Anonymous Coward says:

    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. “

  17. Diane says:

    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…

  18. Andrea (FP) says:

    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.

  19. elena says:

    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?

    • EMF says:

      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.

  20. Ashley B says:

    Do you have $1000? If so, you can invest it in the Vanguard Star Fund.

  21. Elena says:

    I sure do have $1000. But would it be wiser to put it that sum paying off the house first?

  22. Firethorn says:

    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.

  23. Cat says:

    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.

  24. cat says:

    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.

  25. Dan Coogan says:

    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?

    • jim says:

      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.


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