Can’t contribute to a Roth IRA? There’s a workaround.

I was speaking my accountant a few weeks ago when we began discussing retirement options. One of the ideas we discussed was to contribute to a non-deductible Traditional IRA with the plan of converting it into a Roth IRA in 2010. Prior to 2010, if you earned more than $100,000 MAGI, you cannot convert a Traditional IRA to a Roth IRA. This limit is the same whether you’re married or single (boo!). Starting in 2010, that rule disappears so anyone of any income can convert (more on the 2010 traditional IRA conversion income limit loophole).

Right now, my wife and I cannot contribute to a Roth IRA and so we lose access to one of the greatest retirement vehicles available. Fortunately she has access to a 401(k) and I have access to a SEP-IRA, so we do have pre-tax retirement accounts; we just don’t have post-tax vehicles like the Roth IRA. So how do we get some? Use that loophole!

Here is our strategy to take advantage of the 2010 rule change, we will both contribute to non-deductible Traditional IRAs and then convert them, nearly tax free, to Roth IRAs in 2010. It’s nearly tax free because we would still be responsible for taxes on any appreciation the IRAs saw. In talking with my accountant, this strategy works but he gave me some pointers to ensure we don’t run into any headaches.

• Separate the Traditional IRAs from any other retirement assets. He advised that we open separate accounts from both each other (this is required, you can’t have a joint IRA) and from any other retirement assets. This will give us the greatest flexibility in the future. If we were to mix our non-deductible Traditional IRA with my SEP-IRA (I took a deduction for those contributions), I can’t decide to convert just the “non-deductible” part of that mix.
• Remember to file IRS Form 8606. My accountant said that a lot of filers who go the DIY route often fail to submit this form and this can cause big headaches down the road. Form 8606 covers non-deductible IRAs and it’s the only way you can tell the IRS that you contributed to a non-deductible Traditional IRA; they won’t know otherwise. Deductible IRA contributions are recorded as a deduction and the IRS doesn’t care about Roth IRAs.
• You don’t have to convert all at once. This is more an explanation of the rule than advice on what to do but you don’t have to convert all the assets in one shot. You can spread it across two years. This wouldn’t matter to us for our non-deductible Traditional IRAs but if we opt to convert any of our Rollover IRAs, we could spread the damage across two years.

Now we have to hope that the rule doesn’t change or those non-deductible Traditional IRA dollars will be taxed again… in 40-something years.

Has anyone else looked into this?

(Photo: scottwills)

The main point of Daniel Solin’s The Smartest 401(k) Book You’ll Ever Read is that your 401(k), or 403(b) or 457(b), and it’s employer match may not be a no-brainer investment because it could be filled with funds that fat on fees and poor on investment selections. His answer? It’s to model the Thrift Savings Plan, the retirement plan available to government employees that consists entirely of low-cost index funds (the expense ratio is around 0.03%), and use low cost index funds for your retirement options. Look inside your mutual fund options to find the ones that most closely model index funds and go with them.

I think The Smartest 401(k) Book You’ll Ever Read by Daniel Solin does a very good job of opening your eyes to the fee-ladened landscape of retirement investing. He takes specific aim at 401(k) because those “captive audience” type programs are more deceitful than you can imagine. Many companies use plan administrators that offer 401(k) plans for free because they know they can make a killing on the back end with expensive fund choices. If they really had the employee’s interests in mind, then they’d simply offer cheap index funds. In fact, some companies actually pay kickbacks to company HR departments to use them. The plan administrators pay companies for the opportunity to offer their fee fattened funds! It’s pretty ridiculous.

Unfortunately, this means that if you mainly invest in low cost index funds, you won’t get much value out of the first few sections of the book (it could spur you to rollover your 401(k) when the time comes!). The book continues to talk about other retirement investments such as IRAs, both Traditional and Roth, and annuities.

One characteristic I like about the book is that the chapters are short. Many are under three or four pages long, which is exactly how long it should take to explain many of the fundamentals about investing. For example, Chapter 14 is called Simple Investing Is Smart Investing is about three pages long and explains why a simple allocation of basic mutual and index funds will be sufficient for most. Chapter 22 is called “Why Fifteen Is Your Magic Number” and uses three pages to explain why you need to save 15% of your income if you want to expect to have a successful retirement. That, coupled with a applicable quote (usually from some important successful investor such as John Bogle), makes this book an easy read. There aren’t large chapters to digest, there aren’t huge concepts to wrap your head around, this book makes everything nice and simple.

Becoming a millionaire used to be hard back when gum was a penny and comics were ten cents. Now that a pack of gum costs a buck and comics suck, becoming a millionaire is much easier but still a laudable goal. Don’t believe me when I say that becoming a millionaire is easy? I’ll give you six easy steps that, if you have the diligence and the discipline to discard the temptations of a world filled with easy credit and consumerism, will leave you a millionaire. $1,000,000 buckaroos. If you don’t follow them, you’ll likely have to start a dot-com that Google will buy or work 16 hour days and climb that corporate ladder (that’s if you don’t hit some glass ceiling because you’re not in the old boys network).

Many of these ideas are so simple the could make you crazy. None of them are sexy. None of them have you racing down the autobahn in a convertible going 150 MPH. None of them have you throwing dice in Vegas and none of them involve games of poker against James Bond. That’s part of the reason so few people do them… that’s exactly why if you do them you will become a millionaire.

Step 1: Participate In Your 401(k)

If you contribute a meager $3,000 a year to your 401(k), get no match, and it appreciates at 8% a year - after 40 years you will have a balance of over $777,000 on contributions of $120,000. That one little step gets you three quarters of the way there. That one little step that anyone with a job can, and should, do (if you don’t have a job, becoming a millionaire will be very difficult) immediately. Unfortunately, the purchasing power of that $777,000 in 2006 dollars (assuming 3% inflation), will only be $238,000 so we still need some more help to get to the millionaire status but we’re well on our way to millionaire status.

Step 2: Contribute To A Roth

The Roth IRA and it’s tax-free growth is one of the best investment vehicles out there. It also diversifies your tax profile when it comes to retirement because it balances out for your pre-tax 401(k). If tax rates go through the roof, you still have a Roth IRA to tap into tax free. What’s unfortunate is that if your salary keeps increasing, there may come a time when you reach the phaseout contribution limits for the Roth IRA so get your contributions max’d out as early as you can.

Step 3: Find Another Source of Income

Whether it’s selling knick-knacks, performing some freelance work, writing a blog, or taking on a second job; increasing your income and saving that extra income is yet another way to get your precious net worth into the seven figure range. Take that extra money and put it into a brokerage account (if you have no debt) and watch it grow. Since this second income isn’t “necessary” or “expected,” putting it all away should be trivial and something your future self will thank you for as he or she sips mai thai’s in Waikiki.

Step 4: Cut The Fat (Your Budget and Your Belly!)

Do you really need some of the things you always buy? Consider taking a little breather on Netflix and save some cash. Look for some trimmables in your budget and cut them out. Much like losing weight, it’s far easier to reduce your spending than it is to increase your income. If you don’t buy that cup of coffee, you can save yourself $2. Can you think of a quick way to make $2? Probably not.

Step 5: Cut Down On Fees

Adding just half a percent in fees severely reduce the appreciation of your assets. In the earlier example with the 401(k), I did the math and said you get $777k after 40 years at 8%. If you were to add a half percent annual fee, you end up with less than $675k after 40 years instead of $777k. If you add a full percent in annual fees, your nest egg is now worth less than $587k. One percent in annual fees results in a difference, over 40 years, of nearly $200,000. If all other things are equal, find yourself a cheap fund!

Step 6: Buy A House, Then Rent It Out

At one point or another you’ll probably want to buy a house and live the American dream (it’s become the American nightmare for some now!). Be smart about it and don’t overpay, don’t get rushed, and you could be unlocking one of the great wealth building strategies. As they say, they aren’t building any more land. When you buy, remember that after you live in it for two years, you can sell it and the profit is tax free as long as you buy another home with it. If you don’t want to sell, consider renting out the home. In renting, you can go after positive cash flow or just tread water, content in banking on the appreciation of the home at a later date. Either way, it’s a great way to leverage your assets into something bigger.

There you have it, six powerful steps that will turn you into a millionaire in no time!

(Photo by tychay)

When I was younger, I used to play Sid Meier’s Civilization all the time. One of the best parts of the game was trying to build one of the Seven Wonders of the Ancient World because it gave your civilization a distinct advantage in the world. My personal favorites were the Lighthouse (it gave your ships a farther range and they wouldn’t get lost) and the Hanging Gardens of Babylon (I believe each one of your cities now had a Granary), but fun part was being exposed to these wonder in the first place.

Since then, there have been more “Wonders of the World” like the Natural Wonders of the World, 7 Wonders of the Modern World, so why not create a Seven Wonders of the Personal Finance World? Hokey, I know, but it’s my opinion that, if you can, you should “visit” every single one of these wonders.

1. Roth IRA

tax free and whose disbursements are tax free isn’t worth a darned thing. Another wrinkle that makes the Roth IRA is interesting, outside of the tax free elements (growth and disbursements), is that you are limited in how much you can contribute based on your income. While you’re young, it’s less likely that you’ll be restricted in your contributions and it’s more beneficial (because you’ll be taxed less now), so it creates a scarcity effect that almost spurs you to contribute while you still can. (Photo by scottwills)

2. 401K Employer Match

If you put $1 in this jar, I’ll put in 50 cents and you can keep it all. It’ll grow and grow as long as you pick the right jar and you can have it all in forty years, minus taxes. That’s sounds like magic right? Well, for some workers, it’s a reality and it’s called a 401(k) employer contribution match. At my former job, if you contributed 6% of your salary to your 401(k), the company would kick in 3% of your salary and that vested immediately. It’s like a 3% raise for something you should be doing anyway.

3. Pensions (and Social Security)

I lump these in together because they exist and will likely stop existing in the near future so get your looks in now. In both cases, you’re contributing (with a pension, you’re contributing by virtue of having a slightly lower salary than if there was no pension; with social security, it’s deducted straight out of your pay) to a pot that is supposed to grow over time, without you having to deal with it. The problem with pensions is that it requires your company to remain in business, not a guarantee. The problem with Social Security is that it requires the government not to pilfer the lockbox, which it already has. In both cases, they look like great plans because you don’t really contribute and you get a benefit in retirement, which make them wonders, but they’re also both probably on their way out, which makes them ancient wonders. (Photo by Barack Obama, yeah really!)

4. ETFs

These babies have the flexibility of a stock with the diversification of a mutual fund. Before ETFs, you traded mutual funds on their net asset value calculated at the end of each day. Now, with ETFs, you can do everything with it than you can with any stock, such as short it, and you can do it all day as its price is determined much like a stock is. Want to invest in diamonds? Find a Diamond ETF. Want to track the S&P? There are a ton of S&P ETFs. I’m sure if enough people wanted a Personal Finance Blog ETF, someone would sell those too.

5. Credit Cards

Like many things in life, credit cards are a double edged sword. It’s easy unsecured credit that can get you out of a jam or just give you some extra time to float a purchase. It’s easy, unsecured credit that can get you into a jam if you lose control, overspend, and find yourself unable to pay the bill after the grace period. To say that it’s not a wonder would be wrong, but to say that it’s a wonder with just an upside would be wrong as well. With one plastic card, you can bring to bear the power of thousands of dollars of purchasing; it’s enough to carry you through the difficult times and it’s enough to sink you through the prosperous times. With great power comes great responsibility. (Photo by Martin Q)

6. Insurance

Automobile, homeowners, renters, term life, medical, dental, disability, … etc etc etc. If something bad can happen to you, someone is willing to sell you insurance against it. If you’re willing to pay enough, you can insure parts of your body! However, the fact that this exists is a wonder because there is absolutely no reason why someone has to sell you protection against an unknown future. The reason they do is because they can make money, but that doesn’t necessarily mean that they’re making money off you or that you shouldn’t get insurance because you’re “losing.” Insurance buys you peace of mind, sometimes at a premium, but the fact that you can even buy peace of mind is a wonder in and of itself. Look at your situation, look at the various coverages, do you have enough insurance?

7. Personal Finance Blogs

That’s right, I’m calling personal finance blogs a Wonder of the Personal Finance World and you all probably think I’m having a swell time patting myself and my “colleagues” on the back right? There are excellent reasons why personal finance deserve to be mentioned:

• Where else can you read about regular people pulling themselves out of thousands of dollars in credit card debt? (Tricia, NCN)
• Where else can you read about the personal finance trials and tribulations of LGBT individuals? (QueerCents)
• How about the issues swirling around in someone’s head after they’ve just lost their job? (Lazy Man: lost job, his first day off, his wife’s thoughts, an update, and how he handles “how’s work” questions)

Personal finance blogs are open, honest, and they’re not written by Suze Orman, Robert Kiyosaki, or other “experts,” they’re written by regular people for regular people who are dealing with regular problems. That’s why it’s a Wonder. (Photo by nina_pope)

There you have it, the seven Wonders of the Personal Finance World; what do you think?

Nashawn recently asked on my post about opening a Roth IRA right this minute for some advice as to how she should invest $500 with a Roth IRA. She’s looked at Vanguard’s mutual fund accounts and ran into the minimum balance requirement for each of the funds. At Vanguard, the STAR Fund has the lowest minimum balance with $1,000 - a good $500 more than what Nashawn has at the moment. If I were her, this is what I’d do…

Wait Until April 15th Next Year
You have until tax day next year to contribute to your Roth IRA this year. That is, you have until April 15th, 2008 to contribute to your Roth IRA for 2007, giving our heroine a good nine months to try to get her balance up to $1,000. This is predicated on the fact that you are sold on Vanguard’s mutual fund accounts.

Consider Another Brokerage
You don’t have to go with Vanguard and you don’t even have to go with their mutual fund account, with a regular brokerage account your account balance minimums are lower than $3,000. TradeKing, Sharebuilder and Zecco are atypical brokerages that don’t have account minimums and both are known for their cheap/free trades. That’s crucial for a balance of $500. TradeKing has no custodial fee but Zecco charges $30/yr and Sharebuilder charges $25.

When it comes to the bigger brokerages, your pickings get slimmer. Fidelity will waive their minimum of $2,500 if you can commit to a $200/month contribution (Fidelity has no annual fee). If you can commit to that, you might as well wait a few months and go with Vanguard (if you wanted).

Summary: If you’re sold on Vanguard and can wait, wait; otherwise there are plenty of other options out there whether you want a discount brokerage like TradeKing or a more traditional name like Fidelity, just keep an eye out.

If you know of any brokerages with low account minimums and low annual fees for Roth IRAs, please share!

There are five finance related accounts in the personal finance world that I think every single person must have and they should get it as soon as possible. They run the gamut of the obvious, an accessible checking account, to the not so obvious, a high yield savings account (as surprising as it sounds, this is not obvious to most people because they are amazed when I tell them you can get 5% from a regular savings account). So, please enjoy this list of five accounts you absolutely must have and three that you absolutely must avoid.

These Five Accounts You Absolutely Must Have

1. High Yield Online Savings Account
Number one definite must have account is a high yield savings account getting you at least 4%, at the very very least. If you assume inflation at around 3%, anything less and you’re losing money. Take your pick of ING Direct, HSBC, Emigrant Direct, Citi, and you’ll get over 4%. My recommendation is that if you have a Citi or an HSBC bank account, go with one of them because your transfers will be instant between accounts. If you don’t, I use Emigrant Direct but both they and HSBC offer 5.05% APY.

2. Savings and/or Checking Account at a Credit Union
A relationship with a credit union is an absolute must for anyone looking to ever get a loan for anything. The typical rate for a 5 year loan on a new car from Tower Federal Credit Union (some local credit union in my area but I do not have an account there) is 5.74% (currently they have a promotion where the rate is only 5.34%) and for a used car it’s 6.19%. Compare that with a Bank of America rate of 5.89% for new and 6.54% for used. While the difference isn’t all that great, for the typical rates, why pay more than you have to? Also, the interest rates on your savings and checking accounts will typically be higher as well.

Why are the rates low on loans and higher on savings accounts? It’s because the basic premise of a credit union is that it’s there to pool the collective resources of its members and work for its members. It’s a not-for-profit so it’s not looking to earn money off you, at least as its primary focus, and so that’s why the rates are always so much more favorable than a regular bank. Whereas a bank is FDIC insured, credit unions are covered by the National Credit Union Share Insurance Fund (NCUSI) administered by the National Credit Union Administration, so you’ll see NCUA-insured on the placards (also up to $100k).

3. Retirement Account (Roth IRA, 401k or equivalent)
If you have a job and your employer offers a 401k, with or without a match, you should be participating in your 401k (or an equivalent depending on your employer). If you can, budget-wise and income-restriction-wise, definitely participate in the Roth IRA as well. Just as how squirrels save away nuts for the winter, you should be doing the same through a tax-advantaged retirement account. The 401k will let you save pre-tax money but it will be taxed when you take payments in retirement. A Roth IRA will let you save money post-tax but it won’t be taxed when you take payments in retirement. It’s important to use both so that your retirement assets are tax diversified.

4. Accessible Checking Account (Ubiquitous ATMs)
I think that most checking accounts are pretty much the same and it really doesn’t matter which bank you go to, with several exceptions and the biggest one is the location of its branches and ATMs. I chose to do my main banking with Bank of America because they have a branch near my home and my work place plus they have ATMs everywhere. In fact, BoA has 16,000 ATMs and 5,700 branches, so that I can probably find one anywhere I go and I can avoid those stupid ATM fees everyone hates.

5. Credit Card Account
If for nothing else other than to have a safety blanket, having a credit card builds credit and will pay dividends down the road. You can leave it out of your wallet or purse and it’s still building you some solid credit because it’s lengthening your credit history. Don’t ever carry a balance either.

These Four Accounts You Absolutely Must Avoid

1. Store Branded Credit Card Accounts
We’re talking department store credit cards, the ones where they offer you 10% off today’s purchase if you’re approved, and you should avoid these because the APR on these babies are usually pretty high and the payoff, the 10% off, is usually not worth it. If you want free cash for credit cards, here’s a list of credit cards with sign-up promotional offers that you can take to the bank and spend the rest at the store.

2. Finance Accounts From a Dealer, Store, or Anywhere That Isn’t A Reputable Bank
Buying a car? Buying a TV? Avoid the financing from the auto dealer or the electronics store unless it’s a 0% APY for a year, or something great like that. Also be aware that if you do get that offer, it’s likely that once it ends, all of the interest that was deferred during that period will come due (read about how 0% financing offers work). It’s a very insidious practice but one that’s well documented but not well explained to borrowers. If you need a loan, try to get it from your bank or credit union either before you buy or immediately afterwards. If you can get some sort of discount or promotional offer for using their financing, you can always use their financing and then secure your own afterwards.

3. More Than One Checking or Savings Account
This one isn’t that big of a deal but you really should consolidate your banking for a few reasons. First, it’s always better to simplify your life and deal with as few things as necessary. There’s no sense trying figure out which account has what because you’ll start to go crazy. Secondly, you want to consolidate balances so that they’re higher and you can avoid any low balance fees if your bank has them. Lastly, the fewer accounts you have the fewer opportunities there are for your information to be compromised, either by the bank or by you on accident. Simplification is crucial.

4. Reward-less Credit Card Accounts
Your credit card is charging each merchant you deal with somewhere in the neighborhood of 2-3% for each transaction, there’s no reason why you shouldn’t get kicked back a little piece of that. It takes about thirty seconds to apply for a card that will give you 1% cashback on all of your purchases, which is an automatic 1% discount on everything you buy. I use a variety of cards but I like my Citi mtvU card for 5% cashback at restaurants, movies, and bookstores; a Discover Open Road card for 5% cashback on gas purchases; and an American Express Costco TrueEarnings card for 1% cashback everything else with no annual limit.

A lot of times we put something off because we think it will take a long time and be a lot of hassle and a lot of times those things happen to deal with money. Well, if you have ten minutes, you have enough time to do one of the things on this list that could change your life financially for the better (and ten minutes is a conservative estimate, you could finish most less). In less then 15 minutes, Jack Bauer can escape from the grasp of terrorists by biting into a man’s jugular, I’m just asking for ten and for you to check your credit report (#1) - sounds fair right?

1. Request Your Credit Report - If Congress can spend countless hours (and millions of taxpayer dollars) in debate to pass a law that gives consumers free credit credit reports each year (one from each of the three credit bureaus), the least you could do is spend the fifteen minutes it takes to request and scan over your report. Get your free credit report from the only officially sanctioned website - AnnualCreditReport.com. You could find a mistake that could cost you thousands of dollars in added interest or higher fees down the road. The request itself takes no more than ten minutes so request and print now, review later.
2. Open A Roth IRA - I wrote a post about opening up a Roth IRA that details every step and the financial impact of doing so. If you want this to truly be a 15 minute move, put the contribution into a Target Retirement/Lifecycle fund and let the brokerage worry about re-balancing it for you.
3. Participate in your 401K - It wasn’t until recently that folks were automatically enrolled into their company’s 401K plan by default so if you aren’t yet participating, do so and make enough of a contribution to get the maximum employer match. All it takes is a call to your HR department to make it happen - you wouldn’t pass on a twenty dollar bill sitting on the sidewalk, don’t pass it now.
4. Open a High Yield Savings Account - The typical savings account gives a piddly 1%, get five times that by opening a savings account at any number of FDIC insured online banks like ING Direct, Emigrant Direct, HSBC, Citi, the list goes on and on. As long as they’re FDIC insured (all those listed are), you don’t have to worry. Get the yield of a CD with the flexibility of a savings account.
5. Split Your Paycheck - Out of sight, out of mind. Have 10% of your paycheck deposited into that high yield savings account and think of it as an “automatic” savings (in the sense that this is one of the ideas from the Automatic Millionaire - set it and forget it Ronco style) and you’ll never know the difference.
6. Use 0% Balance Transfers - Use a 0% balance transfer (list of 0% bt cards) to pay off an existing credit card balance, it takes only a few minutes to apply for a card and a few minutes to do the transfer (I’ve found Citi has the easiest balance transfer process). The little brother to this tip is to just call up your credit card and asking them to lower your interest rate, saying that you could always just try a 0% balance transfer and leave them. Between 0% balance transfers and asking, Tricia from Blogging Away Debt went from $400/mo in interest to a mere $100 - that’s $300 that can go towards principal.

Don’t read anymore, go do!

When you get both sides of something, you know, at the very least, that there are some smart people looking at it and you can try to piece together a full picture and form your own opinion on something. When was the last time someone said that investing in a Roth IRA is a bad idea?

…

Yeah, I haven’t met anyone who has told me that a Roth IRA was a bad idea either and almost everyone I’ve met has said that the Roth IRA is fantastic, wonderful, a must for everyone; so… who’s giving the other side? Well, in this Devil’s Advocate post, I’m going to try to provide this other side and here are the reasons why I think Roth IRAs are a bad idea!

You Can’t Assume The Tax Structure Will Remain The Same
In the last few years we’ve already seen people suggesting alternate means of taxation to do away with the monstrosity of income tax and the Internal Revenue Service, to go with a flat tax, or a value added tax, or some other form of non-income related tax. What if we did go to something like that? Well, the benefit of a Roth IRA is that you pay the income taxes now so you don’t pay them on disbursement and if there was no income tax then you lose that benefit. If let’s say we instead instituted an automatic 20% national sales tax and abolish the income tax, then your Roth IRA would in essence be double taxed. Now, if we were to make a change, I’m sure there would be some grandfather clause so that no one was penalized but maybe not!

Roth IRA’s Are Not Incredibly Better Than Traditional IRA’s
Often times when you hear someone talk about Roth IRA’s, they talk about how they’re ridiculously better than Traditional IRA’s, except they’re not. With traditional IRA’s, you have a bigger piece of pie to invest now with the spectre of taxation in the future; with Roth IRA’s, you have a smaller piece of pie to invest now but without taxation hovering over your earnings. While it sounds nice to not pay taxes on your earnings, it really works out to be approximately the same if your rate of taxation remains the same. The reason this is so is because what you pay now in taxes on your Roth IRA contribution would be otherwise invested and make up for the amount in taxes you’re skipping out on by prepaying. Hopefully that made sense…

You Can Withdraw Your Contributions Without Penalty
If you withdraw early from your 401K, you face a 10% penalty on top of your regular income tax. If you want to withdraw your contributions from a Roth IRA, they let you without penalty as long as you follow a few simple rules. This is great, except if you are the type that can’t resist taking out the money (once it leaves, you can’t put it back in), then this is a bad thing since there aren’t any obviously negative effects (such as 10% off). Sure, this is a weak argument against Roth IRAs (and often touted as a benefit) but the fact remains some savers like the idea of a penalty so that they aren’t tempted to withdraw the money.

As you can see, Roth IRAs aren’t the holy grail of retirement investing and the tax free growth isn’t as miraculous as it may seem. Personally, I’ve put as much as I can into my Roth IRA (which really isn’t all that much anyway, it’s certainly not the $15k limit of 401Ks) each year so even if you were to go full tilt on Roth IRAs, you aren’t really in a bad shape if things turn out badly. It’s just useful to know that while a Roth IRA is a very important piece of your retirement savings puzzle, don’t let all the talk of its awesomeness overshadow the fact that its use as a retirement vehicle does have risks involved and hopefully in this Devil’s Advocate post I’ve laid some of them out for you.

If you know of any that I’ve missed, please do share and I’ll try to integrate them with the post. (I do admit that making this argument was difficult past the first reason, so keep that in mind!)

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!

A Roth IRA is one of the most intruiging and most often discussed (argued) means of saving for your retirement. You contribute post-tax dollars into a retirement account that will appreciate tax free. You can also withdraw your contributions (but not the appreciate of those contributions) tax free at any time. While the awesomeness of the Roth IRA can and probably will debated until the end of time, let’s move past that for now.

The only significant requirement that a college student needs to know is that you can’t contribute more than what you earn in a year. So if you had an income of $2,000, as reported on your tax return, then you can’t contribute the maximum of $4,000 - you can only put in $2,000 (because that’s your income). What’s nice is that there is no requirement that the money you contribute has to be the money you actually earned, so you can earn $2k, spend it on books, tuition, beer (just kidding Mom!), etc.; and then get $2k from your parents to put into your Roth IRA and it’s entirely legitimate.

Why should you (and your parents) do this? That $2,000 can do so much more for you, growing tax free, than it can for your parents from a retirement funding perspective, if you consider that you are four decades away from retirement. While you are young and can afford it, saving as much as you can in retirement is crucial because time is on your side.

Don’t really want to ask for a few thousand dollars from your parents for “retirement” (especially since they will probably be helping as much as they can for school)? Structure it as a loan and pay that loan back after you graduate and start working, they’ll appreciate how responsible you are in thinking of your retirement.

This article is part of a new series I’ve started called Personal Finance for College Students (hence, PF College).