At long last, I'm nearing completion of my Roth IRA entry. There's no good reason that it's taken me two months to do this. Mostly I was intimidated because it feels so much like trying to be a financial expert. Finally I decided that was dumb. I'm not a financial expert, so the best I can do is try to explain IRAs the best I know how.

Also, it occurred to me that this entry has two parts: an explanation of IRAs and an explanation of how to open one.

I'd love to have feedback on the first part of my IRA article. It's still in rough draft form, but that's a good time to get input. Please help me catch any errors before this gets posted to the blog! Thanks!

p.s. Though this post is stickied now, it will be deleted once the article is finalized.

I am still bummed that I am not allowed to invest in a Roth IRA.

I went the traditional IRA route after pulling my contributions out of the ROTH. I know it makes no sense mathamatically, but i need everything in one spot, and I used vanguard to do it.

JD,

Don't be scared. I tend to get a little over-zealous when editing and several of my comments are just about clarification. Feel free to take any of my suggestions with a grain of salt. If something I wrote doesn't make sense, let me know. A couple of posts that I've written that may be helpful: What's so great about a Roth IRA? and a response to a reader question How do I open an IRA?. This is a great, helpful article and I look forward to seeing the finished product.

1 - I would move the "two types of accounts" section above the "why put your money" section and then specify that in this article you will be dealing solely with RIRAs unless otherwise noted. In that same section:
- "Money inside these IRAs grows tax-free" I would take this out since it's kind of confusing and you address the tax issues below.
- "With a traditional IRA, the money you invest may be tax-deductible (depending on your income, and depending on whether you participate in an employer-sponsored retirement plan such as a 401k), but the money you pull out at retirement is taxed at your current rate." see addition in bold.
- "With a Roth IRA, the money you put in has already been taxed, so the money you withdraw comes out tax-free." I would change it to something along the lines of: ...you do not get a tax deduction on the money you put in, however the money you withdraw...
- "When you use a non-retirement investment account, you’re taxed on your income before you put it into the account, and you’re taxed on the earnings when you withdraw them." I would change to something like this: When you use a non-retirement account you contribute post-tax money. Depending on what you are invested in, you may also be taxed along the way on dividends and capital gains distributions as well as being taxed on the earnings when you sell your investment.

2 - in your "Why put your money into an IRA?"
- For this whole section, I would specify whether you are talking about a Roth or a Trad? Since you haven't described the two different types yet, even though your article is about Roths, I would still use the term Roth IRA instead of just IRA. Or use RIRA, just to be clear.
- "In order to invest with an IRA, you must have earned income." unless you are a non-working spouse and you file jointly in which case you can still contribute to an IRA (of any type) as long as your spouse earns enough to cover the total amount of contributions.
- I would briefly outline the income limits or direct them elsewhere to see them
- "You must contribute by the tax deadline each year." I would make this more specific to avoid confusion. Something along the lines of: You have until tax filing day to make your contribution which means you have until April 15, 2008 to make a contribution for 2007.

3 - in "where to open an IRA"
- Vanguard only requires $1000 to invest in the STAR fund which is a great balanced fund.
- It makes me nervous that you are suggesting sharebuilder...It's not always the great deal it sounds like, particularly for small investors. I'll refer you to my "why i hate sharebuilder" blog post My new favorite brokerate is Firstrade since they DRIP for free, have low fees, low/no minimums and lots of free funds to choose from.
- More questions to ask: Do they offer auto contributions and what are those limits? Do they allow free DRIP?
- ING does offer IRAs
- You might mention T. Rowe Price. It's my top mention for people with little money. They have a program that allows $50 to start the account if you set up regular (not even monthly) $50 auto transfers.

Great post, look forward to reading more.

pf101

Great post.

However, I still have trouble with the widely accepted statement that a Roth IRA may not make sense if "you expect your tax rate to be lower when you retire than it is now." Your tax rate at retirement shouldn't matter, unless I'm misunderstanding something fundamental.

Let's say you contribute $10,000 to your IRA over the years and it's worth $100,000 at retirement.

With a traditional IRA, you have to pay taxes on the full $100,000 (contributions plus earnings) when you withdraw it at retirement.

With a Roth, you only pay taxes on the original $10,000 in contributions. That means you get $90,000 in earnings tax-free, a benefit that should dwarf anything you could get by being in a lower tax bracket at retirement with a traditional IRA. Even if you were in one of the lowest tax brackets at retirement, I can't see how you could possibly pay less in taxes on $100,000 than you would pay on $10,000 at the highest tax bracket.

Right?

Hmmm...Good question, Brad. I should have brought Bogleheads with me to work today. I'll have to look this up when I get home. Meanwhile I'll try to Google for the answer...

Brad,

It has a lot to do with the fact that you an effectively invest more with a TIRA than a roth. If you ran a true side-by-side comparison, you would reduce your Roth contribution by the amount of taxes you pay. When you do that, it's a wash if you are in the same bracket and if you're in a lower bracket at retirement you would have done better to invest in the TIRA and gotten the up-front chance to invest more.

Personally, I think the chances of being in a lower bracket are slim to none so I think the Roth works for most people.

I've incorporated many of the above suggestions, and have revised the post. I'll continue to refine it throughout the day. Now, however, I need to start making screenshots for part two, "how to open an IRA". If I don't start now, I'll never get it done!

Ah yes, I've heard that explanation before but it's more of an economist's argument than a real-world argument. It assumes that since your contributions to a Roth IRA are made with after-tax dollars, you have fewer dollars available and thus your contribution will be lower. But really, how often does that happen in real life? I think it's far more likely that people either plan in advance on a certain annual contribution ($2000.00 for example) or they plan to max out their IRA contribution each year. I don't think you can assume that people in the real world will contribute less to a Roth IRA than a traditional IRA.

Oh, I agree fully. I'm just explaining what I think the reasoning behind it is. I've gotten into this debate a few times with people. I think people look at $4k as $4k. Not as $4k and $5200 (or whatever it would be with taxes).

Brad, there's a table at the end of this page that contains a couple of comparisons...

Wow, now I'm even more confused. Those tables assume the exact same contribution ($4000) to both a traditional and Roth IRA. They don't explain the reasons for the discrepancies in final value so it's hard to critique.

Yeah, that makes no sense. If you start with the exact same amount and earn the exact same return there is no way you would ever get more by paying taxes than by not paying them. Something's wonky with that chart. I think I'm going to drop them a note.

ETA - well, I was going to drop them a note but they have no contact info and no about page. That seems to be a stand-alont page... Weird. JD, I'd find another source to cite that has more credibility...

I thought that if you could do the Roth, you do it.

Just plan very carefully initially because you don't want to be like me and start up a Roth and then not be able to contribute to it after a short period because you didn't look up the rules of contribution.

You know they're changing the rules a bit in 2010 right? You still won't be able to commit but you can convert a TIRA to a roth at that time if you're over the income limits now. I can't believe you can do a deductible TIRA but if you do a non-ded one and convert in 2010 you would only owe taxes on the earnings from your contributions.

On the pre/post tax Roth vs. Trad issue, its usually only an issue when someone can’t afford to max out. Happens more with the Roth 401(k) question.

Also, the future of taxes is a complete unknown. Even if your taxable income is the same in retirement, rates may be higher or lower. Just look at income tax rates over the last couple of decades; it’s any ones guess what the next few decades will look like. If you can make Roth IRA contributions, I think it is probably good deal.

JD, I agree with PF101 on the Sharebuilder thing. I actually think of it as a bit of a marketing scam. Sure $4 is less then the $5, $6, or $7 the other guys are charging, but you may be better off making a few larger purchases at a higher price than several small ones for $4 each.

Last thing, consider linking to IRS publication 590. It’s covers just about everything you need to know about IRA and is one of the more reader-friendly pieces the IRS has.