Finally, at long last, I'm writing up an introduction to Roth IRAs for Thursday. I'm no expert on this subject, though, and most of the entry is going to be derived from web research I do over the next two days. I would love some suggestions as to important points to cover, and little hints and tips about Roths (or IRAs in general).

For example, my understanding is that you can withdraw contributions from a Roth at any time without penalty, but that if you withdraw earnings before a give age, you're subject to substantial penalties. (I'm not saying that a person should do this, just that they can. This is very important to some people, such as my cousin who is worried about his health. He has tens of thousands of dollars in normal taxable accounts, and I keep trying to convince him to put his money into a Roth. "I won't live that long," he says. He wants to be able to get at the money.)

Anyhow -- if you have any Roth IRA hints or tips, I'd love to hear them.

--j.d.

I think that you can pull out up to 10,000 of your contributions at any age at times of emergency or to purchase your first home... I remember reading that somewhere.

I also know that more and more companies are starting to offer Roth options to your company sponsored savings account. My company started offering this this year.

JD: You are correct about being able to pull out standard contributions at any time. I think that it might get stickier with rollovers or conversions, though I can't recall right now. I've researched this in the past and written quite a bit about Roths. You can pore over my Taxes or Saving & Investing archives if you wish.

I will, indeed. I'll also quote Ramit's retirement guide. I e-mailed that to my wife one day, and she then forwarded all around the crime lab. Ramit was a big hit with the Oregon State Police that day!

IRS Publication 590 covers individual retirement arrangements and is, in my opinion, fairly easy to read and understand.

The biggest public misconception that I see, based on comments and questions to PFBlogs, is the difference between an IRA and the investment decisions within an IRA. Specifically, that an IRA is merely an account while an ETF (for example) is one possible investment with the money deposited into said account. Similarly, I've seen people say that they want to buy a mutual fund, without (apparently) understanding that a mutual fund can be purchased in a brokerage account, an IRA, a 401k, etc.

The Wikipedia entry on Roth IRAs is quite good.

http://en.wikipedia.org/wiki/Roth_IRA

You can indeed pull out up to $10,000 toward purchase of your first home, and in fact it doesn't really have to be your first home; the IRS treats you as a first-time homeowner if you haven't owned your own home in at least 2 years. But I've seen conflicting reports about whether you have to pay tax on any of this: some sources say you pay tax on your earnings, others say they're tax-free. This is important to me, as I plan to cash in my two Roth IRAs, which are worth a combined total of just under $10K, toward the purchase of my new home later this year (and yes, that new home can be anywhere in the world, I checked with the IRS).

The other thing that I've never gotten a straight answer about with the Roth is: when I'm retired are my withdrawls of earnings tax-free, or just withdrawls of my contributions? I keep seeing references (including Wikipedia) that both earnings and contributions can be withdrawn tax-free when you retire (at least free of federal tax; you may still have to pay state income tax on them). Can anyone clarify this? Obviously this makes a big difference.

Tinyhands, that does seem to be the biggest confusion. I'm working on a metaphor to try to make it clear. I want to say that an IRA is like a bucket that holds various investments, but that's still not clear. I'll exercise my literary muscles and come up with a better analogy. I think too many people are scared of IRAs because they think the're difficult to understand and set up, when in reality they're easy.

It's like a jar. What kind of jam you put in it is up to you.

I like the analogy of a cake and clingfilm. Then you can extend this by saying that an IRA is more like a lock and lock container. And having it in a taxable account is like having no clingfilm / container at all.

I think reviewing the pros and cons of different brokerages would be really helpful. I know that for myself I just haven't had time to weigh the pros and cons of Schwab, Zecco, Fidelity, etc. and that's a huge impediment. I already have a 401k at Fidelity but want to have a Roth IRA to supplement my savings. I can never seem to find the time to research the different brokerages to make an informed decision, any help in that regard would be greatly appreciated .

A tip from my own financial standpoint.....and maybe its obvious but, in my situation of making just about $30K a year, contributing to a Roth IRA, as opposed to traditional, makes more sense because I sure am planning on making more than 30K when I retire! So what I pay in tax now will be less than I would pay then.

The tax deduction from the Traditional IRA might wash out the taxation after retirement, but who knows.....and its better to pay now (for me).

(Oh, I think I'll be able to open that Roth account by the end of the year! w00t!)

J.D., it may be helpful to point out IRA stands for Individual Retirement Arrangement, and it is essentially a deal that a person makes with the government to follow certain rules in exchange for favorable tax treatment. One of those rules requires that investments subject to this arrangement have a separate account (many banks and brokerages call their account platform an Individual Retirement Account). I like to say that accounts are just the houses where your money lives, and investments are the clothes that your money wears. You can even say that IRA is a town, and all the houses in "IRA Town" have to follow the laws of IRA Town. Nearby, "Roth IRA Town" has its own laws. There's a lot you can do with this metaphor.

I'd really like some very basic information. I'm ready to invest in an IRA, have been saving for it this year. There are some things I'd like to know, such as what exactly happens when I make automatic contributions each month? (what if the contributions end up over the limit by the end of the year? How do I make sure they don't go over the limit? does Vangaurd or whomever automatically prevent that from happening?). Also, I'm married and a sahm (without income), my spouse is employed - is it correct that we can both open an IRA? Do we use the same IRA account or open two accounts?

IRA’s here it is we have two choices ROTH or Traditional
First the basics, an IRA is an Individual Retirement Account, the government loves them because they fear the future, and by getting the general public to start IRA’s they know that they are less liable and fewer people will have no money at retirement. First some of the quality’s that they both share….
- Tax deferred growth (you pay no tax while your money grows within the account)
- Freedom of investment (you can invest in what you want from a CD to a mutual fund)
- Eligibility you must have earned income, if married and filling together only one must
Have earned income.
- You are allowed to open an IRA even if you have a 401k or other retirement plan
- Contribution must be in the account by the tax deadline for any given year. And the most you can contribute is $4000 (if you are over 50 then you are given what is called a catch up contribution of $1000 giving you a total of $5000 per a year) the government is always increasing this number so in the future we will most likely be able to contribute more in 2008 it is supposed to go up to $5000 plus the catch up if you are over 50yrs.
- Withdrawals 591/2 is when you can start to take withdrawals from your IRA’s with out penalty the ROTH has a special provision that I will talk about later…

ROTH
Now what is the difference there are a lot of differences but the main one is that in the ROTH all money comes out tax free this is why not everyone can contribute to a ROTH,
If you make more then 99K filling single or 156k filling joint you start to get phased out and the amount you can contribute goes down. The other main point to hit on about the ROTH is that at any point in time you can take out what you put in with out penalty example over time you put 10k in and it grows to 15k, you can take out the 10 but the 5 in growth must stay until you are 591/2.

Traditional
Everyone can contribute to a traditional but not all contributions are tax deductible. Whether or not you will get a tax deduction on your contribution is a tax question that I can not answer, but anyone can contribute and take advantage of the tax deferred growth. When you start to take money out (591/2) you have to pay taxes on the growth and contribution that you received a tax deduction on. Also with the Trad. You can roll over old 401k’s, 403b’s……into your Trad IRA and maintain the tax deferred growth while now having freedom of investment choices.

I hope this helps, if there are any question feel free to e mail me at email_walt@yahoo.com

My understanding on tax deductibility for Trad IRA's has to do with 401(k) offerings. I cannot remember if the tax deductibility goes away if the 401(k) is employer-matched, or if it is non-deductible if the employer offers a 401(k) at all.

That would be something I would want explored as well JD?
I can also ask my sweetheart, because he knows all of this, him being one of those people who has spent a LOT of time researching retirement saving and all such matters. And then put that information here.