Roth IRA rules and first steps to get started today
Starting a Roth IRA is one of the easiest — and best — steps you can take to save for retirement. But you should understand the Roth IRA rules before investing in them.
I know I’ve written a lot about the Roth IRA in the past, but I still get questions all the time. People find them intimidating. For example, Lynn wrote last week:
I’m a 36-year-old single mother of two. I want to start investing for my future, but I am so overwhelmed by all the information. I was wondering if you could give me some advice on my best options for a Roth IRA. I am a school teacher and earn $41,000 per year.
I am going to do more research, but I would appreciate some advice from someone who already has expertise in this area. I am not sure what I need to start a Roth IRA, or who I should go with. I don’t know much about mutual funds or anything of that sort, so any help and advice would be appreciated.
Let’s clear things up: A Roth IRA does not need to be confusing. In fact, a Roth IRA is actually fairly easy to understand.
Note: This post is going to keep things basic. For more detailed info, see the resources at the end of this article, or consult a financial planner.
Roth IRA Basics
The Roth IRA is an individual retirement arrangement: It lets you save and invest for your future. An IRA is simply a holding account. It’s a label. When you own a Roth IRA, it contains nothing. It’s like a bucket, a place for you to put things. (Most people think of an IRA as an individual retirement account, which is fine, but it’s actually an “arrangement.”)
The things you put in your bucket are investments. You might, for example, buy a stock to put in your retirement account. Or maybe government bonds. Or certificates of deposit. The important thing to understand is that a Roth IRA is not an investment — it’s a place to put investments.
Related >> Best CD Rates | Certificate of Deposit Rates
With many retirement accounts — such as 401(k)s and traditional IRAs — you contribute pre-tax money and are taxed when you take the money out during retirement. Because they work with after-tax money, earnings from a Roth IRA can be withdrawn tax-free at retirement.
Roth IRA Rules and Requirements
Because Roth IRAs are meant to encourage ordinary people to save for retirement, not everyone qualifies for them. If you do qualify, you can contribute up to $5,000 to your Roth IRA every year. If you’re 50 or over, you can contribute $6,000.
Who qualifies? Nearly everyone. However:
- If your tax filing status is single and you earn more than $105,000 per year, your contributions are restricted.
- If you’re married filing jointly, your contributions are limited if your household earns more than $160,000 per year.
You can use a Roth IRA even if you have a 401(k) or other retirement plan, but you must make your contributions by the tax deadline each year.
The rules are a little more complex than that, but those are the basics. If you need more info, take a look at the resources listed at the end of this article.
Where to Open a Roth IRA
Deciding where to start your Roth IRA is the most difficult part of the process. Many financial institutions offer IRAs. Each has its own strengths and weaknesses. Don’t fret about finding the perfect match — find a good match and then get started.
To make things simple, here are four big companies that provide Roth IRAs (though these are by no means your only options):
- Scottrade resists charging its customers set-up, annual or maintenance fees for its online trading services and also offers them the opportunity to get a refund of up to $100 in transfer fees from other brokers for bringing their Roth IRA to Scottrade. Scottrade’s pricing on trades is fairly simple: $7 for stocks $1 and above for online market and limit equity orders. You might also consider a Scottrade checking, savings or money market account. These can be joined with a trading account to help easily fund transactions.
Opening a Roth IRA is easy. You’ll need some minimal bank account info and about 30-60 minutes of free time. If you’ve ever filled out a job application or applied for a credit card, you can certainly open a Roth IRA. Once you’ve completed your application, you can transfer money to the account. It might have to sit in a money market fund until you have enough saved to buy your first mutual fund, but that’s okay. You’re developing the saving habit!
Note: I’m a big fan of automatic investment plans. Most of these companies offer some sort of program that will pull money from your bank account every month to invest in stocks or mutual funds that you designate. By setting aside $50 or $100 or $500 in this way, saving becomes a habit.
Which Investments to Choose
Here’s where I cop out. I’m not a financial adviser. I don’t know your goals or risk tolerance. I can’t tell you were to invest.
Related >> What if the Stock Market Makes You Nervous?
And to be honest, where you invest doesn’t matter nearly as much as the fact that you do invest. To get some ideas, browse through the investing archives here at Get Rich Slowly. (Maybe start with these “lazy portfolios.”)
Related >> The Passive Way to Investment Success
If you’re really stressed, pick a target-date fund that most closely matches the year you’ll retire. This probably isn’t the best option, but it’s fine. Just use it while you get in the habit of making contributions. You can always switch the money to something more appropriate later.
Related >> Choosing a Target-Date Fund
Learning More About the Roth IRA
In 2007, I ran a four-part series exploring the benefits of a Roth IRA. If you need more info about these accounts — or if you have questions — you should start here first:
- Part one: What is a Roth IRA and why should you care?
- Part two: How to start a Roth IRA and where to do it
- Part three: Which investments are best for a Roth IRA?
- Part four: Questions and answers about Roth IRAs
I’ve revised these articles and compiled them into a free e-book called The Get Rich Slowly Guide to Roth IRAs (518kb PDF). (Note that this e-book was produced in April 2008, so some of the info is a little out of date, especially about Zecco.) And if you want the official word on the subject, check out IRS publication 590, which is all about IRAs.
Now’s the part where you can tell Lynn how easy it is to set up a Roth IRA. (And share what sort of things you’ve invested in.) My own Roth IRA started with stupid stock picks (Countrywide, The Sharper Image) and has moved toward index funds. I’m all about making things easy right now!
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There are 76 comments to "Roth IRA rules and first steps to get started today".
I have my Roth in one of the Janus mid cap funds. I don’t remember the criteria I used to pick the particular fund, but I know that longevity and track record were a part if it. I chose mid cap because I was lacking in that area overall. I also have a traditional IRA that has a mix of stocks and large and small cap funds. I’ll be converting that to a Roth next year, most likely. And you’re right, opening a Roth is easy.
Thanks for the great info JD!
I have a Vanguard target-date fund through work and will be using most of our tax refund to open an IRA for my partner. When it’s time to sit down and seriously get ready to open the IRA, these resources will be great to go back through.
Thanks for this post. I plan to start (finally!) retirement planning in February, and this post is very helpful. Bookmarked for future use!
I have my Roth IRA at Ing ShareBuilder. They’re a fee-free custodian and discount broker. I use their Automatic Investment Plan service to sock away a chunk of every paycheck into a no-fee large cap index fund and occasionally buy some shares in a small cap index fund, too. Automatic trades cost $4 each, or less if you buy a monthly package for investing in more than one fund/stock.
I like it. I moved to ShareBuilder from my bank’s brokerage where I was paying out all my earnings in custodial fees. Live and learn.
thanks for the info on these three companies. I like the sound of the T. Rowe Price one, low minimum to get started and a waived minimum for only $50 per month deposits. I think I’ll start this soon!
Thanks a bunch! I was just thinking about how I’d rather get my money into a Roth than the TSA I have at work (I REALLY don’t trust AIG!).
@JD – please pass this along to Lynn. You can have her email me if she has a question.
Depending on her actual Adjusted Gross Income, she might be eligible for the retirement savers’ credit.
$41,000 is right near the top of the 10% credit bracket for the head of household status (which I assume she is with 2 kids and single). She might be better off doing a regular IRA and deducting it, thus lowering her AGI to qualify for the credit.
For example, if she qualifies and puts $5,000 in the IRA, she would get a federal tax credit of $500.
Quick question –
Combined, my wife and I are not too far off from the $160k mark allowed to contribute to a Roth IRA.
Assuming (hopefully) that our income continues to increase over the next few years, we should surpass the limit.
What would happen to our Roth IRA in that case? I’m assuming I just wouldn’t be able to contribute to it anymore?
Thanks!
It IS easy to open a Roth IRA and start saving!!
I opened mine with T.Rowe Price back in January of ’08. I enrolled in Automatic Asset Builder so as to avoid having to pay the $1000 minimum to open. I’ve since bumped up that monthly contribution to $150. Easy as pie! Deducts right from my checking account automatically, no need to do anything on my part from month to month except to be sure to include the $150 in my monthly budget. Since I have at least 30 years until retirement, I picked a highly ranked (by Consumer Reports) mutual fund that mirrors the S&P 500 as my investment vehicle. Obviously, I took a hit last year and part of this year, but again, I’m in it for the long haul.
Do it now Lynn!! Surely you can find $50 a month to get started. It’s really easy to set up. Don’t sweat it.
Another point to note is that, at least with T Rowe Price, they charge the $10/year fee per mutual fund you are invested in until the balance is 5K. If considering TRP you might want to choose a target date until you have enough to branch out fee free. If you are starting with a $50 initial investment and a lower per month investment, it would take awhile and great deal of fees before multiple funds reach the fee free balance minimum.
I have a Roth IRA. It is a good investment vehicle. While the down market hit it hard, I’m leaving it alone because I’m investing long term.
I am 19 and want to start saving. I currently do not have a job. Are there any options available to me?
This makes sense. What I don’t understand is what the difference is between my 401(k) and an IRA. I know the 401(k) involves my employer and an IRA is something I do on my own. Can I max them both out? Should I ignore this if my employer matches a large % of my 401(k) contribution? Is IRA better if you expect to move jobs in the next year or two? These are the kinds of questions that keep me from opening one.
Thanks,
Garrett
For some light relief, check out this billionaire laughing at people who pay into a retirement fund, and see him explain why its a crazy way to be anything other than poor in retirement.
His chuckling is most infectious – you’ll be laughing too, when he’s finished the explanation.
Laughter starts around 6 and a half minutes in, and breaks out repeatedly throughout.
Interesting angle on how ordinary folk get repeatedly screwed despite their best, most earnest efforts to “do the right thing and save”, while the rich know that “ain’t the way to go”.
Definitely worth a few moments of your time.
http://vimeo.com/5490590
or
http://conspiracyoftherich.com/vlog/current
Warning: this may alter your whole outlook on the conventional wisdom for getting rich (either fast OR slow) to fund your retirement, or whatever.
2) Everybody talks mutual funds – ever wondered why that is? Could the salesman have a reason not to mention the cheaper way to get access to growth, namely ETF’s? I’m no expert on this, but I’m just throwing it out into the arena in case anybody else out there has experience of the often overlooked, low-cost vehicle the ETF.
CamKC
Excellent post. Very well explained.
What is the advantage of a Roth IRA over just opening an account with an investment firm?
It doesn’t have the tax-defferment that my 401k does. It has really arbitrary seeming limits on it. What is the benefit here over just buying these sorts of investments through my schwab account, where I don’t need to worry about income levels or annual maximums?
Strangely, the article didn’t cover this at all — why are these better than any other option?
My first two IRAs were stupid mistakes, but remarkably easy to set up. I opened my first one at (the former) WaMu: it was a mutual fund filled with bank stocks. I knew nothing except that it was April 14 and I was “supposed to” invest. My second one was with Scottrade: not bad, but I never knew which stocks to buy, so the funds just sat in a money market account. Now, I have a Vanguard Target account – easy, no thinking, no stressing, automatic investing, low fees. I still need to get my act together and close/transfer my previous IRA mistakes to Vanguard. At that point, I’m planning to determine my own (non-Target fund) asset allocation, since I’m more comfortable with the process (and my research) now. I’d recommend keeping it as easy as possible while you get comfortable with investing. Also, I’d recommend going with an institution where you’d be comfortable putting your future investment money too, so you don’t have my paperwork hassle. Look for low fees, a range of investment options, and ease of use.
Tyler (#16), your standard brokerage account is taxed on dividends and if you sell any of the investments to rebalance. The Roth IRA isn’t, it grows tax free and when you retire the monies can be withdrawn tax free. You can also balance your account options within the Roth IRA without paying taxes on what you sell, provided the net profit stays in the Roth IRA.
My RothIRA is with Vanguard. I’m currently in the S&P 500 Index and will quite possibly be adding one of their international funds in 2010. All my bonds are held in my 401k (Fidelity) for my asset balance.
For me it’s part of my budget and just another bill to be paid every month.
Tyler,
J.D. states, “earnings from a Roth IRA can be withdrawn tax-free at retirement.” That pretty much sums it up.
Granted, that’s not the case in every single situation. (Here’s a flowchart explaining how to know whether withdrawals will be tax-free.)
For anyone curious: My own retirement accounts are all invested via Vanguard index funds or ETFs.
@Tyler – the benefit is the tax benefit when you take the money out. Personally, given the size of our federal debt, I assume taxes will be higher when I’m older. You might not think so, and that will change how much benefit you think the Roth will have for you.
I <3 Vanguard, my Roth is there and it’s all low-cost index fund.
One reason to be cautious with your retirement account & use a separate brokerage account for riskier stuff is that when you’re still working, if you take stock losses you want to have them offset non-tax-advantaged income. I have a little Scottrade account for single picks and targeted ETFs.
@CamCK #14
Wow. Sounds like a bunch of BS from a guy making his millions conning people in to buying his books. From the few minutes I watched of the video, I’d never take anything someone quoted from Rich Dad, Poor Dad without a GIANT grain of salt.
The Roth IRA really has helped me out with my retirement savings. I was so confused and still don’t know anything about specific accounts and what not, but a lifecycle fund has really helped me get started and now I feel more secure.
I just started a Roth this year, with a T. Rowe Price target date fund, contributing $100/mo. It was important to me to start a Roth somewhere, somehow, and T. Rowe Price had several advantages: user friendly website, low fees, and low required monthly contribution.
I have a conventional IRA and a 401k; I started the Roth to provide a little bit of tax balance. I was considering converting my conventional IRA but I’m already going to pay so much in taxes this year – the marriage penalty is going to hit us hard – that I don’t want to pay taxes on that now too.
@JBLenoir – Yes, if you are earning more than the Roth contribution limits, you just can’t contribute new funds those years. Your can still keep your Roth open with the funds contributed in earlier years.
@Parker – you have to have “earned income” to qualify to contribute to any IRA. This includes things like wages, commissions, self-employment income, etc. It doesn’t include things like investment income, pension, social security, etc.
I am really enjoying reading the GRS posts and the comments and I think it is important to note that each one of us must take the time to learn about the investment options prior to choosing to invest. JD is right that the “vehicle” (Roth, Traditional, Taxable) and the “allocation” (which stocks/funds you invest in) are two different issues). The important thing to remember about financial planning is that there is no “best answer” for everyone. Deciding to open a Roth or a Traditional IRA should take into account your tax planning as well as your retirement needs. Do you need the deduction now to reduce your tax liability? Do you have sufficient emergency funds and can REALLY afford to leave the money in a long term account? These are just a few issues to consider and each person must become their own “expert” because no one cares more about your financial well being than you do. Personal finance is not rocket science despite all that you may hear from “advisors.” This site and the CCH Toolkit provides much of what you need and you can create your own financial plan at smartaboutmoney.org.
Be Well
When I was just out of college and had no idea what I was doing, I simply went to my local bank and asked them about Roth IRAs. They were perfectly happy to sit down with me and explain things slowly and in detail and started one for me with a short-term CD (they also explained CDs and money market accounts to me). Since an IRA is, as JD explained, just a bucket to hold an investment, once I became a little more savvy, I was able to cash out the matured CD and move the IRA over to E-trade and fund it with Index funds. The important thing is to OPEN the IRA.
Even opening a Roth IRA at your local bank is a fine start, and quite possibly the easiest and least scary thing to do. They don’t usually try to sell you anything dangerous (like whole life insurance or fancy annuities) either.
I want to re-iterate that I’ve tried to keep this particular post to just the very basics. There are a lot of ifs with saving and investing, a lot of special cases. If you want more detail, feel free to leave a comment, or to look at the other info I linked to, or to contact a financial pro. But these are the basics.
@CamKC (#14)
Robert Kiyosaki is not a reliable source for retirement information. Entrepreneurship? Sure. But not retirement saving.
@JBLenoir: You get to keep the Roth IRA you opened this year. It continues to accrue tax free. If your income exceeds 160K (or whatever the limit is) next year, you have to open up a new regular IRA for the new money from next year (or at least some of the new money). We both have Roth and Traditional IRAs based on our income in different years. If we make under 160K, like this year, we fund our Roth IRAs. If we make over the limit (this happened once), we fund our traditional IRA.
I *think* in 2010 there’s also a special loophole that you can use to convert traditional IRAs to Roth IRAs by paying taxes. The motley fool website I think does a nice job of explaining these more persnickety details.
I opened up my first Roth IRA with USAA when I was 20 and I’m not even sure what mutual funds I picked. I only funded once with 250 before I got scared. Now I use a Sharebuilder IRA to invest.
Starting in 2010, there won’t be an income limit for converting traditional IRAs to Roth IRAs, so even if you open up a traditional IRA this year b/c you make over the income limit, you could convert it into a Roth IRA next year.
@Jacque and @JD – Yes I take your points. I liked the video because it was so “left field” compared to the usual, and often most warranted, serious worries about the fine and complex details of retirement planning.
He put it all in a totally different context – forcing some of us to take a “bigger view” of the whole landscape – and it made me laugh that we take all this so seriously, when in fact the whole game we’re earnestly trying so hard to play fairly, may be fundamentally flawed in its design and conception.
But I take your points – this is the hand we’ve been dealt, so it makes sense to attempt to play it as well as we possibly can – (and maybe put the bigger issues he raises to one side, while doing that).
CamKC
I am a 28 year old who makes about $50,000 a year. I put away 5% into my 401k and get a 5% company match. I also get an additional 4% put into a pension plan. I have a small Roth IRA, but I stopped contributing to it because I have about $7,000 in credit card debt. I am paying it off as I can. Should I continue contributing to my Roth IRA while I pay off my debt? I have savings tied up in the stock market, and do not want to take those funds out because I’d be paying a large amount in capital gains. Please help!
@Donna
Why wait- until feb? Even if you don’t have extra income you can start the process now and be ready then!
Lynn,
I feel the confusion and understand that all of the information is overwhelming! You don’t want to act and make a horrible mistake. However, waiting is a big mistake, here is why: http://ponderingmoney.com/2009/11/04/funding-retirment-is-painfulunless-you-start-early/
Why not break the complexity down into simple enough steps so that you can take some action today?
Find provider — as JD said you don’t need to find the absolute best provider- you can always change your mind later and transfer to another provider. I’ve switched providers and it isn’t that hard. The new provider was very helpful since they wanted my business!
Open the Roth IRA — You will need to fill out paperwork and mail or fax it in. It’s a lot like opening a new bank account. Since you read a blog, I bet you can get online and print out those forms today. If you have any trouble customer service will be very helpful- they want new business!
Fund the IRA — You need to have some money in the IRA to start investing. You can do that online using electronic transfers or sending a check in the mail. I have a feeling you have some amount in a savings account waiting a better option.
Pick Initial Investments – This isn’t as scary as it sounds because of two things: One it’s only your initial choice! Two there is a good default initial choice called a target retirement fund. That type of mutual fund automatically becomes more conservative as you become older.
Refine Later— Start today then adjust later to improve your initial plan. Take some time to read good investment books- I really like http://www.amazon.com/Oblivious-Investing-Building-Wealth-Ignoring/dp/0981454232/ref=sr_1_1?ie=UTF8&s=books&qid=1258132760&sr=8-1 for a simple intro, since you can read it in an afternoon and it covers the basics well. My favorite investing book is http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365/ref=sr_1_1?ie=UTF8&s=books&qid=1258132822&sr=1-1 but it is pretty detailed and is better once you have more background.
You don’t need to feel overwhelmed; you can take some good actions today and adjust them as you lean more. That beats waiting until you know everything!
-Rick Francis
Tying up savings in the stock market is exactly what you DON’T want to do, unless those “savings” are in a tax-advantaged account: either a 401k or traditional IRA in which the money went in pre-tax (this reduced your taxable income, so you will pay taxes on the withdrawals after eligibility); or a Roth IRA, in which the money went in after tax (you will pay no taxes on the withdrawals); or a Health Savings Account, which can be either pre-tax or after-tax.
Playing the market without taking into account capital gains taxes is dangerous for almost everybody. Keeping your stock investments in tax-advantaged accounts means you don’t have to worry about capital gains or dividend income until you start taking distributions.
@ #31, my personal advice for you at age 28 would be, take advantage of the market top right now (it’s likely to be bouncing up and down quite a bit for the foreseeable future) and sell any stock holdings in non-tax-advantaged accounts. Save what you will need to cover any capital-gains tax: do the worksheet now (don’t wait until tax time) so that you know exactly what your liability will be.
Then pound every available dollar into your credit card debt and get rid of it as fast as you can, rapidly followed by any other debt you have, because the “real” return on your money by doing this is whatever interest rate you are currently paying on the debt and is going to be higher than what you can earn in most investments. J.D. has covered this in detail, check out his archives.
Once you are debt-free, assemble an emergency fund so that you never again have to rely on credit cards for unexpected expenses. Keep this money liquid, or near-liquid, as in laddered certificates of deposit or a money-market account through your bank (this allows you to make easy transfers to your checking account if you ever need to).
Then examine your investing options, but don’t invest in the stock market with non-tax-advantaged money unless you have maxed out ALL your tax-advantaged options already.
All personal opinion based on experience: at 30 I was also making about $50K and chose investing over paying off debt. Now 44 and still paying off debt. Don’t let this be you!
For “set it and forget it” IRA ease, I like the Target Retirement Fund options at Vanguard. You choose your estimated year of retirement, and it automatically changes your balance of stocks and bonds to follow your changing risk tolerance.
Target Retirement Funds seem to be index funds, which I got into after reading a book called “Naked Economics” that made a really convincing argument that over the long term, you won’t do better than the market as a whole. Since retirement investment is by definition long-term, I figured index funds were a good choice.
It also keeps me from the temptation of reactively investing, which leads you to buy high and sell low.
I am not a financial expert or financial advisor, just a person trying to save for retirement, so take this advice with as many grains of salt as you like.
@ Jacque 21:
LOL, I couldn’t agree more. Rich Dad Poor Dad’s Philosophy of Life: If you buy it, the income will follow. Just spend tons of money, and then you won’t have any choice but to increase your income! Not everyone on earth is an entrepreneur and/or real estate mogul at heart.
Also, I read that Target Date Funds have a lot of fees in them. I have all of my retirement savings in ETFs with very low fees. I have appropriate percentages in an S&P ETF (80% of my funds) and the rest in a treasury-bond ETF (20% of my funds).
#33, Thank you for the advice. I am very nervous to sell my current investments right now. Many of them are up over 100% in just a few short months, and my brother who is an investor has told me they will probably go up another 100% in a year or two. (I’m talking about stocks like BAC, C, and other financials.) I bought at almost the bottom of the market. Also, I like to think of this as my “emergency savings” account. I have more than 1 year worth of savings in there. I am just so concerned with my debt right now that I can’t imagine funding my Roth IRA more. I’m so afraid I’ll make a huge mistake.
Does anyone have an opinion on Trade King? 4.95 trades and no fees supposedly.
Nearly everyone is not able to qualify for a Roth due to the income restrictions. Many people in my area (NY/NJ/CT)are disqualified because of our “high” salaries. Not so high when everything costs 2x as much here as the rest of the country. And yes, I would move if I could. I’m thinking about doing the conversion next year but don’t really feel like paying income tax on $20,000, even if I can spread it out over 2 years.
@Ever #33 – If you think they’re going to go up, sell now, wait 30 days and buy again in your Roth IRA. If you think you’re worried about capital gains now, you’ll be even more worried about them if your stock DOES double in 2 years. Why not put it in a Roth, then get your gains tax free?
That said, I will agree with the sentiment that you should consider paying off your debt before investing, especially in a taxable account. If it were me, I’d sell 20k in stock, pay off the debt (7k), save 3k for taxes and put 10k in Roth for ’08 and ’09, investing in the same stocks (after 30 days) if you think they’ll go up. You’ll have whatever stock you have left as your “emergency fund”.
I went through this process about 10 months ago…sold my taxable, bought it back in a Roth. Obviously the market has had an unusual year, but I saved myself 5k in taxes by making the move.
1. Opening a Roth IRA is *very* easy.
2. In order to contribute to a Roth IRA you must have *earned* income in the fiscal year. Investment income? Doesn’t count. Money you had in savings and want to add to your Roth IRA so that you don’t fall as far behind in retirement savings just because you are unemployed? Not happening. Retroactively removing a contribution is no fun. In my case it was slightly easier because I had no earnings and I removed it before the tax year in which I contributed it ended so it was easier to deal with tax-wise than it could have been. It was, however, an expensive mistake on my part.
3. I use Scottrade for my IRA. The fees for trading are lower than most. There are no minimums, or open/close/account fees.
4. I have my IRA split between an index fund that mirrors the S&P 500 (VTSMX) one that mirrors the Total International Composite Index (VGTSX) and one share of BRK.B – because I could. I should probably start putting part into a Bond index fund too… But, I am not an investment professional (see #2 for the type of boneheaded mistake I make), am not suggesting anyone else take this route necessarily, etc.
@Mike D. I really like TradeKing–I recommend them on my blog quite frequently.
Customer service is great. Interface is easy to use. Trades are cheap. (I’m a miserly old man when it comes to investing. Low-cost ETFs and index funds for me!)
And they allow for (free) automatic reinvestment of dividends–which is important to me when dealing with ETFs in an IRA.
@ Adam #40
That is a very good idea Adam. I hadn’t even considered that as an option. I can just set aside extra money to pay the capitals gains tax.
@Suzanne (comment #36): Regarding fees in target date funds, it basically breaks down like this:
Vanguard’s are cheap.
Everybody else’s are pricey.
Here’s a morningstar article with the actual numbers:
http://news.morningstar.com/articlenet/article.aspx?id=303077&t1=1258141103
My brother says most people should use ETF’s from ishares.
@ Mike D – I use TradeKing. After setting up the accounts and transferring the money in I found out that ETFs are considered Mutual Funds and so the trades are $15.95 each! They have a great selection, but be careful. I think it’s fine for individual stocks, but if you’re looking at murual funds or ETFs, see if another brokerage is cheaper.
Suzanne: I suspect you accidentally mixed up the ticker symbol–putting in the index fund version of a fund rather than the ETF version of it (VTSMX rather than VTI for instance). ETF trades at TradeKing are only $4.95. I make a couple every month.
https://www.tradeking.com/p/home/tradeking/about/commissionsfees.tmpl
I set up a Roth last year with T. Rowe Price. I already had a 401(k) with them. The setup process was simple and only took 10-15 minutes to do.
I finally opened a Roth IRA this summer (due in large part to this blog!). I’d been meaning to for ages. I opened mine at schwab.com because of the low minimums and also because I wanted to use their checking account. I’ve got my money invested in a few index funds, which is really easy to do with them. It’s fun to watch it grow, and I’m looking forward to adding more when I get a job again.
@Ever
If your CC interest rate is high enough it will make sense to stop contributing to pay off the debt. As long as you put the payments you would have made on the credit card into retirement contributions. It may even make sense to forgo your 401K Match!!
-Rick Francis
Confession – I am a CFO. We changed our 401k plan a couple of years ago to allow for Roth 401k contributions. I am still doing the traditional (not Roth) 401k.
What can I say, I LOVE the current tax deduction, and I have a feeling that by the time I retire, this country will move more towards consumption based taxes rather than higher income taxes to pay the bills.
Also, I’m one of those Dave Ramsey types who puts 15% towards retirement, has a college fund going for our son, and tries to pay off the mortgage as quickly as I can with anything extra we have at the end of each month (at the risk of losing the tax deduction, but oh well – I hate debt).
I’d be curious to read a follow up post from JD on why it makes so much more sense to max a Roth 401k deduction instead of maxing a traditional 401k deduction.
Greg, some of us do both. Actually, on this kind of blog I’d bet lots of people do both.
@Greg
If you are a highly compensated CFO the current tax deduction may well be better! No one can tell you for sure as there are a lot of variables: Will tax rates increase, or tax brackets change? Will you have enough income to be in the same tax bracket? If you are in the same tax bracket the math works out the same for a current tax deduction vs. future tax free. Check out:
http://badmoneyadvice.com/2009/08/why-are-roth-iras-so-confusing.html
Because of the uncertainty it makes some sense to have some of both accounts to give you flexibility in the future.
-Rick Francis
@Ever – Pay off your debts first. If you do that, you’ll have increased cash flow for investing later. You may miss out on some gains, you may miss out on some losses, but either way having your debts paid off makes life a lot easier.
Okay, Mike, now you have me a little concerned. This is what I have:
VBLTX Vanguard Bd Index Fd Inc Long Term Portfolio
VFINX Vanguard Index Tr S&P 500 Portfolio
Is there another version of these?
Suzanne:
Here’s a list of Vanguard’s ETFs.
BLV is the ETF version of VBLTX. If you buy that one, you’ll only have to pay the $4.95 commission. And your annual expense ratio will only be 0.14% instead of 0.22%. 🙂
Vanguard does not have an ETF version of their S&P 500 index fund. You might want to try VTI (their ETF that tracks the total U.S. stock market) instead. Or, if you want to stick with something tracking the S&P 500, you might want to try iShares’ ETF with ticker IVV.
In case it’s helpful, here’s a list of the lowest-cost ETFs I’ve found for each asset class.
Mike, I think I will have to check out your blog. Thanks for the info!
No problem. Happy to help. 🙂
I converted my traditional Roth to an IRA last year. I took the hit on taxes, but in the long run, it will probably benefit me greatly.
Ever #31,
Don’t worry so much about the capital gains tax. Short term CG is the same as your Ordinary Tax Rate. Hold them longer than a year and the Long Term rate drops, in some cases substantially.
Google is my friend: http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States
Disclaimer: I am not a tax guy.
I have an old 401k with some money in it (more than the 5k yearly contribution limit). Id like to take this money and change it over to a Roth IRA. What is the easiest way to do this? I have read in many places that I need to roll it into an IRA – then convert the IRA to Roth IRA. I know that I will have to pay taxes on the money, but I’d like to just take it out of the total amount before depositing the rest. Does anyone have any advice on this? Are there time limits that I am bound to?
J.D.- could you address sometime financial info for seniors. My Mom(67 yrs old) is now loving your site as much as myself. She is making it on social security because she has always been very frugal. She has $10,000 in a savings acct that was back in the 90’s part of a Roth fund before the company she was working for folded up and left for Mexico. She does not know what to do with it and is very conservative, not a risk taker at all. She wants to invest it somewhere without paying too much in taxes. Any suggestions for a situation like this would be very welcome.
I have an extremely noob question. I opened a Roth IRA at T Rowe Price several months ago at the persistence of this blog and other articles. There is not much in it as I am 19 years old and a broke college student working for little pay. Anyway I don’t understand how I can choose the mutual fund I want to put my money in on the website at least. I chose(i think?) TRRNX(T Rowe Price’s 2055 Retirement Fund). Is this fine to leave my low monthly contributions in for a while? or should I switch(can i?) to a few wisely picked mutual funds? Anyhow know how to do it on the website aswell?
-thank you,
from a very uninformed person.
I have a question about the timing of contributions. I understand that I could contribute to my 2009 Roth until April 15 2010. So do I get to pick which year contributions in Jan, Feb, and Mar of 2010 go to? Could I designate that my regular monthly additions go to 2010 and make a lump sum payment to fully fund my 2009? Could I make one lump sum contribution of $10,000 and fully fund both years in the spring of 2010? How does this work? I’d like to open a fund when a CD matures in a few weeks.
The way I understand it, you can fund 2009 IRAs up until April 15, 2010; Vanguard’s form for purchasing shares in your IRA has a box to check to show what year you intend to apply the contribution to.
On a slightly different tack, I have the impression that a Roth is more advantageous to your heirs than a regular IRA, should you die with some money left. The heir’s tax gouge on a regular IRA is pretty large; because you’ve already paid the tax on the money in the Roth, your heirs don’t have to pony up as much cash when they inherit.
I would like to offer a helpful website:
http://www.401khoax.com/
Maybe its time do something different. I believe the amount of taxes we pay as a percentage of income must increase due to recent shift to entitlement philosophy. Consumption tax is a great dream and I am a big fan but if we want to be real we have to admit that this has not happened for 100+ years and the IRS base is so strong we will NOT see this change in our lifetime.
I have a question I have fifty thousand dollars I want to invest but I’m scared to take a risk with the stocks market because of all the fruad going on. Plenty of people have become rich without investing but simply by working harder getting more jobs and saving as much ad possible and opening profitable businesss which brings on triple the income . I’m wondering should I be a risk taker and play the stock market and risk losing my finances hence if another bernie madoffs scam happens or should I just continue to work hard save and ignore the stock market in fear of losing my profits like many uneducated ppl playing the stock market game. Any suggestions?
nice rundown of the basics!
@ptrilla:
You can avoid investing in a fraudulent fund a la Madoff by doing your homework. You want to check out the fund’s past performance, the fund’s fees and watch out for anything that sounds too good to be true.
It’s true that stocks are riskier than bonds and cash. But investing in a mix of stocks and bonds is often the best bet for a long-term retirement portfolio. Low-fee index funds from reputable firms like Vanguard are a good place to start.
Hope this helps,
Kristen
I have recently opened my IRA at Schwab. They have new low costs on their index funds. I think mine is sitting in an S&P 500 with about .09% costs. There are also really low barriers of entry (I’m at 200/month). A few people I know worry about whether or not the costs will stay low, but it’s better to get going and perfect things later than wait for perfect I think.
If she’s a teacher here in Oregon she might not get a tax break from a Roth IRA because of PERS. She should definitely check first!
Thank you again for prompting me to open a Roth IRA. I opened the T. Rowe Price one mentioned in 2007 after the original 4 part series on Roth IRA’s came out. It is very easy to open. I went with an Equity Index fund. T. Rowe has been very easy to work with and sends auto-reminders if you wish about making sure you have the full contribution value by April 15 each year.
Are you sure that it’s an arrangement? I was taking your word for it until I was going around the IRS site and came upon an explanation of SIMPLE IRAs. http://www.irs.gov/retirement/article/0,,id=111420,00.html
There, the A is for account or annuity. I don’t think that the IRS is wrong…
Hi,
I want to say thank you for this article. It helped me quite a bit and I started a Roth IRA at Vanguard this morning. I am 24, put $1k into their 2055 retirement fund (i figure it’s an easy place to start) and should be putting in $200+/month.
As a note – Vanguard’s fees are $20/fund under $10k in an account, not just $20 for an account. So 10 $1k funds = $200 annually. This is still waived with electronic statements.
Thank you again!
Is there an article on this site about how to roll IRAs over to other ones? I can’t actually get the money from it right?
I think the power of compounding money is something that doesn’t get talked about enough in a “right now” society that we live in today.
Great article!
Yes, you can find that information here. https://www.getrichslowly.org/i-quit-my-job-what-should-i-do-with-my-401k/