What is a Roth IRA? A short and simple guide

Most of us know we should save for retirement, but sometimes it's tough to get started. If your employer sponsors a retirement plan — especially if it offers a generous match to your contributions — that's usually the best place to begin. But even if you don't have a retirement plan through your job, you can still save for the future. One of the best ways to do so is through a Roth IRA.

What Is a Roth IRA?

An IRA is an individual retirement arrangement, a retirement plan that gives you tax advantages when saving for retirement. There are two types of IRAs:

  • With a traditional IRA, the money you contribute is typically tax-deductible, but the money you pull out at retirement will be taxed at the then-current rate.
  • With a Roth IRA, you contribute after-tax dollars, but when you retire, you don't have to pay taxes on the investment returns.

In other words, money in a traditional IRA is taxed when you pull it out, but the money in a Roth IRA is taxed before you put it in.

You make investments in an IRA through an individual retirement account. You have just one Roth IRA, but you can have many Roth IRA accounts. That may sound confusing, but all you really need to know is that you can have a Roth IRA account at your credit union and a different Roth IRA account at your broker, but they'll both be part of the same individual retirement arrangement. Clear as mud?

It's important to understand that an IRA isn't itself an investment — it's a place to put investments. When you open an IRA account, it's like an empty bucket waiting to be filled. You might, for instance, buy stocks to put into your bucket, or maybe bonds. Some people use their IRA accounts to invest in real estate, and some simply let their cash sit there, earning interest on certificates of deposit.

Roth IRA Rules and Requirements

There are some restrictions on who can contribute to Roth IRAs. These arrangements are designed to help ordinary working folks to save for retirement by giving them a significant tax break. They're not meant for people with really high incomes.

For 2012:

  • If your tax status is single and you earn more than $110,000 but less than $125,000, the amount you can contribute will be limited. If you earn more than $125,000, you can't contribute to a Roth IRA at all.
  • If you're married and filing jointly, your contributions are limited if your household income is more than $173,000. If you and your spouse earn more than $183,000, you can't contribute to a Roth IRA.

These income limits are based on your modified adjusted gross income. (If you don't know what that is, don't worry about it unless you're close to the limit.) Also note that Roth IRA income limits generally increase every year.

A few other useful facts:

  • If you're younger than age 50, you can contribute $5,000 to your Roth IRA in 2012. If you're over 50, you can contribute up to $6,000.
  • To invest in a Roth IRA in a given year, you (or your spouse) need to have earned income. In other words, you can't fund a Roth IRA if all of the money you received that year came from an inheritance.
  • You can use a Roth IRA even if you have a 401(k) or other retirement plan.
  • You have longer than you might expect to make your Roth IRA contributions each year — you have until the tax deadline. For instance, if you want to contribute to your 2011 Roth IRA, you still can. You have until April 17th!
  • You can withdraw your contributions to a Roth IRA at any time without penalty. But if you try to withdraw the earnings (the returns on your contributions) before age 59-1/2, you'll have to pay taxes and, probably, a 10% early-withdrawal penalty.
  • Lastly — and this is important for many people — if you've had your Roth IRA long enough, you can withdraw up to $10,000 in earnings without penalty in order to buy your first home. (You're still taxed on that money, though.) Check out this article from The Motley Fool for more info.

There are other guidelines and provisions, but these are the basics. If you want more info, check out Publication 590 at the IRS website or contact your friendly neighborhood financial planner.

How to Open a Roth IRA Account

Opening a Roth IRA account is easy. If you've ever filled out a job application, applied for a credit card, or opened a bank account, you've got what it takes to open a Roth IRA account.

Deciding where to open your Roth IRA account is the toughest part of the process. If you already have an investment advisor, ask her for recommendations, but look for other options, too. Many banks and credit unions offer IRA accounts (though you'll usually be able to invest only in deposit accounts, like CDs and savings accounts).

If you're wiling to make some decisions on your own, you can open an IRA account through a discount broker or mutual fund company. There are a lot of good options out there, but you might start your search with these firms:

I recommend that you set aside an hour or two some Saturday morning to explore the options over a cup of coffee and a bowl of Lucky Charms. With a little research, you should be able to find a company and program that suit your needs. When you're shopping around for a place to open an IRA account, ask the following questions:

  • Is there a minimum initial investment?
  • What sorts of fees will be charged to the account?
  • Can you make automatic contributions?
  • What investment options are available?
  • Are electronic statements available?

Search for a company that suits your needs, but don't fret about finding a perfect match. Remember: The perfect is the enemy of the good. Find a good match, and then set your IRA account in motion. You can move your money to a new IRA account if the first company you choose isn't a good fit.

Once you pick a place to open your IRA account, it's time to fill out the application. Some firms want you to download forms and then mail them back. So 1999! Most places should let you apply online, though. To complete the application, you'll need your Social Security number, bank account info (so you can transfer funds), info about your current employer, money in a bank account (depending on where you open your Roth IRA account, you might need anywhere from $25 to $3000), and about half an hour of free time.

Some applications will ask a few simple questions about your investment plans and goals. Once you complete the application, you'll transfer money to your new account. (It'll probably earn interest until you choose an investment.) That's all there is to it.

I haven't mentioned Roth IRAs around here much over the past few years. For one thing, I did a series of articles on the Roth when this site was young. I've always just pointed back there. For another, as my own income grew, the Roth was no longer an option. Starting next year, though, I'l be back in Roth IRA land. You can be darn sure I'll max that sucker out every year. And so should you, if it's an option.

Do you have a Roth IRA? Where do you have your accounts? What sorts of investments do you put in them? Any advice for newbies who want to open a Roth IRA account but don't know where to start? Share your advice in the comments below!

More about...Investing, Retirement

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Long
Long
8 years ago

I started a Roth IRA when I was 18 years old. I’ve managed to max it out every year for the last 12 years. For the past two, I have had to contribute to a Traditional Non-Deductible IRA first, then convert it to a Roth. I started my accounts at Scottrade and have kept them there ever since. I got a little disheartened when Vanguard funds dropped off the no-commission list, so I am in the process of switching over to Vanguard exclusively. I have to admit, I’ve been slow on taking action regarding this. For most people, like me,… Read more »

Sara
Sara
8 years ago
Reply to  Long

Thank you for this information. Where is this Step By Step guide?

Mike Piper
Mike Piper
8 years ago
Reply to  Sara

I’ve always found The Finance Buff’s explanation of the “back door Roth” to be helpful: http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

Long
Long
8 years ago
Reply to  Sara

Hi Sara,

I don’t think it’s appropriate to blatantly promote my own blog on GSR, but I’m sure you’ll find it if you search my site 🙂

Frugal Fries
Frugal Fries
8 years ago

I have a TFSA, which is the Canadian equivalent of a Roth IRA–except we can withdraw earnings anytime without penalty and limits are not income dependent (wee!)

Mike
Mike
8 years ago
Reply to  Frugal Fries

That’s wonderful, however I also find that you have to pay a lot more for some things there than we do here at the states. Autos for example, ouch.

DM
DM
8 years ago

So how exactly do divendend stocks/funds work within a Roth IRA? If you reinvest the dividends, does that count as a contribution towards the yearly limit?

Mike Piper
Mike Piper
8 years ago
Reply to  DM

No, reinvested dividends and interest do not count toward the annual contribution limit.

Sharon
Sharon
8 years ago

I opened a Roth IRA through ING with eight bucks!! There are apparently no minimum balance requirements to open an IRA through ING. 🙂 The money’s just in a basic savings account for the time being. I add a few bucks here and there as I’m able.

Daniel
Daniel
8 years ago

I feel like I’m ignorant asking this here, but how do I know if I should have a Roth (or switch to one) over my 457 (or 403B or 401K)? I am a public employee, don’t get matching funds to my retirement fund. However, I can withdraw from my 457 without a severe penalty. In addition, I get a COL salary increase maybe once every two years, and my wife stays at home (see daycare and recent GRS post for that reason). I currently direct 10% to retirement and 5% in mutual funds, and 5% mixed to children’s college plan,… Read more »

Mike Piper
Mike Piper
8 years ago
Reply to  Daniel

In general, it’s a question of tax brackets. If you expect to be in a higher tax bracket during retirement than you’re in now, a Roth is preferable. If you expect to be in a lower tax bracket in retirement than you’re in now, tax-deferred savings (such as a 457b, 403b, or 401k) is preferable. If you have no idea how your tax bracket 30+ years from now will compare to your current tax bracket, it’s likely a good idea to do some of both. There are exceptions of course. For example, if you were able to get an employer… Read more »

Luke
Luke
8 years ago
Reply to  Mike Piper

I’m also a government employee with a non-matched 457 plan. I agree with Mr. Piper that it is (at least in part) a question of tax brackets. However, I began contributing to a Roth IRA in addition to my 457 b/c the investmest options are MUCH better in my Roth account and the fees are lower. My 457 plan is admistered by ING and while the fees are reasonable, they’re not the rock bottom fees that Vanguard and others charge for their index funds. The other reasons I’m doing both a 457 and a Roth are threefold: 1) I can… Read more »

Mike Piper
Mike Piper
8 years ago
Reply to  Luke

Good point. Costs matter!

Long
Long
8 years ago
Reply to  Luke

I agree. I also have a 457 (deferred comp) plan at work and I choose to max out my Roth IRA because I can choose better investments on my own. My employer just initiated a Roth 457 plan this year, but I’m going to stick with the Traditional 457 because of your points #2 and #3. Also, as Daniel mentioned, we don’t receive matching contributions in a 457. That’s why there is no extra incentive to invest in the 457 first. When I speak to people at work about this, I insist they max out their Roth IRA first and… Read more »

mike
mike
8 years ago
Reply to  Mike Piper

1. Plus it makes a great back up emergency fund, if your emergency fund runs dry you still have the availability to pull your contributions, 2 plus you also get bankruptcy protection on the money if you don’t want to pull it depending on your financial issues, 3. and you never get those years back if you don’t contribute. Thats why I started allocating funds that would have otherwise going to emergency funds anyway. 4. It may be also better to put money into Roth for both you and wife instead of a 529 depending on your personal tax situation.… Read more »

Mom of five
Mom of five
8 years ago
Reply to  mike

I have heard that IRA’s aren’t counted as heavily in college finacial aid, but I believe they count some. Any one out there with experience on this issue? We’re still 3 years away from college in our house.

We view our Roths as an additional emergency fund/retirement savings although they are also now our primary form of college savings. We stopped funding our 529 a couple of years ago. Instead, for the exact reasons you’ve listed, we’ve been fully funding our Roths when the laws regarding the conversion changed.

mike
mike
8 years ago
Reply to  mike

http://www.finaid.org/savings/accountownership.phtml take a look at the account ownership chart to see how assets would count. The way I understand it,traditional IRA withdrawals would impact future years income, Roth contribution withdrawals would not since already taxed, but you have to be invested for 5 years in your Roth. (The chart breaks it down) There are also calculators on this website and on savingforcollege.com that calculate the Expected Family Contribution. They have basic ones and more complex calculators. The biggest factor tends to be Income and asset allocation. Child assets are assessed at a rate of 20%.Parent assets are assessed on a… Read more »

Mom of five
Mom of five
8 years ago
Reply to  mike

@Mike – very helpful website. Thank you!

Julie
Julie
8 years ago
Reply to  Mike Piper

Am I understanding this beneficial Roth tax bracket theory wrong? Your tax bracket 30 years from now will depend on how much you’re taking out of your retirement accounts per your retirement income- right? So you could take out the same amount that you’re making today, 30 years from now- ending up with the same amount of taxation regardless. Then say you’re investing into your Roth with a high tax bracket per your income today, but expect to take less out per year upon retirement requiring a smaller tax bracket- thus having been taxed more at the today then you… Read more »

Scott
Scott
6 years ago
Reply to  Julie

My understanding is Roth withdrawals do not increase your gross income after age 59 & 1/2 so it will not bump you into a higher tax bracket or count against you if you need certain benefits.

monsterzero
monsterzero
8 years ago

I’ve had a Roth through Vanguard for three years. I’ve been pretty risk-averse: for the first couple of years I just invested in their STAR Fund, but this year I started buying the Emerging Markets Stock Index.

Mom of five
Mom of five
8 years ago

I’m a worrier. My husband and I had long been saving for retirement under the assumption that SS will be means tested by the time we retire and therefore we shouldn’t expect anything from it. However, I now see in Europe that some governments are taking private retirement funds from individuals. Scares the heck out of me that it’ll start happening here so I’m trying to diversify our retirement assets as much as possible. We’ve got Roths and 401k’s but now we’re also trying to set a goal of an additional $6k a year in the stock market, but so… Read more »

John
John
8 years ago
Reply to  Mom of five

I am curious as to the details of what you mean when you say “in Europe that some governments are taking private retirement funds from individuals.” If governments in Europe are confiscating private individuals’ investment accounts, I would think I would have heard about that. Maybe you mean they are in danger of defaulting on bonds?

Mom of five
Mom of five
8 years ago
Reply to  John

Unfortunately, no, I’m not talking about bonds.

http://www.csmonitor.com/Business/The-Adam-Smith-Institute-Blog/2011/0102/European-nations-begin-seizing-private-pensions

I can see the logic that politicians will use – “401k’s and IRA’s were tax advantaged accounts so therefore the government has some claims on their funds.” And people who haven’t saved prudently will favor it. And that’s most people.

mike
mike
8 years ago
Reply to  Mom of five

Logic and politicians? Isn’t that an oxymoron? If it hits the fan there is probably isn’t anything thats off the table. 401ks and Iras(non-roth) are wonderful for future budgets because the haven’t been taxed yet, thus who knows what the future brackets will be and maybe they will tax pensions and other tax-deferred accounts at higher rates. So you are right to diversify, but whos to say they don’t come after Roths to capture additonal funds or raise capital gains and dividend rates to say 50%, we just don’t know and I guess that can cause consternation. I try to… Read more »

John
John
8 years ago
Reply to  Mom of five

Wow, thanks for the link. That *is* scary. Makes me see the following story in a new light.

http://blogs.villagevoice.com/runninscared/2012/03/john_liu_with_n.php

Mom of five
Mom of five
8 years ago
Reply to  Mom of five

@Mike – I do think they’re going to come after the Roths – that’s why we’re trying to diversify, particularly into non retirement vehicles. So far, we haven’t had a ton of success, but we’re trying.

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago
Reply to  Mom of five

I’ve thought of that, too. I’d be an absolute moron to think that I’ll get social security when I retire (in my mid-twenties), at least in its present form. WIth the US owing some 12-13 trillion dollars (?), I think it’s quite possible that they’d dip their hands into my IRA accounts. Just like you said, most people don’t save, and they’ll be the ones voting in the politicians who say that they’ll tax IRA (even Roth IRAs) to help pay for the things that non-savers can’t afford. I bought some physical gold. I see it as the future money,… Read more »

Mike
Mike
8 years ago

It’s no guarantee that you won’t pay anything after you retire. There’s no stopping congress from changing the rules and taxing your gains in the future.

Mike Piper
Mike Piper
8 years ago
Reply to  Mike

Good point.

For anyone thinking such a thing is impossible, remember that Social Security benefits were tax-free for 40+ years. Then in 1984 the rules were changed.

Luke
Luke
8 years ago
Reply to  Mike Piper

This is a very good point. I cringe when I hear coworkers say things such as, “They could NEVER take our pensions away!”. Pension plans change or disappear. Tax codes change almost yearly. Marginal tax rates go up and down. Interest rates flucuate daily. Returns on stocks and bonds ebb and flow. The government could one day decide, “Hey we need more money. What could we do?? I know… let’s require all Roth IRA holders to pay 15% tax on their withdrawals” Ergo… DIVERSIFY!

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago
Reply to  Luke

So scary. If they made a movie out of it, I’d be covering my eyes the whole time!

Frugal Portland
Frugal Portland
8 years ago

Yes, questions. Can I have both a traditional and a Roth? If I decided to go for a traditional, should I ask Fidelity to move it to a Roth?

Mike Piper
Mike Piper
8 years ago

Yes, you can have both.

The $5,000 annual contribution limit, however, is a total contribution limit. So, for instance, you could contribute $2,000 to one and $3,000 to the other, but not $5,000 to each.

And, a Roth IRA is not necessarily better than a traditional IRA. It depends on a few factors — the most important one usually being how you expect your tax bracket in retirement to compare to your current tax bracket.

WWII Kid
WWII Kid
8 years ago

So many people whine about how they don’t get the immediate tax deduction with a Roth IRA. Take it from me, you will be happier with the tax-free withdrawals later in life that with the tax deduction now!

Long
Long
8 years ago
Reply to  WWII Kid

I agree. I handle my parents finances now and wish they had a source of tax-free income. People need to remember the other benefits of having tax-free income.

When you are in retirement, having tax-free income means that you have better chances of qualifying for low-income benefits if you need it. Removing taxable income will mean a lot more for you later in life than a small tax deduction now (remember that it’s a deduction, not a credit).

bareheadedwoman
bareheadedwoman
8 years ago
Reply to  WWII Kid

nothing is sure but death and rising taxes 😉

Sarah
Sarah
8 years ago

My husband and I are just barely over $173K (though it certainly doesn’t feel like it because of our oppressive student loan debt)- does anyone have any thoughts on what the best option for us would be? Thanks!

Long
Long
8 years ago
Reply to  Sarah

Hi Sarah, That question is very hard to answer without knowing more about your entire life situation. From your initial description, my wife and I are pretty much in the same pot as you. In order to reduce some of our taxable income now, my wife invests 5% of her income in the regular 401k plan at work (it’s enough to capture the employer match). She also has a Roth IRA for tax-free income later in life. I also do the same, but with a 457 plan at work and a Roth IRA on my own. We are concentrating heavily… Read more »

Sarah
Sarah
8 years ago
Reply to  Long

Wow- this is very informative- thank you! Currently we’re just dumping as much as we can into our 401(k)s, because we weren’t sure what else to do with it. I’m contributing 10% (+ a 4% match) and my husband contributes 10% (+ an 8% match). We are also agressively trying to pay off the student loan debt (over $250K I cringe to say), so we don’t have much more wiggle room to contribute. I sensed putting it in all in the 401(k)s wasn’t the best option, so I really appreciate your advice! Thanks again!

Zach
Zach
5 years ago
Reply to  Sarah

There was a spreadsheet that I came across on the web once. My thought initially was to pay off the loans first then invest. I sure was wrong. Even though I would be paying almost 47k in interest the difference between paying my loans off early (3 years) vs waiting the full 20 was about 70k at 7% growth.

Staying out of Debt
Staying out of Debt
8 years ago

The only issue for myself is just the motivation of doing an IRA. I’ve always felt like it’s not worth doing one if I only do $250 for an opening balance.

How do you motivate yourself to open one up at 18 with only $250?

Long
Long
8 years ago

The motivation is, assuming you retire when you’re 65 (47 years of investment), that if you invest nothing but that initial $250 (at an assumed, but attainable 7.0% return) it will become $3,782 in the future.

If you only can afford to add $250 a year, because of compounding, it will become $66,669 when you retire at 65.

That’s the beauty of the Roth IRA. The magic of compounding gets to work hard for you for many years and is not penalized when you need to withdraw it for income.

Mike
Mike
8 years ago

After 250 years that $250 could be worth $49,500,000 dollars at just 5% annual return. I’m sure your great, great, great, etc .. grandchildren would love you for that. 😛

Raymond Duke
Raymond Duke
8 years ago
Reply to  Mike

In 250 years there is no guarantee there will still be money. If there is, then 14mil might be barely enough for dinner and a movie.

Mike
Mike
8 years ago
Reply to  Raymond Duke

I don’t know. Money’s been around for a while. I was wrong about the 14 mil though. It’s actually closer to 49 mil. Inflation would probably cut into it though.

John | Married (with Debt)
John | Married (with Debt)
8 years ago

I am glad to be a part of this movement. I was drawn to it because of the financial literacy aspect.

We need to do more to educate young people, and ourselves, on our own personal economies.

Thanks GRS for taking part.

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago

It’s funny that in Home Economics, you’ll learn how to bake a cake, but not how to calculate the cost of interest, or how mortgage amortization works. Why isn’t personal finance a standard course in high school yet?

Bareheadedwoman
Bareheadedwoman
8 years ago

in 1983 home ec i learned how to sew an apron, make waldorf salad (another team made the cake), clean an oven and wash a baby.

nuthin’ ’bout balancing the checkbook.

Ramblin' Ma'am
Ramblin' Ma'am
8 years ago

I remember that in high school, the “practical finance” courses were only taken by kids who weren’t on a college prep track. I never did need trigonometry or calculus after high school, but those practical finance classes would have been useful!

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago

An important point about the Roth IRA being taxed now rather than later (which I’m surprised JD didn’t stress more) is that you have to think about your tax bracket. I’m young, and I make dog poo for income. So, I prefer a Roth IRA to a traditional IRA because hopefully and realistically, I’ll be in a higher tax bracket once I start withdrawing from my IRA. That way, my taxes will be effectively lower going in than coming out. I’d rather pay the tax now on my puny income than later on my… well, less puny income.

fantasma
fantasma
8 years ago

I still haven’t opened an IRA account, still doing research (trying to make up my mind) on the following points;

What is the best discount holder for purchasing stocks?

When the advertisement states $4 per trade is that for each stock?

Or for the total amount I am purchasing and am charged for $4?

Is it best to get drips instead of purchasing the stocks within an IRA?

Kin
Kin
8 years ago

Ok, stupid question here…
Can someone tell me the benefit of a scottrade Roth IRA account vs a standard brokerage Scottrade account? I have both but don’t see how they are taxed any differently.
thanks.

mike
mike
8 years ago
Reply to  Kin

I don’t have a scott trade account, I’m with Vanguard and I have roth, ira, and brokerage with them. The roth account should be tax deferred, no tax implications unless you withdrawal earnings. A regular brokerage account would be subject to all regular taxation rules on dividends, captial gains, write-offs on losses,etc..

Raymond Duke
Raymond Duke
8 years ago

What of the great things about Roths is that if are you in the lower income bracket, you can receive a very generous tax credit. For example, if you are single and make less than ~27k (as of 2011), you can receive up to 50% of 2000. So, if you put 2k in a Roth you will receive a 1,000$ check. I was looking forward to doing this, however, if you are a full time student you are illegible. As nice as this credit it, it is not very practical. If someone is single and making less than 27k a… Read more »

PB @ Economically Humble
PB @ Economically Humble
8 years ago

What a great post. Thanks for breaking it down. I opened a roth IRA since I make so little income as a student. what do you all think? good idea?

El Nerdo
El Nerdo
8 years ago

So can anyone knowledgeable please explain how IRAs are handled between spouses? Since “individual” is part of their name, I assume you can’t have joint agreements, then? Can my spouse draw from my IRA tax-free if I croak? Can my IRA survive me and keep growing tax-free?

Mike Piper
Mike Piper
8 years ago
Reply to  El Nerdo

The rules are different depending on whether we’re talking about a traditional IRA or a Roth IRA. If you die and your spouse is the listed beneficiary of your traditional IRA, she would have two options. 1) She can roll the IRA into her own IRA, or 2) She can treat it as an inherited spousal IRA. Inherited spousal IRAs have different required minimum distribution rules than regular IRAs. But the good news is that money can come out at any time without the 10% penalty. If you die and your spouse is the listed beneficiary of your Roth IRA,… Read more »

El Nerdo
El Nerdo
8 years ago
Reply to  Mike Piper

Thanks Mike! I appreciate the answers.

If you wouldn’t mind, I have some more (for you or anyone who would care to answer):

If she already has her own Roth, mine automatically becomes an “inherited” one, yes? Or can she keep two Roths?

Also, in the “inherited” case: the fact that minimum distributions remain in place mean that it also keeps growing tax-free, yes? Even if she maxes out contributions in a different account?

Thanks in advance!

Mike Piper
Mike Piper
8 years ago
Reply to  El Nerdo

A person can have as many Roth IRAs as he/she wants. So, the fact that she already has a Roth would not prevent her from treating an inherited Roth IRA from you as her own Roth IRA.

An inherited Roth IRA continues to grow tax-free for as long as the money is in the Roth. (Of course, the required minimum distributions work to move money out of the Roth.)

El Nerdo
El Nerdo
8 years ago
Reply to  El Nerdo

oooh! brilliant. that about answers it all. thanks!

and i’ve been looking at your website too. good stuff!

Jason
Jason
8 years ago

I use Vanguard for my Roth. I’m still young and don’t make much money, but I am planning to max it every year. Right now I invest in a target-date retirement fund (year 2050) that automatically rebalances and essentially lets me sit back and watch. It’s 90% stocks and 10% bonds, and I think about 63% U.S. stocks and 27% international. I handle risk well!

Katie
Katie
8 years ago
Reply to  Jason

I’m the same way, I love the target funds at Vanguard. I just put money in, pick a rough retirement time frame (this helps them calculate the risk level of your investments) and then stop worrying about it. I know some folks like learning about individual stocks and such, but I find all of that intimidating and prefer the Target funds. I’m going to sound like a Vanguard shill, but, as a young person just starting her investments, their customer service has been awesome at explaining everything and not making me feel like an idiot. Just my 2 cents for… Read more »

Ryan
Ryan
8 years ago
Reply to  Katie

I do Love Vanguard and I’m in similar boats as you both. Vanguard has an awesome site as well as customer service, and while I used to have my Roth going to a target retirement, I moved them recently because their 5 or 10 year averages (where available) were significantly enough less than other index funds. Having said that, Target retirements are excellent for automatically modifying (reducing) your risk as you get older. Pick a few funds and track them in comparison to your target retirements. .5 or 1% might not seem like much, but compounding adds up.

Amy
Amy
8 years ago

I have a Traditional IRA with $3k (rollover from previous job) and a SIMPLE IRA with $8k that I contribute $200 to each month, and my employer matches with an additional $100. My husband received an inherited IRA with $400k in it last year. We are both young (26 and 31) and have no kids. I want to go back to school soon, and I’m considering draining the $11k in my IRAs to pay for tuition in cash. I believe I will need to pay taxes on the withdrawal, but no penalty since it’s for qualified education expenses. Is this… Read more »

Bristow
Bristow
8 years ago

Roth IRAs are amazing creatures – they are the reason why I’m a home owner at 29 in a high real estate price area. I threw almost everything I earned in high school and college into it to max out the contribution limit thanks to my parents who covered college and livings expenses. I kept it up at my first job when I made starvation wages except for the years I had tens of thousands in unreimbursed health expenses thanks to United Healthcare (aka the evil empire). Now that I cleared the pot for my 20% down and I save… Read more »

sarah
sarah
8 years ago

I’m surprised how many people predict they will be in a higher tax bracket in retirement. I thought the whole point of retirment was to have your house, student loans, and everything else paid off so you can live on less. Are people planning to retire super rich or am I missing something in the tax code?

Bristow
Bristow
8 years ago
Reply to  sarah

Having watched various elderly relatives go through retirement, getting older and frailer is VERY VERY expensive. Even if you are relatively healthy, insurance premiums, copays, medications, etc are all expensive. The majority of the elderly spend several years requiring either a nursing home or in-home care. I’ve seen and smelled the ones medicaid provides and I would never do that to myself or a relative. In CA, good assisted living starts at $5000 a month and the cost will only go up. Want to do in-home care? Be prepared for 10 times that. Your taxable income is used as a… Read more »

sarah
sarah
8 years ago
Reply to  Bristow

This is the first somewhat convincing argument I’ve heard on the subject. However, I’m skeptical… or let’s say curious, about means-testing for middle income seniors. What programs are we talking about? I’m a social worker and very familiar with Medicare and Medicaid, and I worked in a Medicaid nursing home. When you talk about Medicaid you’re talking about having income less than $10,000/year and no more than $2000 in assets… I don’t think any of is is planning to be in that boat. I work with disabled people and they have by and large been very poor, so I’m not… Read more »

Bristow
Bristow
8 years ago
Reply to  sarah

The affordable senior rental housing in my town follows these guidelines. The religiously affliated non-profit who owns my grandmother’s assisted living home is giving her a 50% scholarship so she can stay longer as she spends her assets down thanks to them being in a Roth IRA. I agree that it’s not advantageous for medicaid means testing, but many non-profits and local governments discount or ignore Roth IRA assets as they are focused on current income. As long as your Roth has been spent down a bit from where you started when you are in the last few years of… Read more »

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
8 years ago
Reply to  sarah

Good point, Sarah. But the way I look at it is that I’d rather get my taxes out of the way now. I’d like to have some income from investments during retirement, like dividends and fixed-income securities. I would hate for those sources of income to put me at a higher tax-bracket, and make more of my IRA go to the IRS. In other words, if I invest wisely now, it’s quite possible, and hopeful, that my investment-income during retirement will put me in a higher tax bracket. When I retire, I’d like to have some discretionary income to travel… Read more »

Katie
Katie
8 years ago
Reply to  sarah

My thought (and I’m not as knowledgeable as some of the other folks that replied), was that I’ll be working long past the current “retirement age” designated by the government. I’m in my mid-twenties and am fairly confident that SS will be gone or fairly reduced by the time I’m in my 60s, so I bet I’ll be working at least into my 70s. Because of that, I’ll hopefully still be at that top bracket for income. Other folks talked about a lot of tax stuff, but that was the reason I was going with Roth.

Broke Guy
Broke Guy
8 years ago

I started a Roth IRA when I was 17. I have it invested through Edward Jones. I have a family member who works there, so some mutual fund transactions are free for me. I haven’t contributed much over the years due to college. I currently have it invested between 3 mutual funds.

Mike Piper
Mike Piper
8 years ago
Reply to  Broke Guy

I used to work at Edward Jones, and I don’t remember this being possible, so your post has me very curious. Would you mind sharing which mutual fund transactions are free for you? I’m interested to see if anything has changed. When I worked there, there was no way to have the sales load on a mutual fund waived. (In fact, I was under the impression that it’s not legally possible because the sales load is set out in the prospectus.) Of course, switching funds within the same fund family doesn’t incur a sales load, but that would be the… Read more »

Jenna, Adaptu Community Manager
Jenna, Adaptu Community Manager
8 years ago

Yeah. I’ve had a Roth IRA since graduating from college. Wish I would have started sooner but what can you do?

Donny Gamble
Donny Gamble
8 years ago

I personally feel that the self directed IRA is a better retirement vehicle because if offers a lot more diversification.

Christine
Christine
8 years ago

My ridiculously fiscally responsible youngest brother opened a Roth IRA when he was 15 and got his first job as a life guard. He also paid cash from savings for his first job. The local Edward Jones office said he was their youngest client ever. Yay him! On the other hand, I finally set up a Roth IRA for myself last year, at the age of 33. It’s at TD Ameritrade, mainly because numerous family members have their retirement accounts there and it makes it easier for my retired dad to keep an eye on all of us (and we’re… Read more »

PawPrint
PawPrint
8 years ago

One thing I’m not sure I saw mentioned is the spousal IRA. Even though I no longer have earned income, I contribute $6K per year to a Roth as does my employed husband. So if you’re a one-income family, the non-working spouse still can contribute to a Roth IRA.

Ryan
Ryan
8 years ago

Quick question: I already filed my taxes for 2011. If I opened a Roth IRA now (prior to the April 17 deadline) to contribute for 2011, will I have to re-file any tax forms, or modify anything on my 2012 returns?

kate
kate
8 years ago
Reply to  Ryan

No, you shouldn’t have to file an amended return or submit anything additional. Roth IRA contributions don’t normally go on your tax forms when you file (the contributions aren’t deductible and don’t effect your tax owed/refunded — that’s part of what makes it a Roth instead of a regular IRA!).

“You do not report Roth IRA contributions on your return.”
(The IRS,
http://www.irs.gov/publications/p590/ch02.html)

Ryan
Ryan
8 years ago
Reply to  kate

Thanks!

Chris B
Chris B
8 years ago

I have kind of an offbeat Roth question. My (separated) husband has a Roth that was converted from a traditional IRA (and taxes paid) up over 20yrs ago. He is unemployed and seriously in need of some cash right now. I know that he can withdraw his initial contribution w/o any penalty, but … this fund has taken a beating over the last few years and is actually worth less now than the converted amount. So, if he liquidates it and takes all the money now, could he also claim an investment loss on his taxes for the difference?

Anna H
Anna H
7 years ago

I am almost 30, a seasonal worker who makes under 40K in the tourism industry doing what I love. I owe nothing, own everything outright (which isn’t much, but I don’t need much as I’m more of a minimalist) and have very little overhead which makes me actually feel rich with the little amount that I make. I don’t see myself ever making LOTS of money but possible more than this in the future. Should I start a Roth IRA through ING who I already have accounts with? It would only really be cash that I would be adding every… Read more »

tina
tina
6 years ago

I have a little over 12, 000with edward jone I was put out of work on total disability. I owe over 30, 000 in cridit cards. However , I’ve checked my credit my cedit and it most accounts are closed. My questions are 1) can I file bankruptcy and 2) am I suppose to file taxes on money with edward jones? 3) I am only on SS making 1220 a month. If I file bankruptcy and them that I have no money anywhere but SS . Will the bankruptcy people find out I have money at edward jones and will… Read more »

Gus
Gus
5 years ago

Hi i have a friend that told me that I should open a ROTH account since he said I’m still young 33 years old. He told me if I open one ROTH account and I put up between five or ten thousand in the account my gains can be pretty good per year. I wanted to know or ask if you can advise me more about this topic and if you can give me an example of my gains if I open an account with 5000 or 10000 dollars. Can I keep making deposits once I open the account? can… Read more »

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