What is a Roth IRA and why should you care?

Photo illustration on opening an IRA

IRAs are tax-advantaged accounts that can hold your retirement investments. It's easy to get intimidated by IRAs.

Here is an example of a common email we receive on the subject of IRAs:

“I'm going to open a Roth IRA on my own, and I'd like to know what online sites you or your readers would suggest. I want to invest in index funds, having heard they are the bee's knees, but books and the web, and magazine articles are sadly silent on the HOW, spending lots of time on the WHY.

“Right now I'm looking heavily at e*trade and ING. I need to know more about Roths before I make my final decision, although ING is looking the best right now. Vanguard sounds good, but that $3,000 minimum is a problem.”

Individual Retirement Account — What is an IRA?

The technical term, according to the Internal Revenue Service, is an Individual Retirement Arrangement, though it is more commonly called an Individual Retirement Account or IRA.

An IRA is simply a holding account. It's a label. The difference between an IRA and an ordinary investment account is twofold:

  1. Your contributions to your IRA may be deductible for income taxes. (More details below.)
  2. All the gains (dividends, interest, and capital gains) accumulate untaxed as long as they stay in the account.

Related >> How to Start a Roth IRA

When you open an IRA, it contains nothing. It's like a bucket — it's just a place for you to put something — and what you place in your bucket are investments. For example, you might buy stock through your retirement account or maybe government bonds. Some people use their IRAs to buy real estate; and some simply let their cash sit there, earning interest, just as it would if it were deposited in the bank down the street.

Smart people mix things up over time. Their buckets may contain a combination of stocks, mutual funds, bonds, and real estate. But they don't have to be diversified at all. Your IRA can contain a single index fund if that's what you want to do.

But just remember: An IRA is not an investment — it's a place to put investments.

What is the Benefit of an IRA?

The primary benefit of an IRA is that the returns on an investment are not taxed.

Untaxed, the gains earned in an IRA compound much faster compared to an ordinary investment account where what you earn is taxed every year.

 

In addition, depending on the type of IRA you set up, either your withdrawals (Roth IRA) or your contributions (traditional IRA) are not taxed. Over your lifetime, a tax-favored personal savings arrangement, or IRA, can add tens of thousands of dollars to your balance which you may not have had otherwise. It's a benefit the federal government offers workers to encourage them to save for retirement, and the advantage is significant enough that it shouldn't be overlooked.

Types of IRAs and Their Tax Advantages

There are two major types of IRAs — a traditional IRA and a Roth IRA. In order to understand the difference, let's first step back and look at a normal investment account, i.e., one with no tax advantages.

Normal Investment Account (no tax advantages)
When you use a non-retirement account, you invest post-tax money, meaning that you have already paid taxes on that income and you invest some of what is left over after taxes. Depending on how you invest, you may also be taxed on the interest, dividends, and all other gains along the way. You will also be taxed on any appreciation when you sell your investment.

As compared to a normal investment account, investing through an IRA has three different tax implications:

Traditional IRA – With a traditional IRA, you can deduct the money you invest from that year's taxes, but you will pay taxes on any withdrawals you make from the account.

  1. Your contributions (i.e., the money you invest) will be tax-deductible.
  2. All gains (i.e., interest, dividends, and capital gains) will not be taxed as long as the money remains in the account.
  3. When you withdraw the funds after age 59 ½, you will pay normal income tax on the amount you withdraw.

Roth IRA – With a Roth IRA, you invest money that you have paid taxes on, but your withdrawals are not taxed.

  1. Your contributions are not tax-deductible.
  2. All gains (i.e., interest, dividends, and capital gains) will not be taxed as long as the money remains in the account.
  3. When you withdraw the funds after age 59 ½, you will not pay income taxes on the amount you withdrawal.

We will discuss when it makes sense to choose one or the other in a following post. For now, all you need to know is the primary difference between the two major types of IRAs.

In addition to the two types of IRAs, you can also open an Individual Retirement Annuity account. In general, those are structured like conventional IRAs, but there are limitations as to who the beneficiaries might be. The premiums have to be flexible in order to allow for lower limits in future years and count toward the IRA contribution limit. In other words, it's an IRA investing in a specified investment vehicle (annuities), but it has to be in a separate account.

IRA Restrictions

Below are a few general limitations. You can get full details, written in clear language, from the IRS website by typing “590-A” in your favorite search engine. Chapter 1 will deal with traditional IRAs and Chapter 2 with Roth IRAs.

1. Not everyone can open an IRA account. In creating IRAs, the government specifically intended them for people who work for a living. Having a job, therefore, is the number one requirement to qualify for an IRA. Very wealthy people or retirees who live off their investments can't open one. Once you do open an IRA account, you can keep it as long as you live.

2. There are contribution limits. For 2015, your total contributions to all of your traditional and Roth IRAs cannot be more than $5,500 — it's $6,500 if you are 50 years of age or older — or your taxable compensation for the year, if your compensation was less than this dollar limit. (These amounts change annually, so it's worthwhile to check the Form 590-A website referred to above.)

  • The IRA contribution limit does not apply to 401(k) rollover contributions and qualified reservist repayments.
  • For married couples, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.

3. You can contribute to an IRA even if you contribute to a 401(k) or similar retirement plan at work. However, once your income goes over $60,000 (single) or $96,000 (joint), limitations kick in. The IRS Form 590-A web page spells out the various scenarios clearly with two tables (Table 1-2 and Table 1-3 if you're looking for them).

If neither you nor your spouse has a work retirement plan, there is no reduction in your contribution limit.

4. There is an annual cut-off date. You can't make contributions for a given year after April 15 of the following year. You are not obligated to make a contribution every year, but you can never catch up once you have passed the cut-off date.

5. Your IRA can't invest in things that are under your control, like your business. The restrictions are few — you can, for instance, invest in real estate — but as a general rule, the things you invest in cannot be connected with you (like your home or your business). You also can't sell property to it or buy property for your personal use.

6. You can't borrow from your IRA or use it as security for a loan.

7. Your IRA can't invest in collectibles, with the exception of gold coins minted by the U.S. Treasury.

When you engage in what the IRS calls prohibited transactions, your IRA will be reclassified as a regular account and you will be taxed as if you made a complete withdrawal on the first day of the year.

Where to Open an IRA

Because an IRA is technically just another investment account, thousands of institutions that offer investment accounts also offer IRAs. Each has its advantages and disadvantages.

  • Many banks and credit unions offer IRAs, but they may only allow the money to be used for certificates of deposit or money market accounts.
  • Big-name mutual fund companies like Vanguard are great places to open an IRA, but they often require a minimum initial investment of several thousand dollars and provide a limited universe of investment choices.
  • Discount brokerages like Sharebuilder and E*trade allow new investors to begin saving for retirement with no minimums, and they usually have smaller fees or no fees at all.

There is no one right place to open an account. You will need to search for a place that is good for you. (I explore some options in Part 2 of the Introduction to Roth IRA Series.)

Questions to Ask as You Research Where to Open an IRA:

  • Is there a minimum initial investment?
  • What fees are assessed to the account?
  • Does the company offer automatic contributions?
    • What are the limits?
  • What investment options are available?
    • Stocks?
    • Mutual funds?
    • Real estate?
  • Is it possible to download statements automatically into Quicken?

Remember: The perfect is the enemy of the good. It is far better to open a Roth IRA now through any provider than it is to delay because you are worried about finding the very best place. Do your research. When you find a place that meets your requirements, open an IRA. Don't fuss and fret, worrying about whether or not it really is the best choice. Find a good choice and go with it.

The GRS Introduction to Roth IRAs Series

Check out the rest of our Roth IRA series to learn more about how to start your Roth IRA, which investments are best, and other general questions about these great accounts.

Part 1: The extraordinary power of compound interest
Part 2: What is a Roth IRA and why should you care?
Part 3: How to open a Roth IRA (and where to do it)
Part 4: Which investments are best for a Roth IRA?
Part 5: Questions and answers about Roth IRAs

The Bottom Line

Don't be afraid of IRAs. With a little homework you can add these valuable accounts to your retirement strategy.

More about...Retirement, Investing

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Sam
Sam
13 years ago

Roth IRA Rules and Requirements
Not everyone qualifies to contribute to a Roth IRA. If your tax filing status is single and you earn more than $95,000, your contributions are restricted. If you are married filing jointly, your contributions are limited if your household income is more than $150,000.

JD, I had read somewhere that in 2010 the Roth IRA limits on income will expire and if you have an IRA and don’t qualify for the Roth IRA you can convert it at that time. Do you have any other info. on that?

SJ
SJ
13 years ago

can you have more than one Roth IRA?

Aaron
Aaron
13 years ago

For the truly lazy (like myself), Fidelity has a fund that’s managed to your target retirement date so you can setup your automatic transfer, pick the fund targeted to your retirement date and forget it until you go to retire. The fund starts out aggressive and gets more conservative as you near retirement. The minimum open is 2k or 2500, but if you do a automatic monthly investment, you can start with as little as 200 a month (no additional minimum). Someone else has a target fund program like Fidelity as well, but I don’t recall who. As for transferring… Read more »

SJean
SJean
13 years ago

Another comment, not entirely related… I’d love to see a post devoted to index funds–what are they, and how can you tell if you have one. I hear how great they are… but at the same time I am not entirely sure how to go about picking them.

Or what about the “target” funds? Are they different than index funds?

Just a thought!

But good entry, I totally agree that the point is to just do it, and if you are looking for the perfect ROth IRA… you are wasting time!

Alea
Alea
5 years ago
Reply to  SJean

Read the book INDEX INVESTING FOR DUMMIES by Russell Wild. It’s fantastic, easy to understand and quite funny at times. It’s a great “know the basics about investing”. Get one from the library or buy one, and highlight the heck out of it, like I did.

Schizohedron
Schizohedron
13 years ago

Outstanding. Should be required reading for all new savers. I wish schools made lessons like this part of the core curriculum. Well done!!

J.D.
J.D.
13 years ago

SJean, I hope to address some of your questions in part three.

Everybody: I will research answers to your questions. Would you prefer I posted the answers here? Or should I save them for a part four? (Part four would basically be a collection of Q&A about Roth IRAs.)

Sue
Sue
13 years ago

Does anyone know how the government is tracking these funds? For example, if I am not eligible to contribute for some reason, does anyone know how the government would ever find out about that? The firm you invest with doesn’t care if you’re eligible or not (they never even check), so I’m curious how anyone would know if you were contributing when not eligible? You don’t file anything about Roth contributions on your tax return so I just don’t see how anyone knows. My accountant didn’t know I wasn’t eligible so I made a contribution, now I’m curious what to… Read more »

Pete
Pete
8 years ago
Reply to  Sue

When you make an IRA contribution Roth or traditional you will get an IRS tax form 5498 because the firm you made the contribution to reports it to the IRS. You can’t cheat the system, They’re gonna find out.

cjohnson
cjohnson
13 years ago

“Unless you earn a lot of money, a Roth IRA is probably ideal for most people reading this site. The rest of this article deals specifically with Roths.” I could see somebody that has less than 20 years until retirement benefiting from a Roth IRA. However, for somebody with 30+ years of saving for retirement, why would you want to miss out on the magic of compounding interest by investing post tax dollars. I would think that a person with a very long time to invest would more than make up for the future tax liability in a tradition IRA… Read more »

r
r
13 years ago

I’ve been trying to establish whether there are any restrictions on noncitizens (but legal US residents) having IRA’s. As best I can tell, if you have taxable US income, you can have an IRA…?

Covert7
Covert7
13 years ago

I would do a part 4 with the Q&A collection. It’s nice to have that type of info organized in it’s own post. Thanks again for all your work JD!

brad
brad
13 years ago

@Aaron: I transferred my traditional IRAs to Roth when the Roth IRA was first created in the 1990s. There wasn’t any penalty, I simply had to pay taxes on my contributions, which I was able to spread out over two years if I remember correctly. @cjohnson: You wrote “I would think that a person with a very long time to invest would more than make up for the future tax liability in a tradition IRA with the investing of the pre tax money.” Your argument is based on the assumption that people will invest less in their Roth IRA because… Read more »

DC Economist
DC Economist
13 years ago

I know I’m not your target demographic, but I would love a post full of options if you earn too much money for Roth IRA.

Or what to do when you can no longer contribute to one.

J.D.
J.D.
13 years ago

@cjohnson

It’s my understanding that — all things being equal — a traditional IRA and a Roth IRA offer the same returns. In other words, it doesn’t matter when the taxes are taken out if contributions, returns, and taxes are all identical. See the chart at the end of this page for a comparison.

Aaron
Aaron
13 years ago

The interest on the IRA gets reported to the IRS along with presumably the type of source account. I’m not sure how much attention is paid to that, but it seems like something that could be flagged automatically during processing.

James Kew
James Kew
13 years ago

@Aaron: Someone else has a target fund program like Fidelity as well, but I don’t recall who.

T. Rowe Price and Vanguard to my knowledge, maybe more. The Vanguard Target Retirement funds are baskets of index funds, which is useful if you favor an indexed rather than managed approach.

Aaron
Aaron
13 years ago

Brad, thanks for the transfer info. I’ll have to keep that in mind.

My preference for the Roth is primarily to give myself some retirement options. I’m already using a 401k for pre-tax contributions, so a post-tax investment in a Roth just gives me some investment type diversity.

Kris77
Kris77
13 years ago

JD, a Part 4 with Q&A would be great. I would love to know a bit more about how Socially Responsible Investing (SRI) relates to Roth IRAs.

Seth
Seth
13 years ago

I have a Fidelity IRA basically because they manage my work 401k. That was a terrible idea, at least for me. Fidelity has been incredibly unhelpful and their fees for individual stock trades are insane ($20). If you don’t have the 2,500 dollars up front to invest in a mutual fund (which are commission free) you’re just going to have it in a money market.

If you go with Fidelity, and my recommendation is not, don’t bother putting anything in unless you’ve got 2,500 and you’re only investing in mutual funds.

Sam
Sam
13 years ago

My recollection, wish I could remember where I read the info. about income limits expiring in 2010, is that there is some fee or tax associated with rolling the traditional IRA into a Roth IRA.

On a somewhat related note, Fidelity (my 401k co.) offers something called a Roth 401k option. I’m putting 1% of my 401k contribution into the Roth 401k which is after tax (not sure how it can be called a 401k if its after tax). I haven’t been able to find much more info about this ‘401k Roth’ option. Anyone else know anything about it?

Dylan
Dylan
13 years ago

@ Sue — When you make an IRA or Roth IRA contribution, the custodian of your account (bank, brokerage, fund co, etc.) reports the details to Uncle Sam. There are penalties if you get caught breaking the rules whether it was intentional or not.

tinyhands
tinyhands
13 years ago

I know many of the questions will be answered in followup posts, so I will add that investors should remember to consider their IRAs as part of their entire retirement savings when balancing and diversifying their portfolio. I.e. A $50k 401k + $10k IRA = $60k retirement portfolio. The funds may be physically separated, but the net effect is that they can still balance each other out for you in the long-run.

Sam
Sam
13 years ago

Following up, here is some lang. I found on the 2010 expiration for income limits – no idea if this lang. is accurate or not. Those wishing to convert their IRA from a regular IRA to a Roth IRA must not have income over $100,000. However, in 2010, the income limit for conversion to a Roth IRA is lifted, even while the limit for contributions remains. But, this opens a loophole. Even those who cannot contribute to a Roth IRA or a deductible regular IRA can open a non-deductible regular IRA, as long as they have employment income. The limit… Read more »

Jennifer
Jennifer
13 years ago

I am almost 30 and both my husband and I haven’t opened Roth IRA accounts yet. We also want to buy our first home in the next year. If we have about 20K saved up by the Roth deadline next year, should we use all the money to put toward a down payment, or use some of the money for a down payment, and the rest to contribute (and open) Roth IRA accounts?

Alea
Alea
5 years ago
Reply to  Jennifer

1.) For the ROTH IRA, you can only withdraw the contributions you made, and not the returns unless you are of eligible age (is it 59.5?) So if you invested 20K but your balance is $25K due to returns, you can only withdraw the $20K penalty free because you already paid taxes on that money. You would pay a penalty on the $5K if you withdraw that before you are eligible for retirement. 2.) The second point is to consider the Roth just like an IRA or a 401(K) as an investment vehicle, and not a piggy bank. If you… Read more »

Alea
Alea
5 years ago
Reply to  Alea

I should not answer while I have a headache. :o)

I thought you were considering withdrawing from your ROTH.

That’s a tough decision, buy a home or invest, it all depends on your situation and if buying a home is more advantageous than renting.

Kevin
Kevin
13 years ago

This may be a dumb question, but:

If I already have a 401k through work, then why would I want to add a Roth IRA? Wouldn’t it always be better just to contribute more (pre-tax) to the 401k? What other options does the Roth give you that I don’t get with my 401k?

Alea
Alea
5 years ago
Reply to  Kevin

Many, many advantages.

Tax free withdrawals at retirement.

You don’t have to withdraw your money at age 70.5 or face a penalty.

You can leave the money to grow for as long as you like, you can use the money when you are 90.

You can leave the ROTH Ira in your will to your kids tax free.

Alea
Alea
5 years ago
Reply to  Alea

Oh, and you can have access to better investment choices than the straightjacket that is a 401(k).

J.D.
J.D.
13 years ago

Kevin, as I understand it, the optimal order for retirement contributions is:

1. A 401k with employer match (always take free money)
2. A Roth IRA
3. A 401k without employer match.

So, if you have a 401k at work and the employer will match up to 3% (or whatever), then make that contribution, then switch to a Roth until you have that maxed out, then switch back to 401k.

Why prefer the Roth to the unmatched 401k? For the same reason you prefer a Roth to a traditional IRA.

James Kew
James Kew
13 years ago

@Kevin: What other options does the Roth give you that I don’t get with my 401k? a) if you’re maxed out on 401k contributions, a Roth allows you to save an extra $4000/year for retirement. (Subject to the contribution limits.) b) it lets you choose _exactly_ where your funds are invested — in a 401k you’re limited to the funds offered in your employer’s plan, which may be limited and which may have higher costs. c) it gives you some tax diversification. In basic terms, the save-now-pay-tax-later structure of a 401k (or traditional IRA) benefits you more if you’re taxed… Read more »

James Kew
James Kew
13 years ago

Also one comment on JD’s points:

To invest in a Roth IRA in any given year, you must have earned income.

Strictly, you or your spouse must have earned income: this means that non-working spouses can qualify for a Roth.

James
James
13 years ago

Kevin: For multiple reasons. The simple one is tax diversification. You don’t know what the tax brackets will look like when you retire. You could be paying less now, or you might pay less then. By having a variety of accounts (some taxed now, some taxed then) you “diversify” yourself so that you aren’t shot in the foot when it does come time to retire. The Roth also has several nice features such as allowing you to pull money out of it (in certain circumstances)…many more options than 401k or traditional IRAs Wikipedia has a whole list and a good… Read more »

Ross
Ross
13 years ago

Publication 590 also has a bunch of worksheets to help determine your individual contribution limits and other tax-related matters. There is an interactive version based on 590 created at Roth IRA Accounts.info.

cabesh
cabesh
13 years ago

Both my husband and I have IRA’s through Vanguard. If you roll a 401(k) or retirement plan directly into an IRA they waive the minimum opening amount. So, I was able to open one with only $1200. NOTE: If you are doing a direct rollover, you MUST roll into a traditional IRA for tax purposes. Then, if you have $5000+ you can roll that IRA into a Roth IRA. My husband opened his so that he can consolidate 401(k)’s and retirement plans when he takes new jobs. Vanguard has been very helpful. When I have questions, they walk me through… Read more »

angie
angie
13 years ago

Say I have 1,000.00, and I want to invest. I already have a 401K through work. Should I look into a Roth IRA, or Mutual fund?

Alea
Alea
5 years ago
Reply to  angie

A ROTH IRA is the vehicle where you invest in the various mutual funds.

Say you open the ROTH at Vanguard. That is where you tax shelter your investments. Then you decide to buy the mutual funds (your investments) that will be tax sheltered in your ROTH.

Consider the ROTH your shopping bag. Inside it are milk, bread and butter, these represent the mutual funds that you put in there. Total Stock Market, Total International Stock Market, Total Bond Market. All these are index mutual funds that go into our ROTH.

J.D.
J.D.
13 years ago

Hi, angie. You could actually look at both. You can’t invest in a Roth IRA. But you can put a mutual fund into a Roth IRA, and then invest in the mutual fund. I think that sounds like a great idea!

G G
G G
13 years ago

I like discount brokerages for my Roth IRA. It’s easy to find a brokerage that doesn’t have maintenance fees, there are lots of investment choices, and it’s easy to change your investments. I use Scottrade, but if I was doing it all over again, I’d use a discount brokerage that does automation reinvestment of dividends, as it is annoying when some of my ETFs spit up a few dollars of dividends every month.

Also, I like to contribute to my Roth IRA as soon as possible. January 1st every year (starting 2007,) I drop my max contribution in.

GeekMan
GeekMan
13 years ago

How about information pertaining to SEP IRAs? If I’m a self-employed individual who makes more than the maximum allowable for a Roth IRA wouldn’t a SEP IRA make sense? I’d really like to know more about SEP IRAs, especially how I can set one up with Vanguard, Fidelity or whoever. More pressing for myself, I’d like to know how to transfer one SEP IRA at one institution (my current bank) to another institution (another bank or some other entity) since most places I’ve asked won’t accept my SEP IRA unless I convert it to a Roth, which would mean I… Read more »

Russell Heimlich
Russell Heimlich
13 years ago

Excellent piece here J.D. I have submitted it to Digg -> http://digg.com/business_finance/What_is_a_Roth_IRA_and_Why_Should_You_care

Beth
Beth
13 years ago

I’m following this series with avid interest. I grew up poor, and spent the first decade of my marriage that way; I never learned anything about investing because I honestly expected to live paycheck-to-paycheck until the day I die. Now years of budgeting, scrimping, and getting an education is paying off, and it’s scary as hell to realize that I have to start thinking about this stuff and I don’t know anything. So, here’s my question. I’m not to this point yet – my savings are small and inconsistent (maybe $200 one month, $20 the next, but always something!). But… Read more »

Alea
Alea
5 years ago
Reply to  Beth

Congratulations Beth on taking charge. Because I grew up poor as well, I thought that’s how life should be, until I started to learn about finances and investing. You basic question is this: “Should I start looking for a financial institution that offers an IRA I like, and move my general savings to them, so that when I’m ready to start investing I have an account history? Or is there no benefit to keeping everything in one bank?” You are talking about two different things. Bank accounts are for liquid cash, your check that pays the bills and your emergency… Read more »

SJean
SJean
13 years ago

I missed that it was a 3 part (now 4) series! Sorry!

I think this is some of the BEST information for people who are just learning about this sort of thing. I know the very basics of my roth, but I mainly just got the “start ASAP” part down. 🙂

db
db
13 years ago

T.Rowe Price has a GREAT option for a Roth IRA. To begin with, they have a pretty competitive set of retirement funds that are on a par with what you get from Vanguard. The expense ratio is higher (around .76%) but still acceptable, AND you get diversified across some really outstanding mutual funds for the money. (NOTE: I myself invest in their TRRDX, which is their Retirement 2040 fund.) The other great thing is you can open your T.Rowe Price Roth IRA with $50 so long as you make a monthly systematic automatic investment of at least $50. They also… Read more »

Elissa
Elissa
13 years ago

This is excellent! Just what I need at just the right time.
The (very small) company that I work for is starting a 401k plan within the month. I have no idea what the details of the plan will be, but it will be better to understand what my other retirement investment options are before I starting making decisions on my 401k (which will most likely be unmatched).

Rakheem
Rakheem
13 years ago

i have a question that always bugs me (I’m 32 yrs old), and not a US citizen, and i probably will only stay in the US for the period i work here (8-10 years).

Do you guys saving in IRA will still benefit me ?? considering that i will no longer in US when i reach 59 yrs old.

Eileen
Eileen
13 years ago

I’d like to know information from a self employed/small business angle as well. I don’t make enough to be disqualified from a Roth so am I safe in assuming that is still the one to use (versus the traditional one). I’ve been paying a lot of taxes since becoming self employed, even with estimated tax payments. I think I should be doing something differently. From my last job I have a Roth account because my 401K was auto rolledover. There’s not much in there and it’s currently in an account with a yearly fee. I want to move it somewhere… Read more »

Matt_In_TX
Matt_In_TX
13 years ago

Please study IRA and taxes for yourself, and also seek professional advice when needed. Not all the information here is necessarily complete or correct for your situation. Promoting participation in IRAs is laudable, but IRS Publication 590 is over 100 pages long. A few paragraphs and some bullet points are NOT all the information you may need. On a similar subject, when an investment advisor tells you that he is prohibited from giving legal or tax advice, believe him. I’ve been told things by non-specialists which clearly conflict with information in the IRS publications. Get your professional advice from those… Read more »

Ed
Ed
13 years ago

I have to echo what db says, I had my 17 yr old son start up a T. Rowe Price Roth IRA because he can do the $50/month plan. He didn’t have to come up with a large amount to open and the only fee is a $10/yr maintenance. To sweeten the pot I match 50% of his contributions every quarter. Now to work on my daughter, since she has started a new job…… You’ve all seen the graphic where a young person starts an IRA type account when they are 20 and contribute till they are 30 then stop,… Read more »

Rakheem
Rakheem
13 years ago

Another question about IRA / ROTH IRA / 401k /any other retirement investment account: 1. Is there any tax on capital gain / dividend distribution that we have to declare on tax return every year ? 2. I was reading Kiyosaki book about his prediction that in the future when most of the baby boomer/older people start cashing out their 401k/IRA/retirement account (by selling their investment), there’s a chance that market will be affected due to supply & demand rules ? (price might go down since too many people selling their investment & when price keeps going down people stay… Read more »

Rakheem
Rakheem
13 years ago

i miss another question:

3. for Roth IRA, is there really NO TAX at all when we start to withdraw from the account ? no income tax ? no capital gain/dividend distribution tax ?
it really sounds good to be true 😛

Anthony
Anthony
13 years ago

Just wanted to second DC Economist’s suggestion. Non-ROTH solutions?

plonkee
plonkee
13 years ago

Rakheem: on Kiyosaki – its certainly possible, but in reality not everyone will take out there investments at the same time (the baby boom lasted for about 15 years give or take) and most people phase investments. In addition, I’m not sure what percentage of the total market is caught up in 401(K) / IRA funds maybe it wouldn’t be that big of a deal. If you aren’t in the baby boom, then it just looks like the slight possibility of a big sale on stock at the time which doesn’t sound to me like a bad thing. In short,… Read more »

brad
brad
13 years ago

@Rakheem: You asked “1. Is there any tax on capital gain / dividend distribution that we have to declare on tax return every year?” No, you don’t (unless my three accountants over the last 10 years were all doing it wrong!) You asked “3. for Roth IRA, is there really NO TAX at all when we start to withdraw from the account? no income tax? no capital gain/dividend distribution tax?” The language I’ve seen from IRS implies that some states may impose income tax when you withdraw, but my understanding is that you don’t have to pay any federal income… Read more »

Debting Thomas
Debting Thomas
13 years ago

Vanguard is the other fund that has the simplified fund that changes with your age and gets more conservative as you get older.

At vanguard they wave the min. if you contribute monthly with automatic withdrawl which is great because it forces you to Pay Yourself FIRST!

Quit being a Debting Thomas (or Theresa).

Financial Peace,
Chad
http://www.debtingthomas.com
Helping People Achieve Financial Freedom One Dollar at a Time.

Nepkarel
Nepkarel
13 years ago

I’d also like to see more info on this issue of more than maxing out your employers 401/403 and then doing the (Roth) IRA before you go on and save more in your 401/403.

I don’ t understand why I should go with an IRA if I can just add more to my 401/403.

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