You Need a Roth IRA
You need to be contributing money to a Roth IRA! If don’t have a Roth IRA, aren’t sure, or simply don’t a clue as to what a Roth IRA is—please read on.
What is a Roth IRA?
A Roth IRA is a type of retirement savings account with one extremely attractive tax benefit: Your contributions and interest earnings grow tax-free and, at retirement, withdrawals are 100% tax-free.
This benefit distinguishes the Roth IRA from the traditional IRA, in which contributions are tax deductible, but withdrawals are taxed at retirement time. If you can get money into a Roth IRA at an early age and let it grow for 25 or 30 years, you’ll earn a lot of money in interest tax-free!
Another reason Roth IRAs are great is because IRAs have a leg-up over the 401(k) plans you may have at work. Unlike 401(k)s, IRAs let you invest your money virtually anywhere: mutual funds, exchange-traded-funds, individual stocks, and so on.
Other Things to Know About a Roth IRA
When you make IRA contributions, your goal is to leave that money untouched until retirement so it can reap compound returns year after year. Another perk of the Roth IRA, however, is that you can withdraw you contributions at anytime, tax-free and with no penalties (unlike traditional IRAs and 401(k) accounts). This allowance applies to your contributions only, not the interest you earn, which is subject to the same federal taxes and 10% penalties as withdrawals from traditional IRAs and 401(k) accounts.
Another perk is that you can use up to $10,000 in contributions (and earnings) tax-free and penalty-free from a Roth IRA to purchase your first home. The only requirement is that your IRA account must have been open for five years.
How to Open a Roth IRA
Don’t let the recent scary stock market news deter you from investing in a Roth IRA this year (in fact, just ignore the stock market). It’s actually a great time to buy stocks. So if you don’t have a Roth IRA (or haven’t contributed to your account in 2008 yet), do so now! That is, before April 15th.
There are federally-imposed limits on how much you can contribute to an IRA each year—in 2008 and 2009 the limit is $5,000 per year. But, you can make 2008 tax-year contributions up until April 15, 2009. Meaning you could invest $5,000 now for 2008 and $5,000 before April 15, 2010 for 2009.
If you don’t already have an IRA account, I recommend opening an E*Trade IRA account which will give you access to almost unlimited investment options and extremely low trading fees. And don’t worry if you don’t know where to invest…just pick one or more exchange traded funds (ETFs) that follow one of the stock market’s averages like the Dow Jones Industrial Average or S&P 500. As your balances and investing savior faire develops you can tweak your asset allocation accordingly.
Related Posts
- Roth IRA or Traditional IRA: What Do You Do?
- Don't Forget April IRA Contributions
- 401(k) With Company Match or Roth IRA?
- Year-End Tax Tips
What's Next?
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OK, so ever since the first day that I could, I’ve been participating in a 401k. When I left my first job about 1.5 years ago, I left my 401K with the original brokerage account (Charles Schwab). Now, with my new company, I contribute to a 401K at Fidelity. At this point, I can either:
A. Roll over the Chuck Schwab 401K into a traditional IRA at Fidelity
B. Roll over Chuck Scwab 401K into a Roth at Fidelity
C. Keep 401K as is and continue letting it grow with the market (it’s allocated almost entirely in stocks and funds).
Any thoughts?
Rolling the old 401(k) into an IRA will diversify your portfolio, by allowing you the freedom of greater investment options of the IRA, not limited by your former company’s selected plan funds. You will also be able to make further contributions to the account.
Whether or not you decide to make that rollover into a traditional or Roth IRA is totally up to you. I recommend having both ultimately, and maybe even at different brokerages.
Keeping the 401(k) can be limiting and risky. It is limiting because you cannot make further contributions to the account since you have left your former employer. It is risky because if your employer decides to close their plan with the brokerage (they go out of business, for example) your balance may be sent to you in a lump sum payment, at their discretion, causing you the hassle of the penalties and taxes. Save yourself the hassle of scrambling to deal with that and make the change of your own accord, as you will be more informed if you plan ahead.
I know nothing about stocks or mutual funds. What I would like to do is contribute 200 bucks a month into some kind of interest accruing account so 30 years down the road when im around 55 I have some money saved up. I dont like to gamble I just want to slowly accrue wealth, should i do a roth ira or some other kind of account.