Open A Roth IRA Now

Blueprint For Financial Prosperity highly advises you open a Roth IRA right now if you don’t got one, sucka.

Roth IRAs are special retirement accounts that get taxed when the money goes in, not when it goes out. That means the government doesn’t get a piece of all that juicy interest you earn. Mo scrizzle for you. More important info about what exactly a Roth IRA is here, including important limitations, and especially penalties for early withdrawal.

If you contribute $4,000 right now, with a conservative interest rate of 7%, you will have $15,478.74 after twenty years. At 11%, that’s $32,249.25.

You can get one at Vanguard, Fidelity, TD Ameritrade, Etrade and many other brokerage firms.

An English Major’s Money has even got a walkthrough for signing up with Vanguard. We’ve heard good things about Vanguard.

BFP says Roth IRA’s are, “one of the best things you could probably do to ensure you have a financially viable retirement.” — BEN POPKEN

Go Open A Roth IRA Right Now!!! [Blueprint For Financial Prosperity]

Comments

Edit Your Comment

  1. First, I’m not a financial consultant… but why are you suggesting people get ROTH IRAs?

    For a lot of “average” income earners out there who will likely be taxed on LESS income when they retire, it might be nice to look at a traditional IRA where your retirement savings are tax free going in (less taxes today).

  2. Johnie says:

    I never understand why people don’t get Roth IRAs. It’s like leaving free money on the table.

    This is especially true when you are young. One of my friend’s parents started her on an Roth IRA when she started earning money from summer jobs in high school. Her parents forced her to max out her Roth IRA from her earnings. at the time, it is something hard to part with, but looking back on it, it contributes greatly to your retirement fund. Personally, if I were a parent now, I would have my kids work, let them keep the money, and fund $4000/year into their Roth IRAs.

    Why Roth IRAs are great:
    * Taxed at current tax rate
    * No taxes on disbursement at retirement age.
    * No capital gains tax.
    * Able to withdrawl contribution at anytime without tax or penalty.
    * You can contribute for 2006 until April 15, 2007

    Because there is no capital gains tax, I have been using my Roth account for trading. This avoids the short term capital gains tax.

    The “Catch” of Roth IRA
    * Can’t withdrawl gains before retirement age without penalty
    * “Low” contribution limit ($4K for 2006/2007)
    * Begin to phase down your contribution limit after you income surpasses $95K (Unfortunately, I hit this limit this year .. wished my parents taught me about this earlier)
    * Can only contribute up to your annual income (so if you only earned $1500 from your summer job this year, that’s how much you can contribute)

    AngrySicilian says:
    For a lot of “average” income earners out there who will likely be taxed on LESS income when they retire, it might be nice to look at a traditional IRA where your retirement savings are tax free going in (less taxes today).

    1) When you’re young, you never know what your income would be like in the future
    2) Congress may raise future tax rates
    3) If you contribute to 401K, you can’t contribute to Traditional IRA

    Anyways, this obviously apply to people on a case by case basis. It may be great for one person, but not for others. Obviously, you have to look at your specific case.

    From FatWallet’s Finance Forum, this is the suggested contribution:
    1) Build a 2-3 month emergency fund
    2) Contribute to your 401K to maximize company match
    3) Maximize Roth IRA ($4K)
    4) Maximize the rest of 401K (up to $14K)
    5) Investment Account/High Yield Savings/CD/etc

  3. ElPresidente408 says:

    Unless I’m wrong, your tax liability is limited to the amount you contributed towards the life of the IRA and not the earnings.

    A single investor starting young can make a lot more money than the $120,000 or so that he could invest over a 30 year period. Counting dividends, that person could easily make several hundred in tax-free income. This would outweigh the benefit of being taxed later.

  4. alexanac says:

    Also look at the more recent Roth 401(k) option. Your company might not offer it since it’s relatively new (2006), but for the self-employed (like me), it’s an awesome tool. It’s basically a 401(k) but you can choose if money going in is either not taxed (then you pay taxes on interest like a normal 401(k)) or taxed and you get the interest free and clear like a Roth. You can mix and match the funds with each deposit.

    Other benefits include the elimination of the income cap on the Roth portion (for normal Roth IRAs, you can’t do it if you make more than $110,000 single adjusted gross or $160,000 married) and the cap is your 401(k) cap of usually around $15K/year – but can be *much* more for the self-employed since you can company match for yourself. If you can pay the taxes now, a self-employed person could realistically put tens of thousands of $$$ in a Roth every year and let the interest grow and grow – all tax free.

    Might not be for everyone, but Wiki “Roth 401k” and read up. Could be a great option for a lot of you out there. I know it is for me!

  5. Greeper says:

    One other thing…like most tax breaks, the Roth IRA doesn’t apply to many middle class professionals. I can’t remember what the cutoff is but just like the student loan interest deduction and a bunch of other deductions, I remember trying to do it and being told I made too much money. As if.

  6. The cutoff/phase out period is $95k-$110k for single filers. Couple that with the relatively low $4,000 contribution limit and it’s a nice benefit but not a nice big benefit (on the front side) but the ramifications are huge.

    I wonder if the people who are against Roth IRAs truly believe they are poor investment vehicles or they revel in bucking against the trend.

  7. MonkeyMonk says:

    I would highly recommend that anyone interested in personal finance read the book “The Only Investment Guide You’ll Ever Need” by Andrew Tobias. He runs a little on the conservative side (investing, not politics) but it’s still a fantastic book that gives an informative and entertaining overview of the many investment options available. I wish I had read this book 10 years earlier.

  8. tz says:

    DON’T. At least think twice.

    1. You don’t know what the stock market will do, so your $4000 might become $2000 rather quickly – go back and read about 1987, or 1929. 4000->2000 is a 50% drop, but then you will need a 100% gain to simply break-even. Or realize it is a bet on the market going up.

    2. If the economy crashes with the market, you might need the money, so when your $4000 has become $2000, you will need to pull the $2000 out so it won’t be able to grow. Usually bad economies, unemployment, and down markets coincide.

    3. Inflation will negate most if not all of your gain if you invest in something safe like treasuries. So you might have $5000 after a few years, but it will buy less than $4000 does today. It might equally deflate, so if you have physical stored gold, the value of the gold might not buy what you need. But if you are going to save non-interest-bearing cash, and without capital gains, why lock it into an IRA instead of just putting it into a regular FDIC insured bank account?

    4. It will be taxed at whatever rates when you retire. You are making a bet that Congress won’t need to raise taxes between now and then. Also that they won’t change the rules – Social Security – money already taxed – is now indirectly subject to income tax if you have other earnings although they promised that would never happen either.

    So if you trust Jim Cramer, Ben Bernake, the (technically insolvent) FDIC, and the US Congress, go ahead.

    Actually maybe you should trust Jim Cramer, at least when he starts regularly recommending short-sales of bad companies when the market starts crashing, OR Profunds has ETFs which short the market indexes (there are also mutual funds like Rydex Ursa, or other profunds and some for currencies and treasuries)

    Index DJIA SPMidCap NASDQ100 SP500
    2xshort DXD MZZ QID SDS
    1xshort DOG MYY PSQ SIH
    1xlong DIA MDY QQQQ SPY (these are the original amex ones, not profunds)
    2xlong DDM MVV QLD SSO

    If you go into a short fund as a hedge against the economy and your employment it might be a good idea – so if the Dow goes below 5000, and you lose your job, your Roth IRA will go from $4000 to $20,000. But it works the other way too. Or hedge against inflation by shorting the US Dollar through a mutual fund, etc. but these are sophisticated techniques.

    If I were going to invest, I would rather hedge – at worst I’d be unemployed in a booming economy so would find a job soon, or I would have my nest egg accessible and growing BECAUSE of the poor economy.

  9. ElizabethD says:

    I’m assuming these are of little interest (no pun intended) to people ages 55 and over, right? Not that I’m that old. Ha ha.

  10. thrillhouse says:

    Yes, tz, thats the answer – day trading. Not a great idea to take long-term investing advice from someone who can’t see past this afternoon.

    No, we don’t know what the stock market will do. But we know what it has done.
    > 90+% of the rolling 5 year periods have made money.
    > 100% of the rolling 10 year periods have made money.
    > look at when the tech bubble burst in 2000/2001. then look at how long it took to recover – not very long.
    > also the stock market has averaged a 12% rate of return over the last 100 years or so.

    For long-term investing, its tough to beat a Roth IRA.
    > Tax-free growth – do the math, this is a bigger deal than you think.
    > Managed by people who actually know what the hell they are doing

    So 15% of your take home pay into retirement accounts, pick good mutual funds with good 5-10+ year track records, and leave it alone. And once you’ve maxed the Roth for the year, then max out the 401k up to the match, then look at a traditional IRA. Much simpler than Mr. Doom and Gloom’s plan.

  11. Johnie says:

    tz says:
    DON’T. At least think twice.

    WOW! Soooo many false statements that I don’t even know where to begin!

    1. You don’t know what the stock market will do, so your $4000 might become $2000 rather quickly – go back and read about 1987, or 1929. 4000->2000 is a 50% drop, but then you will need a 100% gain to simply break-even. Or realize it is a bet on the market going up.

    The market will go up, the market will go down but in the long run, unless the US economy (and thereby the world economy) collapses, the market goes up. Obviously, when you’re saving for retirement, you adjust your investment according to the risk and how close you are to retirement. At age 25, I can make speculative investments now for capital appreciation but once I get closer to retirement, it’ll be about capital preservation. In addition, you are mixing the concept of investment with the concept of a tax vehicle. Roth IRA is a tax vehicle. You can use the tax vehicle to invest in bonds, stocks, mutual funds, options, or whatever floats your boat.

    2. If the economy crashes with the market, you might need the money, so when your $4000 has become $2000, you will need to pull the $2000 out so it won’t be able to grow. Usually bad economies, unemployment, and down markets coincide.

    Right, that is the great thing about Roth IRA is that you can always take out your contribution without penalty at anytime. Secondly, if you’re tapping into your Roth IRA, then you 1) probably haven’t saved enough in your emergency fund or 2) the world economy has hit a catastrophic event.

    3. Inflation will negate most if not all of your gain if you invest in something safe like treasuries. So you might have $5000 after a few years, but it will buy less than $4000 does today. It might equally deflate, so if you have physical stored gold, the value of the gold might not buy what you need. But if you are going to save non-interest-bearing cash, and without capital gains, why lock it into an IRA instead of just putting it into a regular FDIC insured bank account?

    4. It will be taxed at whatever rates when you retire. You are making a bet that Congress won’t need to raise taxes between now and then. Also that they won’t change the rules – Social Security – money already taxed – is now indirectly subject to income tax if you have other earnings although they promised that would never happen either.

    ABSOLUTELY ABSOLUTELY FALSE! Roth IRAs are not taxed at withdrawl. It is taxed money that you contribute and is not taxed at withdrawl. Obviously, Congress could change the rules, but it would take a lot of political capital for Congress to suggest such a change.

    So if you trust Jim Cramer, Ben Bernake, the (technically insolvent) FDIC, and the US Congress, go ahead.

    Actually maybe you should trust Jim Cramer, at least when he starts regularly recommending short-sales of bad companies when the market starts crashing, OR Profunds has ETFs which short the market indexes (there are also mutual funds like Rydex Ursa, or other profunds and some for currencies and treasuries)
    [snip]
    If you go into a short fund as a hedge against the economy and your employment it might be a good idea – so if the Dow goes below 5000, and you lose your job, your Roth IRA will go from $4000 to $20,000. But it works the other way too. Or hedge against inflation by shorting the US Dollar through a mutual fund, etc. but these are sophisticated techniques.

    If I were going to invest, I would rather hedge – at worst I’d be unemployed in a booming economy so would find a job soon, or I would have my nest egg accessible and growing BECAUSE of the poor economy.

    Again, you are mixing tax vehicle with investment vehicle. You can do the same exact thing that you are talking about in your Roth IRA account.

    Finally, let me ask you, do you contribute to your 401K? Do you contribute anything to your retirement? The same weak argument that you are making here could be made about your 401K account. If you have an investment account and don’t have a Roth IRA, you are giving away too much money to IRS.

    Let’s look at it this way.
    Roth IRA:
    $4000 after tax
    Using average of 8% growth / year becomes $4320

    Regular investment account:
    $4000 after tax
    Using average of 8% growth / year becomes $4320
    After LT Capital Gains tax: $4272
    Or
    After ST Capital Gains Tax: $4240 (assuming 25% tax rate)

    As you can see, I’m not mixing investment vehicle with tax vehicle. Given the same investment, you come out better with the Roth IRA.

  12. Myron says:

    The cutoff/phaseout for married couples is 150k. Nice marriage penalty. Thanks Congress.

  13. lpranal says:

    I must be poor and severely underpaid… I can’t see hitting the 4k limit anytime soon (that would be about 20% of my after tax income!)

  14. Johnie says:

    lpranal says:
    I must be poor and severely underpaid… I can’t see hitting the 4k limit anytime soon (that would be about 20% of my after tax income!)

    Do you expect to be at the same income in the future? If not, you should max out your Roth IRA. Your current tax rate is much lower than it will be later on and it will cost you less now than later on. Each year you only have an opportunity to contribute a small amount. If you don’t, you can’t “back-contribute” later on.

    However, if you can’t, you can’t. As it said in the original article. Even if you contribute $100, it’s better than nothing. With compound interest, $100 contribution / year over 35 years is $41,773. $100/year is $8/month. $4000 / year is $333/month.

    As I said above:
    1) Fund your emergency account
    2) 401K until match
    3) Max Roth IRA
    4) Savings/Investment Account

    If you have a savings account before a Roth IRA, you’re pretty much a sucker. (not directed towards you, but people in general).

  15. Frank Grimes says:

    Please, please, please ignore TZ. His advice is crazy to completely insane. Hedge Funds!? Since June of 1968 the S&P 500 Index has one up 1,425%. That’s not weighted against inflation but for many reading this blog they will be working at least another 30-40 years. Over time the investment in the stock market has shown that it will work in your favor. You do need at $3,000 to open an account at Vanguard (I think) which is known for their very low fee indexed funds. But other companies out there will gladly open an account for as little as $100 and when you reach a certain level move the money to a well known, low cost player.

    The other options are to be one of the MAJORITY, yes MAJORITY of American’s that are over the age of 50 with less than $25K in a 401(k) or other retirement savings vehicle. It’s well worth to sock away a bit now, maybe go out a few less nights per month to fund it or be prepared to spend your “golden years” welcoming people to MegaFreakingMart for $7.85 (minimum wage in 2040).

  16. tz says:

    If you are going to read history, please really go back and READ the whole 20th century, not just a few rigged statistics.

    In 1966, the Dow Jones industrial average was at 1000. It was at 1000 in 1982. That is after inflation that sent gasoline from $0.20 to over $1 per gallon. It was 1986 or later before it was break-even in inflation adjusted terms. THAT IS 20 YEARS. If you go back to 1929 it was sometime after 1950. Also 20+ years

    The markets are at historic highs, like the summer of 1987 or 1929, not at historic lows like 1982 or 1933 when no one wanted to buy stocks.

    If you are 45, and we go into one of those 20 year periods, at 65 you will have what you put in and no more. How old are you and when do you plan to retire?

    BTW – between 1970 and 1980 gold went from $35/oz to $800, and Silver from just over $1 (“silver dollars” were) to over $40. But would you be agile or informed enough to pick the right investments? Bonds crashed.

    In 1980, 30 year non-callable US Treasury bonds (still paying interest) were paying well over 10%. If you loaded your portfolio with them in that year, you would be doing as well as the market and wouldn’t have to worry about ups and downs, but inflation was the fear then.

    And remember 1999-2000? NASDAQ 5000? Where is it today? Enron, which wasn’t a NASDAQ stock? Global Crossing and Worldcom? All in the S&P. Now there are options scandals, FNM and FRE still haven’t reported their financials. The Titanic was thought unsinkable even after being hit by the ice-berg. And no terrorism, war, debt collapse?

    “Over X period” – those investment advisers get paid to take your money and invest it – that is how they get paid. So they pick statistics that show what they want. Adjust the period, ignore the fact that most of the gains before 1990 were from DIVIDENDS (which were over 10% in 1933 and very high in the early 1980s but nearly gone now). It also doesn’t account for the fact that the S&P and Dow and others have survivor bias – when a company goes bad, they throw it out of the index.

    And doesn’t Real-Estate always go up? Why not buy a zero-down McMansion instead (I’m joking). Gold and oil and commodities in general have been doing very good until recently – far better than any stock index.

    If you are going to use the Roth IRA as your only stock investment, fine. But too many people work in jobs that are dependent on the economy and will have bought homes at inflated prices in Google’s back yard, have all their “emergency money” and taxable savings in aggressive stock funds, have their 401K in aggressive stock funds, and then do the same with the Roth.

    Treasuries are paying about 5% now and will be paying that whether the market goes up or down. The S&P might go up 10%, or it might go down 30%.

    Finally, think about the simple calculation – how can the stock market go up at 10% per year constantly when the GDP only goes up 2-4%. Earnings have to come from actual sales and profits over time – the really long periods – the Market follows the GDP. It deviates frequently then over-corrects. Unless you find a company that is very small when you buy it and happens to get very big and you sell at the right time (Dell is up, but what about Gateway? Cisco v.s. 3Com?) you can really beat market and GDP growth. For the market to grow at 10% sustained, it will have a capitalization greater than the entire world GDP in a few years.

    I won’t even bother discussing whether Congress is corrupt or not and would change its mind about the terms of the Roth IRA. If you trust them for the next 20 years you are such a fool there is no hope for you anyway.

    If I’m right, you will have a safe emergency fund in a downturn. If I’m wrong, you will have missed out on a few years of gain.

    And at best I’m arguing for a balanced approach. Again, put SOME of your money into the market. Maybe some in commodities or bonds. But don’t structure things so that the next recession will completely destroy you.

    Or as was attributed to Keynes: The market can stay irrational longer than you can stay solvent.

  17. lpranal says:

    Johnie, I *hope* not to be stuck at this level forever… in fact i’m currently saving up for steps 1 & 3 (my company doesn’t match 401k at ALL). Possibly one of the most useful and concise posts on the subject i’ve read… very helpful.

    So, the question is, with about 6 months of saving to go before I can comfortably put 3000 into vanguard… is it worth it to start with a lower rate firm or just wait and go with a vanguard or the like?

  18. Johnie says:

    TZ, can you differentiate between an investment vehicle and a tax vehicle?

    In the page long posts, I still can’t see what you are recommending as an alternative? In addition, what is inherently wrong with Roth IRA as a tax vehicle.

    You present a strawman argument on a tangent about stock market in general, which really doesn’t have anything to do with Roth IRA as a Tax vehicle.

    lpranal says:
    So, the question is, with about 6 months of saving to go before I can comfortably put 3000 into vanguard… is it worth it to start with a lower rate firm or just wait and go with a vanguard or the like?

    As I’ve been trying to point out, there is a difference between a Roth IRA and what you invest in. You should be able to open up a Roth IRA at any discount brokerage and use that account to buy mutual funds. You should be able to open an account at ETrade and invest in Vanguard funds (for example).

  19. TheChaz says:

    Many people make the mistake of thinking of Roth IRAs, Traditional IRAs, or 401Ks as investments in and of themselves. Actually, these are simply designations that establish how investments will be treated. I can invest in anything – pure stocks, mutual funds, real estate, etc. – and it can fall under the umbrella of a Roth IRA, for example.

    The confluence happens because many 401K plans are funneled directly into particular investments (like company stock).

    On a side note – there’s a relatively little-known method by which one can use Roth IRA funds to invest in real estate. It’s one of the only ways I know of to exceed the annual contribution limits; your proptery’s appreciation is treated as the investment action of your Roth funds, so you can get hundereds of thousands of dollars into a Roth and enjoy the tax free interest on very large sums.

    http://www.realtor.org/rmomag.NSF/pages/featuresept03ira