Retirment questions: Rorth IRA has limits and other stuff

[Tweak155]

Vanguard.com offers both Traditional and Roth IRAs. You can pick one of their Target (year) funds for either account.

Roth is after-tax money. It does not lower your taxes for this year, but all growth is tax free over the years and when you withdraw the money.

Traditional IRA is before-tax money. It lowers your taxes for this year. It is tax-sheltered while it grows, so you do not pay any taxes over the years. You do pay taxes when you take the money out at retirement.

Do I jusT receive a statement at the end of the year that tells me any dividends paid or is it something I need to make sure I monitor each year?

Thanks for the info so far!

 

[evident]

can you do the backdoor if you are under the income limit but want to put more than just $5500 a year into your roth?

 

[KentState]

Thanks for all the help. I would have responded earlier, but was out with the family today. I will read up on all the advice and try to digest it. I currently hold a Vanguard IRA from previous 401k roll overs. Guess it wouldn't hurt to reach out to them as well.

 

[Spacehead]

Do I jusT receive a statement at the end of the year that tells me any dividends paid or is it something I need to make sure I monitor each year?

Thanks for the info so far!

Yeah, you'll just get quarterly & end of year statements showing "start value" & "end value" & it'll show dividends paid or re-invested.
You won't get a 1099 at the end of the year as you don't have to claim anything on your taxes for IRA's.

If you start a Roth IRA keep good track of the money you put in as it can be taken out at some point with no penalty. I don't remember how long it has to be in the account before you can withdrawl though... year or 2 maybe?
My account is like that so i assume it's like that with all Roths.

 

[brianmanahan]

can you do the backdoor if you are under the income limit but want to put more than just $5500 a year into your roth?

the regular backdoor roth IRA doesn't let you do that, but the "mega" backdoor roth IRA does: http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

but not everyone can do it. you need a 401k that allows you to do it, but slightly less than half of them allow it. it has to allow after-tax (not roth) contributions, and then allow you to withdraw those after-tax contributions while you're still employed with the company.

i am putting about 25$k into my roth IRA this year, 5.5$k the normal way and 20$k the mega backdoor way.

 

[StarTech]

Yeah I realized that after I posted it... Roth IRA seems like the way to go though since I have a 401k through work and so does my wife, both of which offer employer matching, although they're somewhat weak.

Thinking I'll just put $11k towards a Roth IRA for me and $11k towards one for my wife and get last year and this year out of the way.

ROTH contribution limits per person/year are $5,500. All not-taxable accounts are individually named, meaning separated for each of you and your wife. This year, if you have the cash, you could put $5,500+$5,500 for you and your wife, before April 15, designating it as a 2014 contribution, and then the same for 2015 any time until 4/15/2016. Contributions made from January to tax deadline can be directed to previous or current year. The rest of the year are assumed for the current calendar year.

Personally, knowing what I know now, I would not put a Life Cycle type fund in a ROTH, and if I was a long way from retirement, not in any accounts. The reason is that they tend to be a bit heavy in bonds, and I see little reason for bonds if retirement is far away.

The above mentioned Vanguard VTI or VOO are good choices for an unattended ROTH far away from retirement. Something equivalent in a 401K may be hard to find, because, unfortunately, many 401K have poor choice of options.

Then, later in life, at some point try to get educated by reading, etc... and reallocate the balance in multiple directions .

As always, invest at your own risk

 

[DaveSimmons]

Personally, knowing what I know now, I would not put a Life Cycle type fund in a ROTH, and if I was a long way from retirement, not in any accounts. The reason is that they tend to be a bit heavy in bonds, and I see little reason for bonds if retirement is far away.

You can lower the bond amount by picking a Target (year) account where the year is later than your planned retirement. For example you expect to retire in 30 years (2045) but you pick a Target 2050, 55, 60 fund instead.

I recommend it to people as a first fund for a couple of reasons:

1) It's easy. You buy and hold this one fund and you are fully diversified.
2) It's cheap. Many funds have minimum account balances to avoid admin fees. If you have 3 different funds that could make it harder to reach the minimum in all of them when you're starting out.

... and it's a good fund, since it bundles up several very good Vanguard index funds in one package.

 

[dullard]

If you do this, one tip is to look at the tax bite for each fund type and put the highest ones into your IRA / 401k with the lowest ones in your regular brokerage account.

For example, you might make the brokerage account 100% S&P 500 index funds or ETFs (or Scwhab's large-cap index equivalent), then put the small-cap and foreign index funds in your 401k and IRA.

Very good advice there that not enough people follow. I'll add individual government bonds (no need for a bond fund or a brokerage account for that matter) and tax managed funds to your list of items that belong in the taxable accounts.

 

[dullard]

Personally, knowing what I know now, I would not put a Life Cycle type fund in a ROTH, and if I was a long way from retirement, not in any accounts. The reason is that they tend to be a bit heavy in bonds, and I see little reason for bonds if retirement is far away.

As long as the bond amount is under 20%, the difference in return is negligible. That is especially true when people are just starting out. Oh, wow, someone may have gained ~$0.50 more in that first year with less bonds. The benefit of the bonds is that it is much less volatile and thus less frightening for the beginner investor. For those reasons, life cycle type funds are good starting points. By definition life cycle funds do not buy and hold stocks (they must keep selling stocks and buying bonds). Thus you are guaranteed to have capital gains (assuming the market actually increases) as the fund goes on. An account such as a Roth where you don't pay capital gains taxes is thus a good match. Plus, in the Roth, they can always switch out of the life cycle funds without paying taxes once they learn more about investing (and when the bond percentage begins to matter).

 

[Hacp]

There is also the after tax 401k. Basically after tax money into 401k, but you can put the basis in roth ira when you do rollover. Example is:

1. Invest 10K over the 18000 deduction limit this year.
2. That 10k gains you 4k in investment earnings after 4 years.
3. You leave company.
4. You can roll over the 4k in earnings in a traditional ira and the 10k basis in a roth ira.