Roth IRA

[James Bond]

My dad has told me a couple times that I should consider opening up a Roth IRA. I'm 26 and have about 10K in savings right now (all of it in a regular savings account).

Is this the right move for someone my age? Is there any risk involved? Any other thoughts?

 

[drinkmorejava]

There are no particular risks other than the market blowing up. It will go up and down as with all instrument based assets.

Good thing about Roths is you can take out principal penalty free whenever you want. At your age you're going to be limited to 5k/yr in deposits.

I might put 5k in the Roth and the other 5k in a high interest savings account. HSBC has an online only account with 0.8% interest (pretty much the best you'll get). CDs are lower. than that right now. There are some high interest checking accounts, but I don't know anything about them.

 

[FallenHero]

Why would you NOT invest in your retirement if you can afford to do so?

 

[dullard]

Assuming you qualify (there are income limits), then yes you should do it. The sooner you save, the more time you'll have for it to grow. With a Roth IRA, all growth is completely tax free (unless there is some major, major change to tax laws in the future).

Think of it this way. If you put the maximum in now ($5000 is allowed each year), and assuming the stock market behaves about the same as it has for decades, and invest nothing else in the rest of your life, then you'll have a quarter million dollars when you retire. Do this for four years when you are young, and you'll retire a millionaire (completely tax free).

There are some risks. You could make a bad investment decision. The stock market could tank and you lose some money. But, the stock market has never done poorly for an extended period. You'll have to have a very big financial disaster to not retire with lots of money if you invest at your age.

I'd personally suggest a simple start. Open a Vanguard Roth IRA, deposit $5000, and buy either VFINX or VFFVX mutual funds. Either fund one is diverse (meaning if a company goes bad you don't own much and meaning if a company does really really well then you get a piece of it). Either fund has low fees and is likely to do pretty well in the future. In a few years, you can look back and adjust to different mutual funds if you want. Where you start investing usually has no measurable impact on how well you do in the long term (unless you do really stupid risky things).

 

[Ninjahedge]

Do eet.

Do eet nahw!!!!!

Seriously? ROTH is the way to go on a lot of it. It is a buffer to things like the 401K which ARE taxable.

If you figure just above 7% APR for stock appreciation, this doubles every 10 years. Starting at 26 and waiting until, to make it easy, 66 is a 16-fold increase in your first years investment. $5K -> $80K.

YMMV.

But putting some in there now and KEEPING TRACK OF IT, is important.

Try putting $5K in there and maybe an additional $1K/yr on top of that, and follow the market for long term recommendations.

Also, if/when you get a job that offers 401K, put as much as you can that they will match. (Say they match the first 6%... well... put in 6%!)

Aside from that, the usual rules apply.

"High interest" bank accounts are bogus right now. Just 3 years ago it was 5% (which kept it above the 1%-2% inflation). 0.8% will only reduce depreciation in your investment. Rates might go up once the fed % goes up (and you will see more howling from property owners). I still remember interest rates at 8% for savings accounts when I was a kid... granted that home loans were at 13%!!!!!

 

[BTA]

My only problem with Roth IRA's is that the people that pimp them out almost never talk about the fact that you actually have to actively invest that money in other things...mutual funds, stocks, bonds, whatever is offered by the company you open the Roth IRA with.

Most of the time they act like "hey put all this money in a Roth IRA and you'll make 10% annually and you'll compound interest and you'll be a millionaire!" and thats it.

 

[kami333]

At the very least open up an ING Direct Roth IRA Savings account.

FDIC insured up to $250k, APY is at 1% right now.
http://www.retiremyway.com/Open/

 

[overst33r]

My only problem with Roth IRA's is that the people that pimp them out almost never talk about the fact that you actually have to actively invest that money in other things...mutual funds, stocks, bonds, whatever is offered by the company you open the Roth IRA with.

Most of the time they act like "hey put all this money in a Roth IRA and you'll make 10% annually and you'll compound interest and you'll be a millionaire!" and thats it.

Not quite. Look up target retirement date funds. Simply choose the one with the right exposure you are comfortable with, set it and forget it. It will rebalance itself. Keep the expenses low (vanguard) and contribute every year. 10% is a bit optimistic, I'd say 7-8% is more realistic after inflation is taken into account.

Stay the course and you WILL be a millionaire when it's time to retire. It's been proven many times over.

 

[HardcoreRobot]

yes definitely. i think i opened mine when i was 18! keep it safe with an index fund and forget about it.

2 catches for you: contributions have to be earnings from the year you are contributing it (prob wont be able to dump all your savings in there).
AND
IIRC you can take the principal back out at any time without penalty, since it is post-tax money. you cannot take the earnings without penalty. i would rarely recommend raiding your retirement fund, but it should be a reassurance

 

[purbeast0]

the one thing i remember from college was my business teacher telling me that if you maxed out your roth ira from the age of 18-28 (for 10 years) you would have more $$$ in there by the time you retire if you maxed it out from 30 - 60.

this is of course, if you got the average historical gains of like 10%.

i wish i started mine earlier. i'm 29 now and started mine a few years ago. i'm putting $400/mo into it now, and hopefully forever. this is on top of doing the max possible in my 401k that my company matches.

 

[Thump553]

Consider traditional IRA versus Roth as well. In traditional the money is tax free when you put it in, taxed when you take it out years later. In other words if you are in a 25% tax bracket (state and fed) it will cost you $2500 to start a $2000 Roth IRA versus $2000 to start a traditional IRA.

As others mentioned you have a broad range of possible investments in any type of IRA, including insured CDs or insured savings accounts. Make sure you understand the risks and rewards of whatever investment vehicle you choose. You can always change it later so if you are risk adverse and don't want to worry now just invest your IRA in insured certificates of deposit.

Personally I also like index funds a lot. They are low cost (very important) and outperform most mutual funds.

 

[BTA]

Not quite. Look up target retirement date funds. Simply choose the one with the right exposure you are comfortable with, set it and forget it. It will rebalance itself. Keep the expenses low (vanguard) and contribute every year. 10% is a bit optimistic, I'd say 7-8% is more realistic after inflation is taken into account.

Stay the course and you WILL be a millionaire when it's time to retire. It's been proven many times over.

Those funds still put money in the market. You just don't have to pay attention to what it's doing yourself.

Also, considering the Roth IRA wasn't created until 1997...I have a hard time believing it has been proven at all besides being calculated on somebody's spreadsheet, and always assuming an 8%+ return.

 

[overst33r]

Those funds still put money in the market. You just don't have to pay attention to what it's doing yourself.

Also, considering the Roth IRA wasn't created until 1997...I have a hard time believing it has been proven at all besides being calculated on somebody's spreadsheet, and always assuming an 8%+ return.

Of course. How else do you plan on compounding large amounts of money if not in the market?

I didn't mean my specific example was proven. I meant that the idea of "buy and holding" index funds has. TR funds are quite new as well. It just makes it simple for the average investor.

Nothing is risk averse, but IMO this is the least risky way of accumulating wealth.

 

[kami333]

Consider traditional IRA versus Roth as well. In traditional the money is tax free when you put it in, taxed when you take it out years later. In other words if you are in a 25% tax bracket (state and fed) it will cost you $2500 to start a $2000 Roth IRA versus $2000 to start a traditional IRA.

Also, depending on how much you make, contributing to a traditional IRA could take you under the phaseout for the saver credit which could net you a few hundred extra in tax savings compared to a Roth.

While in general a Roth is better for younger people just starting out since the expectation is your salary (and tax bracket) is just going to go up, there may also be years where your income is unusually low (went back to school, etc) where you could take advantage of the lower tax bracket for a conversion. And while I don't think it will happen, there's always the remote possibility of a flat tax or something else being implemented in the future that will negate the Roth tax savings.

I contribute to both, most of it into a Roth but I also put about 20% into a traditional as well.

 

[50]

So I just started with a company and am 23 years old. Our company offers Roth, Pre-tax and after tax contributions up to 25% of our salary. Which one do you guys recommend? They match up to 6% of our salary. I read somewhere that if you think you will be in a much higher tax bracket when you retire its better to do Roth. Opinions? Right now I am living very comfortably on my salary with 6% put in so I'm thinking either I should invest money on my own or put more in the retirement account.

 

[Bill Brasky]

Stay the course and you WILL be a millionaire when it's time to retire. It's been proven many times over.

Best advice I learned in high school. Thank you 10th grade algebra.

 

[mshan]

Tax deductible IRA and Roth IRA are supposed to produce same results over time.

However, there is always theoretical risk of Congress coming back and trying to double tax you, though it sounds like someone who already paid taxes should be grandfathered.

Like someone said above, main advantage of Roth is for young person in lower tax bracket now than they would be in later years with well established career and salary.

 

[ichy]

Open a Roth with Vanguard, put your money in a target date retirement fund, and leave it alone. End of story.

 

[Ninjahedge]

BTW, YMMV

I was an unlucky one that did "forget about it"... I started my 401K at about the same time as the first slowdown in the late 90's.

Then I was too stupid to notice the lack of a 1Q bump in 2008, followed by stagnant performance all the way up to the famous September Fallout (I hope that is it, otherwise what am I giong to tell myself when I jump out of the time machine... oh yeah, Google...).

Even so, there is a moderate chunk in there that would take me 12 years of full contributions to match at this point. Get started early, invest moderately and keep a regular eye on it. You are not a day-trader, but you should still keep up with it.

Index funds are OK, but also look to see things like service charges and whatnot. Depending on who you invest with, you cuold be paying more % or more of a base fee.....


GL
HF
GG

 

[GotIssues]

First off, don't think your retirement is set with 4 years worth of Roth IRA contributions. Sure, it should compound to $400k+, but $400k in 40 years is not the same as $400k now. Whoever thought that $20k in contributions will be $1 Million by retirement is really, really, really optimistic.

Don't put money in the Roth IRA that you might need immediately. If you need to pay off some kidnapper or bookie, they aren't going to wait for you to get it out of your IRA (notice: examples are meant to be humorous and ridiculous, but there are still times you need money NOW). $5k should be plenty fine for your super emergency savings, but you still should make sure to have 6mo emergency savings (in one form or another, accessible over the course of that time).

The advantages of Roth IRAs depend on your income level now and income level at retirement. At 26, I would think it would be quite difficult for it not to be in your best interest (and also considering it's very likely that taxes will increase by the time you retire). The Roth vs Traditional question is can be a complicated question when all the factors are considered, but I'd bet a fair amount that in your situation, it's pretty clear.

 

[dullard]

First off, don't think your retirement is set with 4 years worth of Roth IRA contributions. Sure, it should compound to $400k+, but $400k in 40 years is not the same as $400k now. Whoever thought that $20k in contributions will be $1 Million by retirement is really, really, really optimistic.

You are correct that $1 million in 40 years isn't worth as much as it is now due to inflation. But, it is still worth a lot of money ($262,529 in todays money if historical inflation averges keep up). And $262,529 is more than the average retired person has right now. Just four years of contributions now and he'll do better than many people who had their whole life to save.

As for your "really, really, really optimistic" quote, you certainly are really, really, really bad at math. I gave a fund ticker that has averaged 10.8% over the last 35 years. Then, I said if that historical trend repeats, he'll have over $1 million by investing $20,000 as soon as possible. That is what the math says.

$5000 * 1.1080^40 = $302,385
$5000 * 1.1080^39 = $272,911
$5000 * 1.1080^38 = $246,309
$5000 * 1.1080^37 = $222,301
Total: $1.044 million.

It may be optimistic to think history will repeat itself (I personally use 8% in my own estimations for my planning). But it certainly isn't really, really, really optimistic. Don't like the result? Then reinvent math since you'd be wrong with math as it is.

 

[dullard]

So I just started with a company and am 23 years old. Our company offers Roth, Pre-tax and after tax contributions up to 25% of our salary. Which one do you guys recommend? They match up to 6% of our salary. I read somewhere that if you think you will be in a much higher tax bracket when you retire its better to do Roth. Opinions? Right now I am living very comfortably on my salary with 6% put in so I'm thinking either I should invest money on my own or put more in the retirement account.

MShan got it right.

For the typical person Roth and traditional IRA would both be equal monetarilly, assuming there is no major tax law change. But, there are certainly exceptions and there will certainly be major tax law changes. If you are in a low tax bracket now, you'll likely be in a higher tax bracket later. In that case, I'd choose to pay tax now. If you are now in a high tax bracket, then I'd personally consider the chance that brackets will drop later and choose to delay taxes until that happens (for example you might be unemployed for a bit and do a conversion from traditional to Roth in that year). For that reason, some advisors suggest getting both. Diversification.

Tax savings are very valuable. Even if it means just delaying taxes like in the traditional IRA. If you are comfortable with what you have now and can save up for things (like a house), I say put it all into retirement accounts. Start with your 401K (or similar) until the company match, then IRA or Roth IRA up to the $5000 max, then finish out the 401K (or similar) if you have money left.

 

[spidey07]

You are correct that $1 million in 40 years isn't worth as much as it is now due to inflation. But, it is still worth a lot of money ($262,529 in todays money if historical inflation averges keep up). And $262,529 is more than the average retired person has right now. Just four years of contributions now and he'll do better than many people who had their whole life to save.

As for your "really, really, really optimistic" quote, you certainly are really, really, really bad at math. I gave a fund ticker that has averaged 10.8% over the last 35 years. Then, I said if that historical trend repeats, he'll have over $1 million by investing $20,000 as soon as possible. That is what the math says.

$5000 * 1.1080^40 = $302,385
$5000 * 1.1080^39 = $272,911
$5000 * 1.1080^38 = $246,309
$5000 * 1.1080^37 = $222,301
Total: $1.044 million.

It may be optimistic to think history will repeat itself (I personally use 8% in my own estimations for my planning). But it certainly isn't really, really, really optimistic. Don't like the result? Then reinvent math since you'd be wrong with math as it is.

There are two facts in life.

1) The sun always rises
2) Dullard knows his math

 

[brianmanahan]

I gave a fund ticker that has averaged 10.8% over the last 35 years.

what fund is that?

 

[dullard]

what fund is that?

VFINX which has been at that level on average since 1976. I guess today, is at a 10.79% average. Should I alter my posts to correct for the minimal change?

It is an S&P tracking fund. You certainly could find better ones I bet. But it is a pretty safe fund over the long run and a good starting point for a new investor.