Starting Roth IRA

[KingGheedora]

I'm finally getting around to organizing my finances, something I started last year (I'm 28 right now).

Last year I started contributing to my 401k for the first time, company matches up to 4%, i maxed out the 2008 contribution, and have contributed almost $7K this year (surpassing the company match). I requested the deferrals to stop for now, and have started an online savings account with HSBC. (I'm a little unclear about the difference between that account and a money market account. Are they the same thing? if not, what's the difference?).

What I want to do now is build up some emergency fund, probably around $6K to start with, and then later this year start and max out a Roth IRA. My main question is where to start a Roth IRA? Can I start one with any bank? Does it matter which one I start it with, will it affect what I can invest in? What about fees and things? Do they charge for trades and transactions within a Roth IRA? How do you transfer money into a Roth IRA account, does it just get treated like any other bank account (gets an account # and bank routing # to transfer funds into it?). Any issues with having multiple types of accounts at the same bank where I have a Roth IRA?

Thanks for reading and hopefully answering all my Q's.

 

[dionx]

Check with your 401(k), but I think to get the entire company match, you need to contribute the entire year. For example, with a $52K salary, you need to have your deferrals spread out the entire year. Assuming you get paid bi-weekly, you would get $2K bi-weekly. A 4% contribution would mean $80 towards 401(k) deferral. If they matched 100%, that means your company would contribute $80 too.

Now say that you decide to increase your contribute so it?s greater than $80 (the 4%), the company doesn?t know how much you?ll make later in the year so it still only contributes $80. Plus if you get any raises, you would want the company to contribute 4% of the raised salary, not the $80. So in sum, continue with your employee deferrals just to get the 4% match.

To start a Roth IRA with just mutual funds, I'd recommend Fidelity, with Vanguard as a close second. Fidelity can offer you other services besides just a Roth.

It's better to use a discount brokerage than a bank. Vanguard does have a $10 annual fee for accounts under $5k, but there are no recurring fees. For no-load mutual funds, there are no transaction costs whether in an Roth IRA or not. I'm not sure if Fidelity has that $10 annual fee since my Roth is with Vanguard.

To transfer money into an IRA, you can transfer just like any other bank account.

There should be no issues with having multiple accounts besides an IRA.

 

[longhornlump]

I use Vanguard for my Roth IRA because of the low costs but I hear Fidelity is good as well.

 

[Jadow]

IMO the best 3 places to start a Roth are T. Rowe Price, Fidelity, and Vanguard (in no particular order). You can do no wrong at either of those three. All of them have great low cost index funds.

Just open one up, pick a good low cost fund (or funds) and start an automatic investment plan or invest all your money at once.

T. Rowe Price has the lowest minimums. You can start with as little as 0 initial deposit and 50 dollars a month.

Just keep plugging away putting money into 401k and Roth IRA and you'll be in great shape.

Lastly, the Roth can act as a last stop emergency account too. With a Roth, you can always withdraw your principal at any time with no penality, ie. If you put 4000 into a Roth, then have an emergency and need that money back 2 months later, no problemo.

 

[dionx]

Originally posted by: Jadow
Lastly, the Roth can act as a last stop emergency account too. With a Roth, you can always withdraw your principal at any time with no penality, ie. If you put 4000 into a Roth, then have an emergency and need that money back 2 months later, no problemo.

That is assuming the balance remained the same or had gains. If the account had a loss, a person can only withdraw the original contribution minus the % loss.

 

[Jadow]

Originally posted by: dionx

Originally posted by: Jadow
Lastly, the Roth can act as a last stop emergency account too. With a Roth, you can always withdraw your principal at any time with no penality, ie. If you put 4000 into a Roth, then have an emergency and need that money back 2 months later, no problemo.

That is assuming the balance remained the same or had gains. If the account had a loss, a person can only withdraw the original contribution minus the % loss.

True dat. A lot of people have been slammed really hard since Oct 2007.

 

[mcmilljb]

Originally posted by: KingGheedora
I'm finally getting around to organizing my finances, something I started last year (I'm 28 right now).

Last year I started contributing to my 401k for the first time, company matches up to 4%, i maxed out the 2008 contribution, and have contributed almost $7K this year (surpassing the company match). I requested the deferrals to stop for now, and have started an online savings account with HSBC. (I'm a little unclear about the difference between that account and a money market account. Are they the same thing? if not, what's the difference?).

Here is general info about Money Market Accounts. Here is general info about Savings Accounts.
Difference? Money Market Accounts will generally pay a higher interest but generally require a higher balance to get the best rate. You have to shop around for the best rate. Plus you can access your MM Account with checks/ATM card if you wish. It's kind of like combining a checking and savings account together, but it's neither.

For a 401k, they're probably matching dollar for dollar up to 4% of your gross pay for that period. I wouldn't do more than their match (in this case 4%) unless they have some super awesome funds that would only be available to you through them, and that's generally not likely. Your goal should be to keep getting the 4% match over the year which is basically FREE money, while maxing out your IRA contribution for the year. After the IRA is maxed out, you can up your 401k contributions, just save the money or have a general investing account.

What I want to do now is build up some emergency fund, probably around $6K to start with, and then later this year start and max out a Roth IRA. My main question is where to start a Roth IRA? Can I start one with any bank? Does it matter which one I start it with, will it affect what I can invest in? What about fees and things? Do they charge for trades and transactions within a Roth IRA? How do you transfer money into a Roth IRA account, does it just get treated like any other bank account (gets an account # and bank routing # to transfer funds into it?). Any issues with having multiple types of accounts at the same bank where I have a Roth IRA?

Thanks for reading and hopefully answering all my Q's.

You're going to need to contribute ~$416/month to max out your Roth IRA. I would start contributing to the Roth IRA now and not worry too much about getting to the $6000. Why? You can take out any of the direct contributions to a Roth IRA without tax or penatly. You put in $2000 and something happens, you can take that $2000 right back out without any problems. Keep some cash on hand because you're not going to be able to get the money immediately, but I would not put off starting the Roth IRA because of the desire to have a high level of cash. Also talk to potential financial firms about how quickly you can get your money so you can feel secure about how quickly you can get to it. Ask them tons of questions too, you don't want to be caught off guard by fees and restrictions from fine print.

You can start an IRA with any financial firm that offers them. Generally you can use online discount brokerages for low fees and access to multiple mutual fund companies (Vanguard, Fidelity, etc). The firm you pick will affect what investments you can make, and you can even directly pick a mutual fund company like Vanguard for one-stop shopping. Talk to firms about what investments interest you, they will be willing to find the right ones for you. Fees vary from firm to firm, you just have to shop around for the best deals. Mutual funds generally have no fee depending on the mutal fund. If you want to buy stocks or bonds, you probably will have to pay a fee. Once again, this where you have to shop around for what you want to do.

Since you're doing a Roth IRA, you're most likely going to just have a monthly electronic transfer from your checking account. You could probably get it out of your paycheck, but I would work with the firm providing the IRA for the best way to do that transfer. As long as you do a scheduled transfer, I believe you can extra benefits like lower minimum purchase amounts.

 

[KingGheedora]

Originally posted by: dionx
Check with your 401(k), but I think to get the entire company match, you need to contribute the entire year. For example, with a $52K salary, you need to have your deferrals spread out the entire year. Assuming you get paid bi-weekly, you would get $2K bi-weekly. A 4% contribution would mean $80 towards 401(k) deferral. If they matched 100%, that means your company would contribute $80 too.

I checked the company matches so far this year and you're right, they've been matching a max of 4% of my gross pay each pay period. I have been wondering whether or not they would do a lump sum to adjust at the end of the year, for people who don't spread their contributions evenly across all 26 pay checks.

I'm gonna call my 401(k) provider, and talk to the HR person in charge of payroll too. Lesson learned: contribute at least the company match amount with EVERY pay check. You can always contribute more later in the year if you want to exceed the employer match amount.

 

[KingGheedora]

Originally posted by: KingGheedora

Originally posted by: dionx
Check with your 401(k), but I think to get the entire company match, you need to contribute the entire year. For example, with a $52K salary, you need to have your deferrals spread out the entire year. Assuming you get paid bi-weekly, you would get $2K bi-weekly. A 4% contribution would mean $80 towards 401(k) deferral. If they matched 100%, that means your company would contribute $80 too.

I checked the company matches so far this year and you're right, they've been matching a max of 4% of my gross pay each pay period. I have been wondering whether or not they would do a lump sum to adjust at the end of the year, for people who don't spread their contributions evenly across all 26 pay checks.

I'm gonna call my 401(k) provider, and talk to the HR person in charge of payroll too. Lesson learned: contribute at least the company match amount with EVERY pay check. You can always contribute more later in the year if you want to exceed the employer match amount.

Actually, I just dug up an email from our HR last year. At the end of the year they did a "true-up", so that people who didn't spread contrib.'s evenly across all pay checks would get the correct company match. I just asked if they plan to do it again, but I think I'm good on that front.

 

[KingGheedora]

Originally posted by: dionx

Originally posted by: Jadow
Lastly, the Roth can act as a last stop emergency account too. With a Roth, you can always withdraw your principal at any time with no penality, ie. If you put 4000 into a Roth, then have an emergency and need that money back 2 months later, no problemo.

That is assuming the balance remained the same or had gains. If the account had a loss, a person can only withdraw the original contribution minus the % loss.

This is a good point. I eventually want an 8 month emergency fund, but planned on only building up a 2 month one before starting the Roth IRA because I kept in mind the fact that I could withdraw the principal without any penalties. This strategy lets me sort of use the Roth as both an emergency fund and a retirement account, allowing me to start the Roth this year and then finish building my emergency fund next year. I still think it's worth the risk to start it this year. Perhaps I will be more conservative with the allocation of funds in the Roth until I have a good emergency fund built up.

 

[mcmilljb]

Originally posted by: KingGheedora

Originally posted by: KingGheedora

Originally posted by: dionx
Check with your 401(k), but I think to get the entire company match, you need to contribute the entire year. For example, with a $52K salary, you need to have your deferrals spread out the entire year. Assuming you get paid bi-weekly, you would get $2K bi-weekly. A 4% contribution would mean $80 towards 401(k) deferral. If they matched 100%, that means your company would contribute $80 too.

I checked the company matches so far this year and you're right, they've been matching a max of 4% of my gross pay each pay period. I have been wondering whether or not they would do a lump sum to adjust at the end of the year, for people who don't spread their contributions evenly across all 26 pay checks.

I'm gonna call my 401(k) provider, and talk to the HR person in charge of payroll too. Lesson learned: contribute at least the company match amount with EVERY pay check. You can always contribute more later in the year if you want to exceed the employer match amount.

Actually, I just dug up an email from our HR last year. At the end of the year they did a "true-up", so that people who didn't spread contrib.'s evenly across all pay checks would get the correct company match. I just asked if they plan to do it again, but I think I'm good on that front.

But you cannot gain any interest/dividend or appreciation on the matching funds during the year.

 

[zzuupp]

Originally posted by: Jadow
IMO the best 3 places to start a Roth are T. Rowe Price, Fidelity, and Vanguard (in no particular order). You can do no wrong at either of those three. All of them have great low cost index funds.

Just open one up, pick a good low cost fund (or funds) and start an automatic investment plan or invest all your money at once.

T. Rowe Price has the lowest minimums. You can start with as little as 0 initial deposit and 50 dollars a month.

Just keep plugging away putting money into 401k and Roth IRA and you'll be in great shape.

Lastly, the Roth can act as a last stop emergency account too. With a Roth, you can always withdraw your principal at any time with no penality, ie. If you put 4000 into a Roth, then have an emergency and need that money back 2 months later, no problemo.

QFT.


I use Vanguard, but the others are in the same league.