Roth IRAwareness

March 27, 2012 · 39 comments

So yesterday was Roth IRA awareness day, where hundreds of personal finance bloggers banded together to spread the good news about Roths. I’m sure you noticed I wrote no such post, in fact, I wrote no post at all yesterday. While I’d like to pretend this is just because I am so rebellious I go against societal norms, the reality is I simply forgot to do it. 

I told my buddy Jeff Rose (Met the dude in real life multiple times. He’s a good guy), I would join the cause and spread awareness about Roth IRA’s faster than chlamydia spreads through a college frat party. It’s a day late, but I want to honor that promise I made. Enjoy some Roth IRAwesomeness…

If you don’t already know, the Roth IRA is a way to get insanely rich with minimal effort. This holds especially true for younger people. The younger you are, the more time your money has to grow. Compound interest for the win!!!! The Roth lets you make contributions with your after tax money (the money you actually get in your paychecks). Your contributions grow tax-free forever and you get to pull out all the profits without having to pay anyone a dime. It’s seriously amazing!

Don’t be confused, Roth IRA’s are not a type of investment, just a way to invest. You can use your Roth to invest in stocks, bonds, REITs , etc. If you’re investing in a 401k, you can even make your Roth investments mirror your company sponsored retirement plan (this is kinda what I do).

There are really only two downsides I see to the Roth IRA. 

  1. It leaves you poorer. If you max your Roth out each year, you are giving up $5,000. Five thousand you could have spent on things like vacations, new gadgets, etc. Good things never come easy. If you want to have millions waiting for you come retirement you have to win the lottery or start investing in your future.
  2. It takes time. With the economy being about as stable as Charlie Sheen’s mental health, my return on investment has been less than stellar. Over the last five years, I’ve put $25,000 in to my Roth and it is currently worth $28,759. That’s a gain of $3,759. It’s not bad, but it’s definitely not where I’d like things to be. If you are super emotional, you may not be able to wait out a crappy market.

Other that those two things, the Roth IRA is pretty much the best thing since sliced bread and if it’s already not part of your retirement portfolio, you should consider adding it. When hundreds of personal finance bloggers band together to tell you about something (when there is no personal gain for doing so) you should probably listen. Just sayin’

You got a Roth? Why or why not? You max it out each year?

Favorite Nail from yesterday: Come at me bro.

 

1 SavvyFinancialLatina

Ninja loved your stick figure and pile of money! I have’t started one yet, only because I have not graduated and earned income yet. As soon as I get that job offer, you bet I am going to start investing. When I first heard about the ROTH IRA, I was going to wait a couple years to start one. I thought I need that money for other things…well after reading everything I have decided to get one as soon as I can.

2 Ninja

Awesome! I’ve been fortunate enough to max out my Roth IRA every year since I graduated college (2007) and don’t regret it one bit.

3 SavvyFinancialLatina

That’s the plan!

4 StackingCash

I wish it was just as simple as opening a Roth IRA. Like you said, one has to pick what type of investments the Roth will contain. Bad investments and you are toast. Remember folks, you better feel confident in your investment abilities or others to pick those investments for you, because you CAN lose money in a Roth IRA. Of course don’t let my fear mongering scare you away, so many people have great success with investing. I’m one of those rare ones that seem to lose all the time :/

5 peaches

A Roth IRA doesn’t require you to play the stock market – you can put your money into FDIC-insured certificates of deposit and characterize it as a Roth IRA.

6 StackingCash

That is exactly what I do :) Allows me to avoid income tax on the interest earned from my CD’s.

7 Savvy Scot

Loving the analogy!

8 sheila

I started working on mine just last year, ninja and I rolled over some stuff and put in 5k. My particular one will guide my stock/bond/ect choices when I reach 25k in it. So I will plug away and hope for a happy retirement!

9 Jackie Walters

I lovingly told my 15-1/2 year old son today he better get a job this Summer not only for spending money and college savings but also to fund a Roth IRA. The way he hoards his money he’ll be sitting pretty at age 45.

Excellent job in maxing out your Roth IRA each year! You and Girl Ninja are great examples of “getting it” while you are both so young yet!

10 Errica

I’ve put 10% of my income into my 401(k) since I graduated college. But I haven’t done the Roth IRA yet. I am the sole income, with a husband in medical school. We take out loans for his tuition, but I pay our living, etc. I do not end up with a lot of extra cash at the end of the year since we pay our extra cash to his tuition or finishing off paying my car loan. Would you suggest still putting money in a Roth IRA even if it means contributing less to my husband’s education loans? I’ve been thinking of asking for a Roth IRA for my birthday if we have the cash.

11 Larry

Would you suggest still putting money in a Roth IRA even if it means contributing less to my husband’s education loans?

Could depend on how much is owed on the loans and at what interest rate, as well as your ages and expected income after graduation. If your employer matches your 10%, I would not contribute to a Roth until you get the full match. If the match is low or non-existent, then you might consider the Roth as it gives you greater freedom in investment options.

12 Errica

My newest employers match won’t become effective till July 1st. I’m not paying on my husband’s loans yet. I’m decreasing the amount we take out for loans each year with my surplus cash. I think I’ll continue the 10% and once my car loan is paid off I will open an IRA.

13 David

I would probably put more in 401K before Roth in your situation. To put 5K into the Roth probably costs you more than 6K in gross pay.

I think the big thing to look at is how much tax protected money you can have in the future. A doctor will probably make enough to be above the Roth contribution limit, so you will only be able to save 34K a year in the 401K (17K each).

I would prioritize paying the car loan before student loans.

14 Errica

The car loan has 3% interest, and I pay more than minimum payments, so I’m not feeling like that money is better served towards paying more cash to my husband’s tuition. I think you’re right that I should look at the future to think about how much he’ll be able to put into a Roth IRA in the future…. But I’d rather get started now, since med school is 4 years, and residency will be about 4 years if he specializes so he won’t have a decent income for 7 more years since he’s finishing his first year? The years are ticking by and the sooner the better for starting a Roth IRA.

15 Broke Guy

I started a Roth IRA when I was 17 (I’m 24 now), I haven’t really put anything into it though. College got in the way, and buying pizza, beer, and togas were more important….stupid college! This is my first year out, and in the real world. I plan on putting more into it for sure this year. Hopefully I can max it out.

16 tom

Yes… DCA to the max every paycheck for both me and my wife.

The market has been tough on my Roth, but we still have $30K each after 6 years, so we are roughly even.

Just as important as actually opening one and investing is setting an asset allocation that suits your risk level. If you are uncomfortable figuring out your own asset allocation, there are many “lazy” portfolios available and all-in-one mutual funds that accomplish the same goal, e.g. Vanguard 2050 Target Date Fund.

So…

#1 – Open a Roth with a low cost brokerage like Vanguard or Fidelity
#2 – Choose an appropriate asset allocation
#3 – Max yearly contributions
#4 – Rebalance as necessary
#5 – Profit!

17 Larry

http://www.obliviousinvestor.com/good-and-bad-reasons-to-contribute-to-a-roth-ira/#comments

I think the assumption that a Roth is ipso facto superior to a traditional IRA is dubious. If your tax rate in retirement is lower than when working (because your expenses are lower), then a traditional is the better choice – though this argument could be clouded by inflation. Since tax rates are unpredictable, you could hold money in both types of accounts for tax diversification. I also would not set a higher priority on a Roth than on maxing out a 401(k) or equivalent with a decent employer match.

Personally, I have both a Roth and a traditional IRA, but my Roth has a much smaller percentage of my assets because my traditional was quite substantial before I opened the Roth. I could have run around like a chicken with my head cut off and converted to the Roth, but I decided to leave things alone. I think a lot of the attraction of the Roth is that you’ve already paid the taxes and won’t have to worry about them in the future, including any growth. For younger people starting out this may be the best option as they can realize a lot of tax-free compounded earnings, but to someone older like myself I don’t think the Roth has an insuperable advantage.

18 Jeff Rose

Better late than never! Welcome to the #RothIRAMovement party. :)

19 Em

I’m 25 and have not started setting aside for retirement but now that our emergency fund is fully funded that money is going to be used for retirement savings. The only thing holding me back is understanding how to invest. Once I”m comfortable with that I’ll be doing Roth IRAs because our tax rate will certainly be higher in retirement than it is now.

20 Jake

Congrats on being getting started on thinking about your retirement while you still have lots of time to plan.

A recommendation that I would make(bc I wish someone had told me when i was younger), would be to go ahead and start contributing now. I have an IRA with Fidelity, and with them (and most other major brokers i assume), your money just sits in an account waiting for you to pick your investments. Having that money already there will motivate you to learn about your options. It is good way to force yourself to jump-start your research in how to invest.

21 Em

thanks for the advice!

22 StackingCash

Stick them in FDIC certificates of deposits until you make sure you really want to risk your money in the stock market. Most Roth IRA custodians hold the money in a .01% interest money market account. A .5% interest CD is a smidgen better…damn FED trying to force me into the stock market I consider a Ponzi scheme >:(

23 Alice @ Don't Debt

I don’t have a Roth – yet. I’ll max it out once I start contributing to it, but that’s likely four years away. Give or take a couple of months. That’s when I’ll have all debt paid off and will have my entire paycheck (less a few utility bills and such) to do with as I like.

Maybe I’m living in a dream world, but for now I’m relying on my retirement plan from my employer to be there for me. A total of 20.4% of my income goes into that. ~6% on my part and close to 14% on my employers part. I can retire from here in 14 years (and two weeks). After that, I’ll still be young enough to seek gainful employment elsewhere – or not. I have several other things going for me: house is paid for, hubby’s retirement, etc.

24 Bryan

I just opened my Roth in 2011, and I’ll be very close to fully funding it (if not actually fully funding it…I actually put a few hundred dollars in a traditional IRA, and the total sum you put into both can’t be more than $5,000).

That said, I don’t know that I’ll be able to put money into my Roth in future years. It’s looking like my wife and I (but especially my wife) are going to make too much money in 2012 to be eligible to contribute (which is a good problem to have).

25 Brian

I do have my ROTH and talking my sister and my wife into opening ROTHs this year. I’m a big fan, but don’t quite get it maxed out yet. Personally my favorite thing about the ROTH is no RMDs (required minimum distribution). This can be a big deal for people with Traditional IRAs. If you forget to take the RMD it’s a 50% tax penalty! Don’t have to worry about that with a ROTH.

My goal was to max the ROTH out this year, but we have a baby on the way so the budget it going to have to adjust. The ROTH will still be a priority, but I’m going to have to see where I am sitting once the little one arrives.

26 Young Professional Finances

I started a Roth IRA but I only have a couple hundred dollars set aside for it. Still working on putting in as much as I can!

27 The Happy Homeowner

I definitely have a Roth, and I’m finally at the point where I fund it fully each year (have for the past 4 years). When I opened it in 2006, I only could contribute $383 for the year–my, what a long way I’ve come…haha!

28 Kristin

My first year working was 2009, and I didn’t know about Roth IRAs then. I have contributed the full amount available in 2010 and 2011 (just made my 2011 contribution last week). However, it’s just sitting in a money market account and not doing much. I thought the market would drop in August with the debt ceiling fiasco, which it did, but I kept waiting for it to drop further with the European crises always imminent, but it just went up since August. So I kind of missed the boat there. I don’t have the stomach for investing, and possibly losing a significant amount of money. I don’t love target funds since they often seem to have high fees, and I feel that absolutely everyone is blindly investing in ETFs and index funds, and when everyone does that, it really distorts the market. But at least the money is in the account, so when I get to the point where I feel more confident in my investing skills, I’ll have a good start.

29 Brianne

I’ve had a Roth since 2008, contributing as little as $50/month at the beginning and now I invest $200/month. I also contribute 10% to my 401K, though we don’t technically have a match. I would get profit sharing whether or not I contribute to the 401K.

We just discovered we’ll be subject to the AMT next year because the 2012 standard deduction is dropping $30K for a married couple. I’m looking at contributing more to my 401K and holding off on upping my Roth contribution until 2013.

30 peaches

Timely! I logged into my Vanguard account this morning and initiated my Roth investments for 2011. I max our my Roth every year – either with my tax refund, or by transferring money from other savings into the Roth account.

This year my tax refund is going to reduce the principal on my mortgage (woo!) so I transferred the funds from my 0.60% savings account to some lovely index funds.

31 StackingCash

I wish I knew about Vanguard 21 years ago… I probably would be a “normal” investor…

32 dreemsie

I can no longer contribute to the Roth IRA, but we do have one at work, so I contribute half of my 401k into the Roth 401k option.

33 Midwest

My wife and I have made it a point to contribute the max to our Roths for the past 5-6 years. As suggested by someone above, it seemed to me like a good way to hedge your bets in terms of taxes. In the Roth, withdrawals are tax free, in the 401k, you have to pay taxes when you withdrawal. You could guess and pick one, but it would seem a minimum of a two pronged approach would better your chances.

I wish I had the problem of too much household income to contribute to a Roth. : ) Jealous!

34 Rachael

I opened up a Roth IRA for the 2010 tax year. At the time, I had only had a “real” job for a month so I initially just put in 3000. I was able to put the max in for 2011. I don’t know if I will max it out this year for sure or not. I am now putting money in a 403b and getting a matching amount from my employer so I am considering backing off on the Roth and focusing on paying off student loans.

35 John

The benefits of the Roth IRA totally outweigh the negatives you mentioned. You’re right, if you faithfully put money into a Roth IRA you’re going to have loads of money in the end due to compound interest.

Come on people! Invest! Now’s the time!

36 Kevin

I opened up a Roth account a couple of weeks ago and maxed out my 2011 contribution ($5,000)…i was given the option at the time to have my contribution count towards 2011 or 2012 (I believe you have until mid-April to still have the 2011 option). I plan to max it out again for 2012 probably with a few lump sum deposits over the course of the year. I am 34 and have only had my 401K up until this point. Very happy to finally be able to get the Roth rolling!

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