Roth IRA?

IAmSherlocked · January 2014

Hi all,

I've lurked for awhile but this is my first time posting on these boards. You guys seem smart, so I thought this would be a good place to ask for some advice regarding opening up a roth IRA.

I recently started working full-time (graduated college last year) and while I'm lucky to be employed my job doesn't really pay all that much (not that I'm complaining!). Anyways, the company does offer a 401k program, however they do not match or contribute anything towards that, so I'm wondering if I might be better off just opening up a Roth IRA instead of participating in the company 401k program. Everything I've read says that if they contribute then you should max out that 401k up to whatever they will match, but I can't seem to find much info about what the best course of action is if there is no matching by the company.

If you have a Roth IRA who do you have it through? My Credit Union offers one but the interest rate is super low, and I'm a little overwhelmed looking at all the other options from places like etrade, Schwab, etc.

I've never done any sort of investing before, but would like to start, it's just hard figuring out how/where to begin. My parents are notoriously horrible with money and savings, so I can't really go to them with questions. Plus they think it's crazy that I want to start planning for my retirement at my age, lol.

Thanks in advance for your help!

smerka · January 2014

This has been discussed before so if you scroll down, you can find posts about IRAs. I think it's great you want to start saving now. My advice would be to open an IRA with a low fee place like Vanguard or Fidelity. Because you are new to this, I would also suggest putting your money in an Index Fund, which follows the overall stock market or a Target Fund which allocates assets based on how long you have until you plan to retire (more stocks the further away it is and moves money into more secure things as retirement becomes closer). The key for someone your age is to start putting money away. You have a long time to ride out the market ups and downs.

Xstatic3333 · January 2014

Hi! If I were in your shoes, I would just do a Roth IRA until you are able to max it out down the line, and then add on the 401k. You'll have a lot more flexibility as to where your money ends up, and you'll be able to take advantage of tax benefits once you've retired. The exception would be if you want to reduce your taxable income, but if you're not making a ton (I'm in the same boat) I don't think that's too likely.

As for where to open one, I felt just as overwhelmed as you at first! I am with Fidelity, and have been very happy with them so far. When I first went in, one of their advisors talked to me about the process, helped me figure out my risk level, explained load vs. no load funds, and helped me make my first pick (Disclaimer: they will want to sell you Fidelity funds first, so do your own research, too!) They do have a minimum to open your account, but other than that they're a great place to start out.

From my research so far, and I'm just getting started like you, Fidelity is most known for actively managed funds. If you think you might want to invest in Index funds, which try to match the market instead of beating it, I would also look into Vanguard. You can buy non-Fidelity funds through Fidelity, but there is often a big transaction fee.

bparkhur · January 2014

We use vanguard. I put in my target date for retirement and they do the rest. It was 3000 to open the account

vlagrl29 · January 2014

fidelity is good too

hoffse · January 2014

I agree you should just do a Roth for now. Roth accounts are vastly better than regular 401(k)s from a tax standpoint (as long as the tax laws don't change). Roth accounts have you paying taxes now instead of deferring taxes to your retirement. That means you are paying taxes at a lower marginal rate (because it will probably be higher when you retire than it is now), and you won't pay taxes on any gains you earn between now and retirement. If you're in your 20's, that's enormously valuable because you have about 40 years of growth that is tax-free.

I also have my Roth through Fidelity, though any investment bank would probably be just fine (Schwab, Vanguard, Scottrade, Fidelity, etc. are all excellent).

One thing I love about Fidelity is that I have a Fidelity American Express which deposits 2% of all my purchases into my Roth account. It is deposited as cash, so I still have to invest it on my own, but it makes the amount of cash that comes out of my paycheck or savings less than I would otherwise need to fully fund my Roths each year. That's my primary credit card, and I got about $200-$300 annually deposited into that account while I was a single girl in law school. As a married girl with a husband who uses the card and a good job, the rewards are now higher. It's been really great for us.

Obviously, the credit card thing only works if you pay your cards off in full each month. But if you do, it's a great deal especially when you need a little help boosting your Roth contributions. As far as I know, Fidelity is the only investment bank that offers this. Schwab used to, but they stopped for some reason.

Roth IRAs have an annual maximum contribution limit of $5500/year. It will probably stay the same for 2015, but it might go up. When the limits increase, it always increases by $500/year. Do your best to max this out. You will thank yourself in retirement.

hoffse · January 2014

Oh one other thing - you actually have until Tax Day (Apr. 15) of each year to fund your Roth for the previous year. So if you can find it in your budget to contribute over $5500 for 2014, do what you can to fund your 2013 Roth before April. Then after April work on your 2014 Roth. That will let you contribute a bit more than the maximum for this year.

Again, doing that in your 20's is crazy-valuable. If your regular debt is under control, I would probably make this my #1 financial goal for 2014 since you are in a unique position right now to over-contribute by doing a catch-up for 2013 as well.

anssett · January 2014

hoffse said:

Oh one other thing - you actually have until Tax Day (Apr. 15) of each year to fund your Roth for the previous year. So if you can find it in your budget to contribute over $5500 for 2014, do what you can to fund your 2013 Roth before April. Then after April work on your 2014 Roth. That will let you contribute a bit more than the maximum for this year.

Again, doing that in your 20's is crazy-valuable. If your regular debt is under control, I would probably make this my #1 financial goal for 2014 since you are in a unique position right now to over-contribute by doing a catch-up for 2013 as well.

You have to actually open the account during the current calendar year. So if she wanted to contribute for tax year 2013, but she hadn't opened a Roth IRA account yet (1/3/14), she'd be stuck contributing to tax year 2014 since it's a new account. Once the account is open you have until April 15 of the following year to contribute funds for that tax year.

hoffse · January 2014

Ah thanks, anssett - I didn't realize that.

Well PSA for anybody who had one in 2013 that's not fully funded! You can still do it!

jtmh2012 · January 2014

My financial advisor says to contribute to a 401k up to the max, then max out a Roth IRA, then return to the 401k. So in your case, just start with the Roth.

MommyLiberty5013 · January 2014

I have had my IRAs with Vanguard. They are very easy to do business with. Their phone and website customer service is great. Also, they have no-load funds, which means you do not have to pay fees annually for them to manage your stuff (not all their funds are this way, but many are). Ditto the PP who suggested to go with an Index Fund (these are compilations of funds from various industries). The idea with these funds is that the diversification is already done for you.

Many investment companies have little "quizzes" you can take online to assess your risk tolerance and retirement needs based on your approximate retirement year.

hoffse · January 2014

OP, I might also look and see which investment banks have branches in your area or a nearby city you visit relatively often. Every once in awhile I like to go in just so I can talk to somebody face-to-face. My city has physical branches for Schwab and Fidelity, so those were the two I was considering when trying to choose. Fidelity won for me primarily for the credit card deal.

IAmSherlocked · January 2014

Thanks guys, that is a lot to think about. Bummer that I missed out on opening up an account at the end of last year, but hey, if I start now it gives me until next April to meet that maximum $5,500 so that’s something at least.

I took a few of those investment personality quizzes and most said I had an average/slightly above average risk tolerance, and I think I will go with one of those Target Date Fund things just to keep things simple, at least for now while I'm still learning.

I’ve been looking online and at the moment feel torn between Vangaurd and Fidelity. I’m leaning towards Fidelity mostly because there are a couple of offices nearby (well, they’re about an hour away, but still local if I decide I want to actually go in, which I probably will at some point), and also they don’t seem to have a minimum amount required to open an account (a good thing in my case, I think).

Hoffse, that AmEx deal sounds pretty cool, I may have to look into that. My dad works for Visa though, and I’m pretty sure he would kill me if I ever got a card that was anything other than Visa, haha. It may just have to be my little secret if I do get one of those.

Thanks again everyone, you guys have been a great helping a little noob like me!

hoffse · January 2014

Well... Fidelity has a Visa rewards that gives you back 1.5%. Not as sweet a deal as the AmEx, but it's still better than most rewards, and it still goes into your retirement.

I actually have one of each, and I use the AmEx where it's accepted and the Visa where it is not.

IAmSherlocked · January 2014

I was just reading about the Visa actually, I may think about opening up an account. Sounds like an interesting deal, that's for sure!

Mom987 · January 2014

This might be common sense, but I'm wondering. For those who max out the Roth IRA, do you automatically have $458.33 transfered to that account every month? Or, do you control it monthly and sometimes there's more, sometimes less, but always totaling $5,500/year max? Thanks!!

hoffse · January 2014

I actually just fund ours once a year. I started my job in 2012 and had a huge loan to pay back to my parents almost right away. So I ended up funding mine and H's 2012 Roths in April of 2013. We got married on April 6, and I funded them on April 9.... I got it in just under the deadline. I didn't want to jinx the wedding by funding his early... I funded our 2013 Roths in October of 2013. I think I'll probably fund our 2014 Roths in July or August.

My goal is to eventually get it so I can fund them in full in January, instead of waiting until the middle or the end of the year. That basically give us an extra year of growth for each contribution.

I just hold it in savings until I'm ready to make my contribution for the year. I like to know that if something catastrophic happens I have plenty of cash on hand. So once I cross a certain dollar threshold in my savings, I fund them.

Xstatic3333 · January 2014

Mom987 said:
This might be common sense, but I'm wondering. For those who max out the Roth IRA, do you automatically have $458.33 transfered to that account every month? Or, do you control it monthly and sometimes there's more, sometimes less, but always totaling $5,500/year max? Thanks!!

I'm not quite maxing out yet, but I make my contribution manually each payday. I'm paid biweekly and don't keep a huge buffer in my checking account (everything goes straight to savings or debt) so automatic deductions don't work great for me.

ETA: I always contribute at least the 5% my employer matches, but more when I can.

Rainzzzy · January 2014

@Mom987 I fund my Roth through my paychecks. My husband doesn't have the option to do this through his employer so I treat funding his Roth like another household bill therefore I transfer $500 a month from our checking to his brokerage account and once that posts I have him log into his account and purchase shares in a mutual fund within his Roth account. One month out of the year I don't fund the account (since by transferring $500 a month it takes 11 mos to hit the max of $5500). Generally the skip month is December just because we seem to have so many other expenses that month. I like funding his account monthly because otherwise it might be tempting to use that $5500 on other things, Plus seeing as how well the market did last year it is good to have the funds in the market as soon as possible that way we could experience the most return. Some months I look at the amounts that we pay into retirement every month and groan as it is so grueling, and I can get how some people aren't willing to aggressively save as the delayed gratification is tough. But I really do believe in paying yourself first, and that the bills of the future are just as urgent as the bills due this month.

mbecker03 · January 2014

Some food for thought on whether a Roth or Traditional IRA is the way to go: http://momanddadmoney.com/traditional-vs-roth-ira-for-young-investors/

Roth IRA?

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