Why a Roth IRA?

[billybob]

Can someone explain to me why I need a Roth IRA in addition to the 10% I am currently contributing to my 401k plan?

Should I reduce my 401k contributions to, say, 6% and put the rest in a Roth IRA?

If so, why?

Thanks!

[sweeps]

One advantage of contributing some of your retirement money to a Roth is that you are hedging your bet on taxes. Some people predict that tax rates will have to rise over the next 20 or 30 years (due to the federal deficit, etc.). If that's true, it will be better to pay taxes on the money now, and withdraw your earnings tax-free at retirement.

A 2nd advantage is that IRAs give you a much broader choice of investments than your company's 401k plan.

A 3rd advantage is that you can withdraw your contributions at any time. (This can be a bad thing though, since you really shouldn't tap into your retirement funds except in true emergencies.)

Having said that, I think people are a little too crazed about the Roth. Funding your Roth is not nearly as easy as funding your 401k since you (and not your employer) does the work. Also the guess on whether taxes will be higher in the future is purely a guess. They could be the same or they could be lower, who knows. Also for someone who is in their peak earning years, paying taxes later will probably be a better choice.

If you're putting as much as you can in your 401k, and are invested in a diversified portfolio, go with it and don't overstress about it.

[Ima saver]

I would open up a no load index fund and put part of my money into a roth ira. It is really easy to do and you can withdraw the money tax free when you retire.

[Fern]

I would continue to contribute at least the minimum needed to get any company match on the money in your 401k...that's something the IRA can't give you. Both the IRA and 401k are tax-deferred vehicles, so either one is good, i think, altho as sweeps said, one advantage of the IRA is that you have much more choice about where to invest the money, whereas at work you are limited by your company's menu of choices.

[billybob]

where should i go to open a Roth IRA? Which is the best option? is there a minimum investment to get started?

[Ima saver]

I would suggest that you open an IRA with a bank until you get the minimum to open a roth IRA with a mutual fund. I would suggest Vanguard Index 500 which has a minimum of $3000 to open it.

[Fern]

A Roth IRA is only the vehicle you use to make your investment. The actual investment could be something as simple as a bank CD, a mutual fund, an annuity or stocks. It depends on your tolerance for risk. A good bet would a stock oriented mutual fund with a well-known, no load fund family such as T rowe Price, Fidelity or Vanguard. (Be careful with Fideltiy as not all their funds are no load.) Index funds are fine if you want a broad stock basket of large cap stocks.

[CJsoccerchic]

So a traditional IRA is pre-tax savings and then after a certain age, you have to pay taxes on the money you put in when you were younger as well as the interest that it has earned?

[sweeps]

Originally Posted by CJsoccerchic

So a traditional IRA is pre-tax savings and then after a certain age, you have to pay taxes on the money you put in when you were younger as well as the interest that it has earned?

Maybe an example would be helpful. Let's say you have $1,000 of pre-tax money to contribute, and let's say it will grow to 10 times that by the time you're ready to take it out. Let's also assume your effective tax rate is 20% both now and in the future.

In a 401k or traditional IRA, your money goes in untaxed so you deposit the full $1,000. It grows to $10,000. Then you withdraw it, paying $2,000 in taxes, for a net return of $8,000.

In a Roth IRA, you're taxed up front, so you deposit $800. It grows to $8,000. You can withdraw that amount without paying tax on it.

[CJsoccerchic]

So either is fine and in the end either one will yield you the same amount of money... Which on would you prefer sweeps?

[sweeps]

Personally I put everything in my 401k. It's convenient and I like the investments my employer offers.

However, I think the ideal scenario is to contribute some to your 401k (or traditional IRA) and some to your Roth. The reason is tax diversification. You don't have to make any guesses about what your tax situation will be in the future. You've hedged your bets either way.

Also you get more flexibility when it comes time to withdraw. For example at 60 you may be better off withdrawing from your Roth and holding off until 70 to start withdrawing from your 401k, or vice versa.

[SuzeOFan]

I'm with Ima Saver.

There are so many plusses to a Roth it's hard to know where to begin.
But the key is to BEGIN one now asap! It's really a no-brainer. Your still young. Even if you only contributed $4000 now to your Roth and that was it. You'd still have quite the sizable pot when you turn 59!

Right now, the limited contribution is $4000/year. (That's roughly $333/mo. if you want to max it. With what you make a year, and being single, you shouldn't have much difficulty in socking away that kind of money. AND since you are interested in buying a home someday, there is a first-time homebuyer allowance built into it.

Read what Suze Orman has to say about Roths at Yahoo Finance.
Her advice has changed my life.

Her advice: "It's just plain nuts to not take advantage of a Roth IRA."

401Ks are just ok. And then - only if your employer is matching your contribution. 401Ks are only tax differed. That means Uncle Sam's gonna hit you with his best shot later when you want to take it out. The big difference between them is the Roth is TAX FREE upon withdrawl.

The future of taxes? Does anyone really believe that given the war, the trade deficit, social security and medicare running out etc. etc. ....that there's a chance congress will ever lower taxes? On the contrary. You can bet your bottom dollar taxes will not only go up... but these will look like the good ol days....!

The more you learn about the Roth IRA the more you will love it.

And when you marry someday, you and your spouse will be able to contribute a total of 8,000/year until 2008 when it goes up to $5000 apeice.

New Flash: The Roth IRA may only be available until 2010 when it's up for a revote before congress. That is why so many companies are hesitant to offer the Roth 401K to their employees. The future is uncertain.

I personally like Vanguard. They want $3000 to open a Roth Index Fund.
(I chose a REIT Index Fund, but wished I had started sooner!) And they only charge $10/year if your fund carries a balance of less than $5000.

My Advice: Start your Roth today! You won't regret it.


The Roth IRA: As Close to Perfect as You Can Get

A Suze Orman exclusivehttp://biz.yahoo.com/pfg/e28socsec/art021.html

[sweeps]

Originally Posted by Sweepsplayer

I think people are a little too crazed about the Roth.

I rest my case.

[Ima saver]

Good advice, suze and now I know where you got your name!!

[sweeps]

Suze Orman and other financial "gurus" do people a major disservice by selling people their one-size-fits-all advice. Please do not take their advice as gospel. Everyone's situation is different.

[SuzeOFan]

Hi Sweepsplayer,

Of course everyone's situation is different. And I would like to qualify that no one should depend on only one source of information for *anything*. That applies to listening to just one doctor when your health is at stake, or getting only one point-of-view when your financial future is at stake. Today, you have to be your own best expert on just about everything you're seriously interested in. And that means getting informed from every source you can find.

I like Suze Orman for many reasons, but most of all because she was responsible for getting me (a woman of all things!) interested in knowing more about (what is for many) a very dry, and seeminly complicated subject: Finances! :

Having said that, I am now hungry for knowledge. I read every news article, every financial column I can read off the internet, the IBD that my husband subscribes to...anything I can get my hands on that will broaden my knowledge about anything having to do with finances and saving money.

This has been a big step for me. One I probably wouldn't have taken had I not come accross Suze while perusing Yahoo Financial. She just made it so clear to me - I had to know more!

But I wouldn't say she is doing anyone a disservice. The knowledge is out there for the taking. It's our choice whether to use it or lose it.

[akaivyleaf]

Gotta agree with you. I don't take one person's advice as gospel, but its piqued my interest to find out more for myself. Now the thing I've discovered is that all the guru's speak the same thing, so there must be some truth in what they say if they all agree. Its up to me to try it, and find out what works for me and that is what I've been doing consistently and wholeheartedly for the past 5 years now.

[sweeps]

Listening to Suze and company for inspiration and a starting point for own your financial research is fantastic -- I have no problem with that. But let's be honest, there are people out there who just take their advice and run with it. It makes me cringe whenever I hear someone say "Well Suze (or Dave Ramsey or whoever) said to do XYZ, so you should to!"

[Ima saver]

I started reading money magazines and listening to all the financial guru's, but i make my own decisions. I feel Roth Ira's are a smart way to go!

[CRFSaver]

Part of it depends on your tax situation, cash needs and time till retirement. Remember to look at the present value of a dollar. Think about how long that (in my case) extra 28 cents on the dollar can compound over 30 years. You lose that with a roth IRA as you pay your tax up front. Even if tax rates remain exactly the same over the next 30 years, you will better off with a 401K plan if you are in the higher tax brackets.

Just doing a simple fv value calculation with the assumption of 100 put into either a Roth or 401K per month, 6% yield compounded monthly, for 30 years, if the marginal tax rate today and in 30 years are both 28% you have an extra 20,352 dollars (after tax) by putting it into the 401K. 200 dollars a month and the extra dollars double. Thats also assuming you took out everything after 30 years and not a little bit at a time like most people do.

The major advantage I see with a Roth is it allows you to pull out your contributions (but not earnings) so if you needed those funds for a house for example. I still think you are better off with a 401K especially if you have many years till retirement. Remember in a 401k, most of the time the employer is paying the administration costs that you cover in an IRA.

Just some things to think about.