I'm clueless about IRAs

[Bob B.]

Well, not completely clueless. I understand the differences between a Roth and Traditional IRA (amount placed in a traditional reduces your taxable income now, and is taxed at withdrawal, Roth does not reduce your taxable income now, but is not taxed at withdrawal time). Also, I know that the limit is $5,500 per person per year, or $11,000 for a married couple. After that I'm clueless.

What prompted this thread is another question about investing in this forum, and the suggestion that to contribute to a Roth IRA one needs earned income.

We've never put money into an IRA. We'd like to put money into a Roth IRA this year. I'd like to put the IRA under my wife's name. (We probably won't go over the 5.5K this year.) My wife is a SAHM. She has no earned income. We file income taxes MFJ. Can we put the IRA under her name?

It's not a huge deal, but all of our retirement fund is held under my name through my work. I'd like money invested under her name.

Also, if someone could, help me understand the mechanics of putting money into a Roth. Monkey Momma mentioned in another thread that we could put it in as cash, and have it available in the future if we needed it. Please, give me a sampling of the investment options.

I know that with my retirement program through work, I direct, and can change the general classes of investment (equities, real estate, money market, etc.) but I have no clue where the money is actually invested. Does a Roth work the same way? We can have all of it in cash, or we can have all of it invested in equities, or we can split it up how we see fit?

I'd like to have a better understanding of the whole process before we visit an IRA professional.

Also, any tips on choosing a professional would be appreciated. Or do we need a professional at all? Can we do this cheaper on-line somewhere.

[MonkeyMama]

If you are married, you just have to have enough combine earned income (need at least $5500 earned income to contribute $5500). So yes, your wife can contribute to an IRA.

You can basically open a ROTH account just about anywhere, and put just anything into it. I would definitely not bother with a professional.

You can just go to bank and open a cash IRA (like a savings account or a CD). I'd probably just start at a discount rboker. We had our efund in our ROTH for a while, and just kept the cash in Money Market Mutual Funds. That way it's simple to shift to equities when you get on better financial footing. I do believe you need $3,000 to open any mutual fund at Vanguard. (Vanguard Star is $1,000 minimum), but might not work for your purposes, if you want to start in cash/keep as a backup emergency fund. If you take online statements, Vanguard charges no fees outside of the expense ratio.

T Rowe, Fidelity, Schwab, are some of the others. They all have different minimums and fees.

The primary difference between IRA and 401k is that 401ks are very limited. Employer generally offers just a few funds from one broker. When you look at any of these broker websites, you will see endless choices for what you can invest in. Once you have the minimum to open an account/mutual fund, you can just set up automatic monthly contributions, going forward.

An IRA is easy peasy to get set up online, once you decide where to set it up.

[Bob B.]

OK. Thanks for the reply MM.

So, if I'm understanding this right, an IRA is just a tool to protect investments from taxes, either now or in the future. Once you invest money under the protection of an IRA, there are penalties that discourage withdrawing that money before retirement age.

So, the investments can be made in nearly any way that any investment can be made. But by labeling the money "IRA" you get the tax preferred treatment in exchange for the age limitations on withdrawal.

Is that close?

[MonkeyMama]

Yes, you got it.

Every tax advantaged account is going to have some *catch* (not just age for withdrawals). So you may want to google ROTHs a bit just to look up all the rules.

[snafu]

The 2nd step is to fully understand fees, Management Expense Ratio [MER} and top ten holdings for any Mutual Fund you are considering. 3rd step as you accumulate a significant amount/value over time, is your choice of allocations. There are several streams you've seen discussed. It helps to read one of the easy to understand popular books like Wealthy Barber or Millionaire Next Door...available from your library.

[MakeAStash]

IRAs are all about tax rates. If you believe your tax rate on ordinary income will be lower during your retirement years than it is now, via a traditional IRA you defer payment of the tax until then. If you believe your rate will be the same or a higher during retirement, then elect a Roth IRA.

Note also that any gain in value while your funds are in a traditional IRA will upon withdrawal also be taxed at your ordinary income rate. As a result, you may actually pay more tax than if you had not put the funds into the tIRA at all but instead invested them outside an IRA.

Why? Dividends and capital gains are typically taxed at a lower rate than oridinary income, but if those dividends and capital gains occur inside a traditional IRA, they are instead taxed at the higher ordinary income rate.

You can avoid this "catch" by electing a Roth IRA instead because there are no taxes on gains on the investments within one.

[creditcardfree]

We put our first investments outside of work into the Vanguard S&P 500 Index fund....and it has done great for us! We have branched out a little more with an International Index fund. We do not use a professional. You can learn so much by reading and participating in forums such as this.

Here's a link to the definition of Index Fund...on pretty good site, too.

[JustBill]

Also, Roth IRAs do not carry an age triggered annual required minimum distribution requirement. In some cases, the RMD on TIRAs may push your tax liability higher than one would like.