Roth IRA; What to do after it is maxed out?

[dpechal]

Hey guys,

First off I am new to the boards, so just wanted to say a quick hello.
I have been doing some research about saving for retirement and I came across the Roth IRA (Fidelity Website). Now I have noticed that you can contribute up to $4000 (07') and $5000 (08') my question is after I match the max contribution what are my options after it is full? Now I have googled and did my research so go easy on the flaming. Also I am 100% brand new to investing and savings plans. So any advice would be greatly appreciated.

Thanks,

DPechal

[skydivingchic]

Does your employer have a 401k plan? If so, you need to find out what (if any) matching contributions they do. If they do match some of your contributions, enroll in that plan and contribute at least enough to capture their entire match - that is free money.

After you have captured their entire match and maxed out a Roth, you can start upping your 401 deferral. General recommendations are that you set aside 10-20% of your income for retirement. How much is determined by your age and current savings.

Do you have any emergency fund? If not, that can be another goal for you. Depending on your situation, 3-6 months of expenses should be saved up in a safe place (for example an online savings account by Emigrant, ING, or similar) and used only for emergencies.

[dpechal]

Thanks for the quick reply,

However I do not have an emergency fund. But I will take your advice in having one of those before I even think about opening a Roth IRA or any type of investment.

I also had 1 more question, I read this on another website (googled) "A Roth IRA isn't an investment, per se. It's more like a label put on an investment to identify it as a retirement account." Now with the money you contribute to your Roth IRA, do you actually transfer the money into stocks, bonds, mutual funds? If so how does the IRA account build up?

I am googling and searching forums, but just not getting the direct answers, sorry for any confusion.

Thanks again!

[skydivingchic]

Yes, the Roth IRA simply describes the type of account, not what type of investments the money is held in. With a Roth, you put the money in after taxes are already taken out. The initial investment and all the earnings are tax free. You can't take the earnings out until retirement age (can't remember right now, but you can look it up). After 5 years, you can take the principal out. But as this is generally considerd a retirement fund, its not a good idea to take the money out before retirement.

As far as what type of investments, the money could be in stocks, bonds, money markets, mutual funds, cash, etc. Generally speaking, the younger you are, the more you should have in stocks so that your money has the best chance to grow.

I wouldn't necessarily recommend not investing in a Roth until after you have an emergency fund - it depends on your situation. How old are you? How much extra money each month do you have to dedicate to some type of savings or investment? What are your other goals - buying a house, college, travel, a new car, etc? How much are your monthly expenses? Do you have any dependants?

We need a better picture of your total financial picture before being able to give good, specific advice.

[maat55]

Accually, you can withdraw your contribution into a roth at anytime. You have to wait 5 years and until you are 59 and a half to withdraw any earnings. Example: Say you are 57, you have to wait till you are 62 before you can draw any earnings. Say you are 52, you have to wait until you are 59 1/2. You can draw your original contribution money at anytime.

[jIM_Ohio]

You need to look at whole picture (financially) and then make some decisions from there.

For example, if you make less than 50k and have 5k per year going to Roth, you are saving 10% of your income. That is a GREAT start.

So I would backtrack and ask- are you saving 10% of your income already? If not, look at your gross pay, and make sure 10% of this gets sets aside.

If you have a 401k that is a good choice. If the 401k has a match, that is FREE MONEY which you are not taking advantage of.

Taxable accounts are OK. You could just open a regular account with Fidelity (known as a taxable account). The main issue with a taxable account is Taxes- you will have to pay taxes on distributions the fund makes.

Most investment houses have "tax efficient" mutual funds. They utilize tax loss harvesting and avoid dividend paying stocks to keep distributions low.

T Rowe Price has some which are balanced- 70% in tax efficient stocks and 30% in municipal bonds (muni bonds pay interest, but interest is tax free).

Index funds might also be tax efficient- consider a whole (total) stock index fund (a fund which tracks the Wilshire 5000 index is my suggestion).

I utilize my 401k (I put 11% of my paycheck there)
I max my Roth (I put 5k per year there)
I have a taxable investment in PRPFX. I use this as a secondary emergency fund- has more risk than a money market account and CDs, but much much less risk than most stock investments.

[Scanner]

If you have an emergency fund and you have maxed out your Roth and you still need some tax insulation because you have no 401(k) and you are not self-employed, I recommend muni bonds.

That being said, I would recommend going higher risk within your Roth's since bonds are generally conservative investments.

Lets say you made 80K and you had 10K to save.

$5000 to Roth, maybe something like Janus 20 (risky but high reward)
$5000 to muni bond fund for your state, to escape taxation on profit.