Questions about opening up a Roth IRA

[brig2221]

Hello all,

I have a few questions regarding opening up a Roth IRA. To give you a little background, my wife and I have a good amount of money (for our age) in our respective 401k's, and both contribute 15% pre-tax.

We also have about $225K in cash savings sitting in two separate bank accounts earning less than one percent interest. I LOVE having that much money in liquid savings for peace of mind, a (large) security blanket. However, we haven't made any money on it for the past 4-5 years given the ultra low interest rates. I'm thinking I have to start utilizing that money in some way, so I thought about investing in Roth IRA's.

Background information out of the way, here are my questions:

1) Can I still fund a Roth IRA for 2013? For some reason I have it in the back of my mind that you can still fund for 2013 up unil tax time?

2) I know there are yearly contribution limits somewhere betweeen $4K-$5K. Would and could I setup two separate Roth IRA's for my wife and I, and thus fund up to $8K-$10K in one shot?

3) I know the huge benefit of investing in a Roth IRA is that you will be able to withdraw the funds at some point tax free (under current law). Once a Roth IRA is opened up and funded, what are your options as far as pulling money out if needed? Do you suffer IRS tax penalties for doing so, or is it like any other investment vehicle where you can liquidate at any time without penalty?

4) What are you thoughts on investing into the market now at it's all-time high? I view 401K's differently (right or wrong) in the sense that it comes out of my check before I see it, and I also get matching contributions from my employer. To me, the money in my 401K is mostly out of sight and mind because I know I won't be accessing it for another 20+ years. The money we have worked hard to save above and beyond what we contribute to our 401K's, I view very very differently. It absolutely kills me to think about putting that money into a vehicle (stock-market) that can and often has declined in value, potentially significantly. In summary, I have a lot of apprehension in investing in the market now at all time high's. I would like other's feedback and thoughts on this.

[MonkeyMama]

1 - Yes, you have until April 2014 to fund 2013 ROTHs

2 - $5,500 per person, so you can set aside $11,000 total for 2013

3 - If you take before a certain age you will pay taxes and penalties on the growth in the account. There are some exceptions. You can take out the money you put in at any time.

4 - Two comments on the high market. If you are young, this is moot. If you have many decades to ride out the market, then today's stock prices should not matter. Also, if you start contributing to your ROTH each and every year, you will be dollar cost averaging into the market and smoothing out some of the volatility. You have like 14 months to make your 2014 contribution, too. If you want to wait it out and see if the market drops a bit, go ahead. (Just be aware that it might not drop at all, and so you may be stuck buying higher).

Another overall comment. If you have a bunch of money sitting in cash with no real purpose, then shifting it over to ROTH accounts is wise idea. ROTHs are little more than a tax shelter. If you want to keep your money in cash and move it over to a ROTH, you can. It would kind of defeat the purpose (since you would not expect to save a lot of taxes when it comes to these low interest rates). But, this is some middle ground until you feel more comfortable investing the money.

[feh]

4) What are you thoughts on investing into the market now at it's all-time high? I view 401K's differently (right or wrong) in the sense that it comes out of my check before I see it, and I also get matching contributions from my employer. To me, the money in my 401K is mostly out of sight and mind because I know I won't be accessing it for another 20+ years. The money we have worked hard to save above and beyond what we contribute to our 401K's, I view very very differently. It absolutely kills me to think about putting that money into a vehicle (stock-market) that can and often has declined in value, potentially significantly. In summary, I have a lot of apprehension in investing in the market now at all time high's. I would like other's feedback and thoughts on this.

Seems to me this is a case of mental accounting. The money going into your 401K is for retirement, as is the money going into an IRA. I don't know why you would treat them differently.

[srblanco7]

I think monkey mama nailed it with the response. Note that their are income limits for Roth IRA of $112k single and $178k for married. You can do partial contributions up to $127k single and $188k married. If you are over those limits, I believe you can open a non qualified traditional IRA (no income limits ) and roll the money into a Roth IRA (back door approach).

There are also exceptions to early withdrawal penalties for higher ed expenses, first time home purchase, and certain medical expenses.

[brig2221]

Hmmm, did not know there were income limits. We are over (this year anyway) the limit for eligibility

I miss the days of 5% interest rates!

[srblanco7]

Indeed. But without QE, I'm not sure where the economy would be right now...

Look at the "backdoor" option (example http://www.nerdwallet.com/blog/inves...how-to-guide/). No income limit there...