Roth IRA

[Gatores]

Just wondering if anyone has any tips on getting one started. I just dont really know where to start or who to trust. I know you can do it online, but is that a good option or do I go to a brokerage firm? Any insight or advise would be appreciated.

Thanks

[caseymcq]

Have you exhausted/maxed-out contributions to a tax deductible retirement account? If you haven't you may want to look into that first.

Roth IRA's are accounts that you contribute post-tax money too. If you can contribute to a 401K, (traditional)IRA or some other pre-tax retirement account you could potentially gain additional tax savings. Because the money would go into the account pre-tax depending on how much you earn and how much you contribute, your contributions to a pre-tax retirement account could possibly put you in a lower tax bracket and essentially ease your tax burden.

If you can get access to "Personal Finances for Dummies" there is some good, simple, easily understood information on retirement accounts in that book.

I would reccomend going through a firm if you aren't too terribly savy on IRA's. Ask around, do some research on the internet and/or pick up a few books. You should be able to find a reputable firm/advisor.

There is information available that would help. The book I mentioned is actually a good starting point. Don't let the title shy you away from it, it isn't meant to be demeaning.

[tacklejunkie]

both my wife and i have both a roth and have maxed out our 401ks. like casey said, find a firm and work through them. i would name the company both my wife and i go through but it may get a warning by moderators. i have read that if you really dont need the tax savings now the roth is the way to go. its free from fed taxes when you retire

[caseymcq]

i have read that if you really dont need the tax savings now the roth is the way to go. its free from fed taxes when you retire

I forgot that. TJ made an excellent point there. That is why it may be a good idea to talk to an advisor so they can assess your financial situation and give you some recommendations on what would make the most sense for you.

[Sandmannd]

I work with a company that does Roth's and other investments. Roth's are great. Actually, even if you do have a 401K at work, only put the money in that your company will match. Anything above that take to an outside firm. You are just better off that way. It's nice to have the money taken out pre-taxed, but you will get taxed at the time you retire and need to start pulling out. If you invest post-taxed money, you may get taxed on the earnings, but they can't tax you on your original investments as they have already taxed you on it. There are so many programs out there to help people setup a nice nest egg. I would recommend getting out and talking to people in the financial area. I'm always willing to discuss options with folks. I work for Equidy Leadership Group in Woodbury. You can look it up and ask for Shane.

Tacklejunkie, you can list the name of the company you go through, you just can't give their web addy/phone number or any contact info per the forum rules.

[BoxMN]

Sandman, great advice. The other thing that is very nice about a Roth, other than what you guys have already stated, is that it is a really safe option that can (although you don't want to ever need it) use it like an emergency fund. As you can take out whatever you invested penalty free should the emergency need arise. I.e. lost job, sickness, etc. Again, you don't want to do that, but it is easiesr and less costly to get at than a 401k, etc.

[PerchJerker]

Actually, even if you do have a 401K at work, only put the money in that your company will match. Anything above that take to an outside firm. You are just better off that way.

I'm sorry but I have to strongly disagree with you on this point. In almost every situation it is better to put off paying taxes as long as you can --- in other words max out your pre-tax investments before you go to post-tax investments. These two examples illustrate why:

If you invest in a pre-tax 401K, and you put $1,000 of your wages into, that full $1,000 is out there compounding and growing. You are correct that you will pay taxes on it when you take it out, but you pay no taxes on it now so that full $1,000 of wages is out there working for you and growing.

In contrast, if you take those $1,000 of wages to a post-tax investment, it's only worth $650 to $700 after your taxes. So now you have $650 to $700 out there working for you, compounding and growing. A smaller start to your investment, and over time a much smaller nest egg when you retire --- although like you say there are no taxes on it when you take it out. Another way to agrue this point is that you could invest $1,000 in a post-tax investment, but the problem here is you will be using almost $1,500 of your pre-tax wages to do it. So you either start with a smaller investment compared to a pre-tax investment, or you spend more money to have the same size investment as a pre-tax investment.

That is why it's always better to do as much pretax investing if you can (the only exception being if you have essentially no after-tax savings or investments to draw on if needed). Deferring your tax payments and investing for a longer period of time are the investors two biggest allies. Roths are great, they just shouldn't take the place of pre-tax investments.

There are tax strategies you can use to minimize the taxes on your 401K when you take it. It will likely comprise the majority of your income at that time and you'll probably be in a lower tax bracket. A good tax advisor will come up with other strategies for you live comfortably, draw on your earnings, and minimize your taxes. The longer you can put off paying your taxes, the better for your finances.

[theoilman]

Look at your current earnings versus your anticipated retirement earnings.

With a Roth IRA, yes you pay the taxes on it out front - the year your make the contributions, but when you withdraw it ALL of it is tax free - for paying the tax on it out front, the IRS gives you all the earnings tax free! (I don't believe anyone else has made this clear in this thread.)

[harvey lee]

You are correct Don, with the Roth, your money is tax free at withdrawal. Thats alot of tax on the growth for over 30 years that one will not have to pay like you would with a 401.

[Sandmannd]

Look at your current earnings versus your anticipated retirement earnings.

With a Roth IRA, yes you pay the taxes on it out front - the year your make the contributions, but when you withdraw it ALL of it is tax free - for paying the tax on it out front, the IRS gives you all the earnings tax free! (I don't believe anyone else has made this clear in this thread.)

Yep and that's why I stand by my first comment that you should only put in what your company matches in your 401K. Their contribution is free money so it's nice to have. Other than that it's better to put it where you won't pay taxes on your earnings over the years. There are many models you can run to show you the differences and it's huge. Another thing, if you are young, I would encourage you to save now. If you only saved a little money every month from when you are 18 till 25, you would be set for retirement. Once you get over 25 if you haven't saved anything you have to save the rest of your life to get up to what you would have had in those first seven years. Compound interest is a wonderful thing.

[PerchJerker]

You are making a mistake. Or ...... may be making a mistake depending on circumstances.

Putting money in a tax-deferred investment like a 401k and not paying the taxes until you retire will ALWAYS ALWAYS ALWAYS EVERYTIME give you MORE MONEY in the end, compared to shifting it to an after-tax investment like a Roth IRA.

It is basic math and compounding interest. It is not an opinion, or something that is true only part of the time.

A Roth IRA could be a better option if you are worried about needing the money early or are paranoid that income tax rates are going up or something like that, but it will not give you as much money in the long run as tax-deferred investing.

[harvey lee]

While one tries to figure out which plan to use, remember one thing, when and if the goverment needs a little extra money they could very easily change the tax laws and tax both programs and even at a higher rate than thought.

Its best to save all one can but one can only guess what the outcome will be as the rules seem to always change. Use Social security as an example. Changes all the time.

If our goverment wants us to save for retirement and not depend on SS, they should allow all citizens to save all they can at a tax free rate. Never happen but boy would people max out there savings then. It would not matter what you recieved from SS.

[Walleye Guy]

PerchJerker,

I completely disagree with you. You cannot make a statement that says pre-tax investing (401k & IRA's) is ALWAYS better than after tax investing (Roth). In some cases it may be. In some cases it may not be. One big factor on which is more appropriate is your current tax bracket and the tax bracket you plan to be in when you retire. Some people are actually in a higher tax bracket when they retire than when they are working. Small business owners and people who start investing very early some time fall into this group. If that is the case you will pay more taxes on the pre-tax investment gains when you withdraw them then you would have paid if you paid them up-front when investing in a Roth.

I understand your point about the growth and size of the account but you also need to keep in mind that ever dollar in growth of pre-tax investments is taxed when you withdraw it. Yes your total will be bigger because you invest more to start, but your tax bill will also grow at the same rate.

The bottom line is that each individual investor should do their homework or better yet meet with a professional, certified investment adviser. You need a plan that is well thought out and that factors in a multitude of factors.

[Jaspernuts]

My financial advisor said the same thing, get the free money out of you company and max out the Roth. This is what these people do for a living and they are the experts.

[PerchJerker]

Yes your total will be bigger because you invest more to start, but your tax bill will also grow at the same rate.

[Gatores]

I guess I have figured I want a Roth I was more looking for ideas on where to go to get it started. Like do I go to the local Edward Jones or has anyone started one online like through a Ameritrade or Fidelty type sites. Just didnt know if it could be trusted to do something like this online. Sandmann I was going to give you a call here after the 4th, but I do live in North Dakota and didnt know if that was a big deal or not.

[Walleye Guy]

You don't get my point. You used the term Always three times and Every once in describing the results. You are correct in that the pre-tax dollars will get you a bigger gross number over time given the same investment performance. That is a no brainer. However you are comparing two completely different "numbers". The Roth number is a net amount. The Regular IRA amount still has taxes that need to be paid. You can't fairly compare those numbers on any level. They are apples and oranges. I can draw up scenarios where one outperforms the other and vice versa depending on assumptions regarding current tax rates and those tax rates anticipated in the future.

AGAIN, my point was that every situation needs to be looked at on an individual basis. Some people should be first be investing their extra cash into a regular IRA and some into a Roth.

You state that he is making a mistake by investing in a Roth. How can you make that statement when you have no idea about his complete financial situation? You need to look at the whole picture before making recommendations on his personal financial sitution. Maybe he thinks he will need access to the money without penalty. That option is only available on the Roth.

He asked for help on setting up a Roth IRA. Give him advice advice on that. Let him figure out if that is what he actually needs. He has a better sense of his financial situation than any of us could.

I have 20+ plus years in Finance disciplines and have an MBA in Finance. However I won't use that experience to make recommendations about others financial situations when all I know about the situation is the guy has a desire to open a Roth IRA.

[fish2live]

i started my own. i went with vanguard lookes at the performance of two different funds and compaired them to other companies. seems to be doing ok. a investor friend of mine told me that if you start it young put it in 100% because you have time to recoop any losses if they happen and wait till you have a little bit of money before you diversify. he says this way you get more out of your money.

[upnorth]

I am no expert here, but from the info posted here so far it would seem that what your income levels are going to at be when you retire would play a huge part in deciding where to put your money. The biggest things is put some money into a retirement fund.

Myself, as far as I can tell my income and tax rate will drop when I retire, so the pre tax option should work well for me. I should wind up paying a lower tax rate on the money then as I would now. The only bummer here is the company I work for only offers a 403.b so there is no matching funds.

I am always a bit leery of making a decision based on the schpeal of someone who can or might make money based on my decision, you know they will want to sway you to their benifit. Human greed normally plays a part.

Just like any big $$$ purchase I will not make the decision there in front of the salesman, I would rather go somewhere and talk it over with someone impartial.

[harvey lee]

When trying to figure the tax rate on these programs its tough as they can and will at times change all the rules.

If there is a match at your place of employment, one has to at a minimum put that much in to get that match.

All one can do is save as much as possible and start as soon as one can and never pull any of that money out. Who knows what one will have in the end but we do know it will be more than one who starts late or never starts saving at all.

I believe the biggest key is to start as early as possible.

[upnorth]

Quote:

I believe the biggest key is to start as early as possible.

Amen!! The earlier you start the less you need to put away per pay day. I wish I would/could have started earlier than I did. Now it is a mad dash to put money away so I don't have to work til I am 70.

[JohnMickish]

I am always a bit leery of making a decision based on the schpeal of someone who can or might make money based on my decision, you know they will want to sway you to their benifit. Human greed normally plays a part.

BINGO!

Which one is best? Nobody can say for sure EXACTLY which one will be best 30 years from now, only which one is best for the situation you are in now. Just start one you feel the most comfortable with. For our situation both my wife's financial guy and my financial guy (both are thru work, no cost to us) and the investor guy we pay for have recomended a 401K over a Roth. The biggest key to financial stability is to reduce debt. You can chose to either have interest rates work for you or agianst you.

Heck, if someone can tell me what the rules are going to be in 20 years I'd just have them give me tonights lottery numbers then I wouldn't have to worry about retirement accounts!

[harvey lee]

Thats right, one will not know what the rules are 20 years from now so all one can do is save. It doesn't really matter where you put it as long as you put some somewhere.

[Sandmannd]

I guess I have figured I want a Roth I was more looking for ideas on where to go to get it started. Like do I go to the local Edward Jones or has anyone started one online like through a Ameritrade or Fidelty type sites. Just didnt know if it could be trusted to do something like this online. Sandmann I was going to give you a call here after the 4th, but I do live in North Dakota and didnt know if that was a big deal or not.

Gators, you can give me a call or shoot me an email. I can hook you up with people in the GF area to talk to if you want as well.

[MuleShack]

I thought the old saying was to pay tax later instead of paying it now. Put in 401 Pre tax and have the governments money work for you for 30 years.

[BlueLundFishrman]

The best thing to do is talk to a professional.

Either way you will probably pay taxes on it. It's whether you want to be paying it in the years prior to your retirement, or be taking out taxes when your retired.

Yes, you will have more in the retirement plan if you put in a pre-tax plan, you will just be deferring that tax.

I've heard it's better either way depending on who you talk to. Personally, I would like to have as little tax to worry about then as possible.