KaliRaksha
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Location: Austin, Texas
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I'm 20, in college. I work 30 hours a week. I'm pretty sure I want to start a Roth IRA... but I have NO CLUE what it really is or how it works... or where to go to start one. A professor of mine explained it to me once during class... and I ofcourse... napped in and out of that. Sigh me. Educate me, please!
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Wed Oct 19, 2005 2:00 am |
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auggyf
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http://en.wikipedia.org/wiki/Roth_IRA
http://www.fool.com/money/allaboutiras/allaboutiras.htm
Searching for "definition roth ira" on google leads you to:
A type of Individual Retirement Annuity in which contributions are made with after-tax (nondeductible) dollars. If certain requirements are met, earnings accumulate tax-free, and no federal income tax is levied when qualifying distributions are taken from the plan.
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Wed Oct 19, 2005 5:26 am |
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MattL
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Check out www.vanguard.com Their site will give you all of the info you need and guide you in opening an account. Their costs are some of the lowest available. It's very easy.
If your not sure what to invest in consider an Index fund like Total Stock Market.
Debt Elimination
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Wed Oct 19, 2005 12:24 pm |
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jlee1224
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The beauty of ROTH IRAs, which I believe is one of the best things the government has done, is you put money in every year, let it grow in the investments you want, and when you are in retirement and take the money out, you don't worry about taxes at all. No keeping track of your cost basis, dividends, interest, or anything. Plus, if you should die, Roth IRA's are easily transferred to someone else.
Because you are taxed immediately on your money instead of in retirement (opposite of a traditional), it is better to be in a lower tax bracket now than in retirement. If it is the opposite, you would fare better with a traditional, and take the big tax break now and pay lower taxes later in retirement. If you don't know what tax bracket you'll be in in retirement (and no one really does, the government can easily change tax brackets), then having a mix of a ROTH and a traditional (or 401k, or similar tax-deferred account) bodes well.
Opening a ROTH for you would be awesome, I think. If you're ever in a bind, you can take your contributions out at any time before retirement. Hopefully you can keep adding to it throughout your life and in retirement, 40 years of compound interest will make you very happy.
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Wed Oct 19, 2005 1:27 pm |
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sayyes
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You can also go to any online brokerage (Ameritrade, Scottrade, etc.) and open a Roth IRA account there. It's the same as any other brokerage account, except there is a limit to how much you can put in a year.
Basically, the money you put in a Roth IRA grows tax free. This means you won't pay taxes on the money you withdraw when you retire.
The rules are: 1. There are limits to how much you can put it in per year and 2. You have to wait until you are 60 years old to withdraw.
So don't put money in there thinking you can use it for a house or car in the next five years.
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Wed Oct 19, 2005 2:46 pm |
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auggyf
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Speaking of houses ... the exact rules for QUALIFIED withdrawals (definitely no penalties) are:
- made after 5 years
- you must be
+ > 59.5 years old
+ disabled
+ dead (money goes to your beneficiary or estate, a nice feature to have)
+ your first home, up to $10k
Even if it does not fit in this category, you can also avoid paying any penalties on withdrawals if:
- > 59.5 years old, disabled, dead, first home up to $10k.
- distributions are part of a series of substantially equal payments (I do not understand this one)
- certain medical related exceptions
- certain education related exceptions
- you owe the IRS and are paying them
see http://www.irs.gov/pub/irs-pdf/p590.pdf pg 58 for the word right from the source.
I'm not saying you SHOULD or SHOULDN'T take advantage of early withdrawals, but know that there is some flexibility if it is needed.
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Wed Oct 19, 2005 3:23 pm |
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jlee1224
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I am not sure, but I believe "distributions are part of a series of substantially equal payments" is called a 72t distribution.
I know you can do this with your traditional IRA. Pretty much, you can take regular payments from your IRA on a regular schedule based on your life expectancy. In a traditional, you are taxed as regular, but are not penalized the 10% early withdrawal.
But I am not sure it applies to ROTHs, since you can always take out your contributions without tax or penalty anyway.
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Wed Oct 19, 2005 3:30 pm |
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KaliRaksha
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Location: Austin, Texas
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Thanks for all the help. I ordered a package from vanguard and one from scottrade. I guess I'm a little interested in the mechanics of it, how does it work? How does it grow? I definitely don't plan to take it out for anything but retirement, unless something unfortunate comes up.
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Fri Oct 21, 2005 5:06 am |
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auggyf
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How it works:
- You can put in a certain amount of $ each year (after tax), provided you meet some income limits. Currently it is $4000/year.
- You can choose what kinds of investments to use the money for. If you are at Vanguard, for example, they feature Vanguard mutual funds -- but that still gives you the options of money market, bonds, various stocks, and combinations. Take a look at their Target Retirement 2045, which has what Vanguard money managers think you should invest in if you wanted to retire at 2045 [this allocation will change as you get closer to retirement].
The money should grow because of exponential growth of the economy [or equivalently, compound interest of some expected returns on your investment each year]. Historically, stocks have returns between 10-11% per year, bonds between 5-8% (don't quote me on that), and cash between 2-5% (don't quote me on that either, please). Many people expect inflation to be around 3% / year.
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Fri Oct 21, 2005 5:26 am |
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KaliRaksha
Member
Cash: $ 2.70
Posts: 13
Joined: 29 Sep 2005
Location: Austin, Texas
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Ok I was looking at that... is there any possible way I would loose money...?
I understand that a "Roth IRA" is just really a tax law... but does it still require smart investments from me? (I'm not too sure on what those are yet....still researching)
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Mon Oct 24, 2005 4:45 am |
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sayyes
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YES!
A Roth IRA is just a type of account at a brokerage. You open the account and put money in it (much like a savings or checking account). Once the money is there, now you have to decide what to invest it in, which is where the research you are doing will pay off.
Good Luck!
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Mon Oct 24, 2005 1:04 pm |
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Rolo
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Individual
Retirement
ARRANGEMENT
An IRA is a set of tax laws that treat certain money you specify differently.
It is NOT an investment, it is tax code. Think of it as a container that you put investments into.
"Expect me when you see me."
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Thu Oct 27, 2005 10:20 pm |
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