Contribute to a Roth IRA Today

By in Advanced Investing, Asset Allocation, Automatic Saving, Investing | 12 comments

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For whatever reason, I find talking about Roth IRA’s boring. Nevertheless, they are an unbelievable way to amass great wealth. To minimze the disomfort of talking about the subject, I’m going to give you the Cliff Notes Version.

INVEST IN A ROTH IRA

Background; I’m one of those finance nerds who started investing in my 20’s and have not stopped. I was decades younger than the other attendees at my first retirement investing seminar. When a way to invest and save taxes came up, I dove in! Thus, as soon as self directed IRAs became accessible, I started contributing the max. When I met El Carino in my mid-20’s, after just a few months of dating, I got him to contribute to an IRA as well.

This article will tell you why you must contribute to a Roth IRA and how to do it.

WHAT IS A ROTH IRA?

According to Money Chimp a Roth IRA is a tax advantaged investment vehicle which allows your money to grow over the long term and only get taxed one time! You put money in an investment account after taxes, invest it in your preferred investments, and pay zero taxes as the money grows and zero taxes when you take the funds out!

That’s correct, you pay no taxes at retirement when you withdraw the funds.

HOW MUCH COULD YOU EARN?

Assumptions:

Put $5,000.00 in an investment account once every year from ages 25 to 65.

Invest in 3 funds:

40% in Vanguard Total Stock Market Index Fund (VTWMX)

40% in Vanguard FTSE All World ex-US Index Fund (VFWIX)

20% in Vanguard Total Bond Market Index (VBMFX)

Earn an average return of 7% over 40 years.

At age 65 your investment account will be worth $998,175.56

When you withdraw the funds, you pay zero taxes.

HOW TO SET UP A ROTH IRA?

Contact a discount broker such as Vanguard, Fidelity, Charles Schwab, Etrade, or other.

Either on line or by phone, follow the required steps to set up the account.

Transfer money into the account either directly from your bank account, paycheck, or mail a check (very old school).

Choose the funds and indicate your preferred percentage for each one. Instruct the brokerage to transfer this money and future contributions into your funds.

WHAT IF I DON’T HAVE $5,000.00 PER YEAR TO INVEST?

No worries. Invest any amount you can. Start now, and set up an automatic transfer every month. Increase the amount as your income grows. Check out an online calculator to find out how quickly even small amounts can grow into large sums over time.

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What type of retirement accounts are you using? What asset allocation do you prefer?

image credit; newsusacontent

    12 Comments

  1. There are great benefits for a Roth Ira, however I would max my IRA first because of the immediate deferred growth. I max out my 403B, IRA and Roth IRA.

    krantcents

    December 16, 2011

  2. I see you recommend Vanguard Funds. They are my favorite place to invest. Their low fees are the best.

    Dave@50plusfinance

    December 16, 2011

  3. Thanks for the reminder to get more into my Roth! I also fund my rollovers and 401k. Which do you think should be maxed out first? Roth or 401k’s?

    Buck Inspire

    December 19, 2011

  4. Not to be too picky, but at age 65 that $998K won’t have the purchasing power that it has today!

    That said, if you and your spouse EACH contribute $5K into a Roth IRA each year, you’ll have a solid foundation for your retirement. $2 million, even in 40+ year future dollars, should be a respectable sum of money.

    Paula @ Afford Anything

    December 19, 2011

  5. @Krantcents-The more you can contribute to any tax favored retirement vehicle, the better off you will be in the future!
    @Dave-Vanguard has great offerings. For those who can’t meet the minimum investment amounts, Schwab has good offerings as well.
    @Buck-Your question is a good one for one of my Wednesday “Reader Question” series. That’s not an easy question. The key is to keep funding retirement vehicles as much as possible.
    @Paula-Not picky at all, but accurate!!! Inflation is a killer.

    Barb

    December 19, 2011

  6. Any particular broker you would recommend, personally?

    Whitney

    January 29, 2012

  7. Hi Whitney, I have accounts at the following discount brokers; Vanguard, Chas. Schwab, and TD Ameritrade and am happy with all three. You might want to check out http://www.findthebest.com (where I am a reviewer) to check out the reviews on discount brokers. Best of luck and feel free to subscribe to the Wealth Tips Newsletter (top right of site) and you’ll get a copy of my free investing book.

    Barb

    January 29, 2012

  8. Ok now I need to start putting money aside. I will sit down with my wife this weekend and have her read this. Thanks Barb.

    I am tweeting this too.

    Jai Catalano

    February 18, 2012

  9. I’m a big fan of the Roth to lock in a tax treatment. I make sure to max out a 401(k) and a Roth every year. Good to know Old Nick will have a few bucks laying around…

    Nick

    February 19, 2012

  10. Jai, The younger you are and the earlier you start the easier it is to amass great wealth. Good luck.
    @Nick, You are on the right path. We have done whatever it took to fund our retirement accounts from the get go.

    Barb

    February 20, 2012

  11. I have always thought about my retirement from the very beginning, really can’t depend on others for my living.

    Jessica Allintone

    May 3, 2012

  12. Jessica, Wise thinking. It never hurts to take charge of one’s own life.

    Barb

    May 3, 2012

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