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How to start contributing to a Roth IRA


How to start contributing to a Roth IRAOut of all my investments, the Roth IRA is my favorite account. Why? It is because I won’t have to pay any tax on the gains in this account. I don’t plan to withdraw until I’m 60 and not having to pay any tax or penalty at that point is a plus. (See the end of the post for the qualification flow chart.) Additionally, if we really need some money due to an emergency, I can withdraw the contribution with no penalty. The Roth IRA will also give us more tax strategy options when we finally withdraw from our retirement funds. We can avoid the higher tax bracket by mixing the withdrawals from both the traditional and Roth IRA.

Previously, I assumed that everyone knew how to contribute to a Roth IRA, but recently I found out that some of our readers would like more information. So today I’ll go over how to start contributing to a Roth IRA.

Save up some money

Before investing in an IRA, you should have enough money to cover an emergency. Most experts recommend enough funds to cover 3-6 months of expenses, but even $1,000 would be helpful. Once you have an emergency fund, then you can save up some cash to put toward the Roth IRA. You probably would want to save up at least $500 to invest in the Roth IRA before opening a new account.

*Note: you can only invest “earned” income in the Roth IRA.

Decide where to open a Roth IRA account

Most financial institutions offer some kind of Roth IRA. Big banks like BofA offer CD and Money Market IRA options. These are very safe, but the rates are pathetically low. Personally, I don’t see the point of investing in these accounts. The big advantage of the Roth IRA is you won’t have to pay tax on the gain. If you only make 1%  a year from your investment, the tax saving will be negligible. I think it’s better to take a bit more risk and invest in the stock market with a brokerage especially if you are young and have over 20 years before retirement.

zero commission on all trades FirstradeHow to open a Roth IRA account at a brokerage

You can open an account at any brokerage, but I recommend a low fee online brokerage. I use Firstrade because their fees are very low. I used them for years and their customer service is quite good. I have been able to get help on the phone whenever I need it. New investors should pay close attention to the mutual fund transaction fee when opening a new brokerage account. The mutual fund transaction fee is usually much higher than the stock transaction fee. For example, Ameritrade charges $49.99 to trade no-load mutual funds. Firstrade now charges $0. You can’t beat that.

Fees at Firstrade

  • Stocks and ETFs: $0
  • Mutual funds: $0

Opening an account

You will need to gather the following information to open a new account.

  • Social Security Number or Taxpayer ID Number
  • Employer’s Name and Address
  • Date of Birth
  • Bank account and routing number (if funding electronically via ACH)
  • For IRAs: Name, address, social security number, date of birth of beneficiary(ies)

Now you are ready to open a Roth IRA. Here is the first page of the application.

Roth IRA

Select the Roth IRA. I would skip the other features for now. You can always add them later if you’d like. The easiest way to fund your account is through electronic funds transfer. After this, just fill out the forms. It should take around 10-15 minutes to do so.

Funding your account

You can set up auto deduction while filling out the forms or you can do it later as well. I like to transfer the maximum contribution amount ($6,000 for 2019) early in the year and invest it when there is a pullback. For many young people, this is a lot of money to invest at once. It might be easier to set up an automatic deduction and invest $200 per month to start.

What to invest in

For beginners, I recommend investing in low fee mutual funds or ETFs. If you add to your investment consistently over a long period of time, you should be able to build your wealth. It’s really great that Firstrade no longer charges a fee. New investors can pick a good passively managed mutual fund and invest $500 to start with. Then add $200 every month without worrying about fees. In the old days, you can’t do that because the transaction fee was so high. Well, it’s still high at most other brokerages. Hopefully, Firstrade will other brokerages to lower their transaction fees too.

For new investors, I recommend putting everything in VTSAX. This is Vanguard’s Total Stock Market Index Fund. The market will go up and down, but don’t worry about it. Just keep investing and you’ll come out ahead in 30 years. Once you learn more about investing in the stock market, you can trade these in for no fee and buy something else.

How to Trade Mutual Funds at Firstrade

You can log on to Firstrade and click on the Trading tab up top. Then click on Mutual Funds, below the Trading tab. Once you are there you can trade mutual funds. In this example below, I asked to buy $500 of VTSAX. The trade will execute at the end of the trading day. Click on preview and then submit the order. See it’s easy to start investing in your Roth IRA.


Why I love the Roth IRA

Let’s summarize why I love the Roth IRA.

  • No tax on the capital gain
  • I can withdraw the contribution at any time with no penalty
  • No RMD (Required Minimum Distributions) You aren’t forced to take your money out if you don’t want to.
  • Pass on to your beneficiary with no tax. Your heirs continue to benefit from the tax-free status.
  • More tax flexibility

If you don’t have a Roth IRA account yet, you should make it a priority to open one. The Roth IRA is a great deal for young folks because over 30-40 years, the earnings can easily grow larger than the original contribution. Why pay tax on these earnings if you don’t have to? Let me know if I can answer any questions. I hope this is helpful for some readers. Good luck!

401k First

Another question new investor has is whether to invest in their 401k or Roth IRA first. I advise them to focus on their 401k first. Max that out and then invest in the Roth IRA second. You can read more here – Should I invest in 401k or Roth IRA?

Related posts

*Sign up for a free account at Personal Capital to help manage your net worth and investment accounts. I log in almost every day to check on my investment. It’s a great site for DIY investors.

Distribution flow chart

Here is the distribution flow chart from the IRS if you want to learn more about withdrawal.

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 72 comments… add one }
  • Harry Thompson November 2, 2019, 11:27 am

    Can I fund a Roth IRA with a traditional IRA RMD?

    • retirebyforty November 2, 2019, 4:43 pm

      You should check with your tax guy. I don’t think you can. Roth IRA is only for earned income.

  • freddy smidlap August 29, 2019, 7:51 am

    i like that flow chart, joe. i think people need to remember that 5 year rule and just get the account open, even if you won’t fully fund right away. i told malevolent missy to just start with 1,000 bucks to get one going and at least that starts the 5 year clock if she wanted some of the money + gains to maybe buy a house.

    i really like that fee structure for firsttrade. it might be time to reexamine ameritrade but now i have 5 accounts open there and never buy mutual funds.

    • retirebyforty August 29, 2019, 10:43 am

      That flowchart is from the IRS. It’s good.
      I think $1,000 to start is perfect. Although, she could start with $500. That’s the minimum for many mutual funds. The fee is great.

  • JBR April 27, 2017, 11:10 pm

    Hi, I am 34 and contribute to my employer’s 401K. I recently opened a Roth IRA and have been contributing $195 every two weeks. However, my husband and I file separately because of my student loans and I didn’t know that people who file separately and make over 10K are basically blocked from contributing. What should I do? I’ve contributed about $585 this year.

    • retirebyforty April 28, 2017, 8:25 am

      I’m pretty sure you can call the brokerage and tell them to reclassify the contribution. You can move it to a regular brokerage account. This should not be a problem. Don’t wait, though. Call your brokerage soon.
      Strange about the married filing separately, though. I wonder why the rule is like that.

  • Smith April 17, 2017, 10:15 am

    Thanks, RB40!

    I just invested $6,500 (which includes the 50-and-over “catch-up” $1,000). I was really surprised that it was an unusual process. I had to talk with three Vanguard representatives before I understood how to do it. (Write a “letter of introduction” to Vanguard and reference all the rules that the good representative told you about. There isn’t an official form — you do it yourself.) Kind of weird, right? I thought so, but it did work. form — you do it yourself. Good luck!

    • retirebyforty April 19, 2017, 8:54 am

      I didn’t have to do that when I rolled my Roth IRA over. Just send in some paperwork. Good luck with your investment. Vanguard is a great place to put your money.

  • Sandy August 5, 2016, 3:37 pm

    Feel too old and have a household income too high for a full Roth. Also, certain that my tax rate will be lower in retirement, so we continue to max out the pre-tax options. Also have some after tax funds to supplement. A Roth seems great for people just starting out. In our mid-fifties I have only considered a Roth ladder when we stop working.

  • 2Broke2Joke January 18, 2015, 6:27 am

    I am 28 and have been considered financially retarded most of my life. I have $0 saved, own a house that I bought for $170k (owe about 160k still 4 years later), and about $40K in misc. debt to include $19k towards a truck payment. I understand I am not in an ideal situation to start thinking about retiring early but I do want to see what ya’ll think is a great option for me. I am currently in afghanistan making $91k tax free and cutting away at big chunks of my debt, and how I have budgeted it I still have a few hundred left over every payday, what would be the best way to put that money to work for me if I’d like to retire by 50?

  • AlexNB January 16, 2015, 3:01 pm

    Hello. Stumbled upon this site. Talked about Roth IRA, haven’t read much. I have a job with the railroad which is, what I have heard, great retirement benefits. I also have some money in the bank about 25,000. Just sitting there. Any suggestions about where I should start. Thanks

    • retirebyforty January 17, 2015, 11:33 pm

      I think you probably have a good pension lined up if you stay there long enough. You probably should keep most of your money in cash. Maybe invest a part of it to see if it will work for you. You can probably start with $5,000 at Vanguard. I’d go with the basic index fund like VFINX. You have to keep investing even when the market goes down to benefit in the long term. Good luck!

  • Matt January 12, 2015, 2:09 pm

    I am currently 25 years old and have been working at my company for 2.5 years. From the start of my employment, I started contributing to the company sponsored 401k plan (pre-tax). I saved up about $11,000 pre-tax, up until last October when my company offered a Roth 401k plan, which I started to contribute to instead of the tradition 401k plan. I now have about $20,000 total (Roth 401k and Trad. 401k combined), and I have been fully funding a Roth IRA for the last 3 years as well. I have a standard brokerage account with about $70,000, and a emergency savings with about $13k. My question is, should I be contributing that much to my employee sponsored Roth 401k? Or should I start scaling that back and contributing to my normal brokerage? I am nervous about socking away all my money in a Roth 401k and not be able to access it by age 60. What are your thoughts? Thanks!

    • retirebyforty January 13, 2015, 10:21 am

      Matt, you are doing great at your age. You saved up quite a bit already.
      If I were you, I would continue with the 401k. Maybe split between the traditional and Roth if you need some tax write off and you’re in a high tax bracket.
      You can borrow from your 401k if you really need. There are other options also.
      Good luck!

  • Bob Sanders December 29, 2014, 1:08 pm

    Roth IRA account you can only withdraw when you retire right?

    • Matt January 12, 2015, 2:10 pm

      You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½, unless it’s for a qualifying reason.

  • Kathy May 3, 2014, 8:50 am

    Every month my grandson pays 65.00 for his phone bill. I have decided to save this money and I wanted to invest it for him like how Dave Ramsey talks about the Ben & Arthur chart. I went and talked to someone yesterday and they said it was not a good idea since I have alittle bit of debt to pay off. He is almost 18 and works hard for his money. I just want to invest for like 7 years for him and then let the money sit until he is older. I seen mutual funds you have to let it sit until you are 59 1/2. Are there any other accounts where he could take the money out when he was like 50? I just want him to get started off on the right foot. I don’t know a lot about investing, I have my own 401K at work. Please does anyone have any advice.?

  • Jason April 20, 2014, 2:03 pm

    I just opened a Roth IRA with Vanguard – topped out the 5500 for 2013. Should I continue to fund this same fund within the IRA for 2014 or look for another fund within the Vanguard selection?

    • retirebyforty April 21, 2014, 9:33 am

      What fund do you have? If it’s a big index fund like VFINX, I’d probably just add to it for now. You can try different funds when you have a bigger account.

  • Broke Millennial January 7, 2014, 6:41 pm

    This is really awesome! I’ve been eying a Roth IRA as my next investment adventure (full disclosure I actually do have a Roth 401k). This breakdown is going to be really beneficial as I start vetting my options.

  • wallet engineer #1 January 7, 2014, 9:51 am

    I would note that a fund with a low expense ratio is necessary or you are throwing away money. IVV does very well in this regard.
    My preference is Vanguard, specifically VTSMX .

  • RetireAtSomePoint January 6, 2014, 9:19 am


    I contributed my limit of $5,500 last year but found out from my accountant that I was unable to contribute since my gross income was above $110,000. As a result I had to remove what I contributed plus any gains, then pay taxes on the gains. I’m not sure what my gross income will be at the end of this year, but I’m afraid to contribute since I might have to withdraw again. She advised me to convert my RothIRA to a traditional IRA. Is this a good move? I’d like to keep it, but if I can’t contribute to it, what’s the point?

    • retirebyforty January 6, 2014, 3:53 pm

      Yeah, if your income is over the limit, then you probably shouldn’t put money in the Roth IRA. We stopped contributing when we were over the limit.
      I’m not sure why you would convert Roth IRA to traditional IRA. What’s the advantage?
      You can try contributing to the Roth 401k. That might work if it’s available.

      • RetireAtSomePoint January 8, 2014, 1:44 pm

        Doesn’t a traditional IRA have different income limits? Wouldn’t it make sense to convert it to a different type of investment so I can contribute to it instead of just letting it sit there? I just want to be able to contribute to it regardless of my income.

        • retirebyforty January 9, 2014, 3:15 pm

          Actually, I think it depends on whether you have a retirement plan at work or not. If you do, then the income limits is similar. I think the Roth IRA have a higher income limit. Please check with a tax professional and research the IRS site.
          Even if you can’t contribute to the Roth IRA, I think it’s still a good idea to keep it. You can always open another traditional IRA. You don’t have to convert your Roth IRA. Your situation can change in the future and you might be able to add contribution later.
          Good luck!

  • Laurie January 6, 2014, 4:42 am

    Actually, you do not have to pay any transaction fees for no-load mutual fund investing. I have invested for years in Vanguard funds via the Vanguard site, and I pay no transaction fees for mutual fund transactions. The same is true for Schwab; I pay no transaction fees to Schwab when I invest in mutual funds via their site. All of the mutual funds I invest in via both companies are no-load. You will need to compare fund-by-fund to see if the ones you are interested in are available, but it is definitely worth checking as these transaction fees really add up if you are dollar-cost averaging.

  • Kayngi January 5, 2014, 9:32 pm

    It’s so nice to see such great retirement advice! I really appreciate it.

    I do have what I suspect is a dumb question. Your article talked about starting a Roth IRA and then about investing in stocks. I thought that you just put money into the IRA and let it compound. Can you invest in stocks through the IRA? I’m confused…

    • retirebyforty January 6, 2014, 12:07 am

      You need to invest the money you put in the Roth IRA. You can invest in stocks, bonds, or anything you’d like. You don’t want to just deposit the money and let it sit there. Good luck!

  • Green Money Stream January 5, 2014, 3:01 pm

    This is a great detailed post. Opening a Roth IRA has been on my to do list for a while. We are over the income limit for a traditional IRA and currently I’ve been investing in a taxable account. I’d like to balance things out a bit with a Roth IRA.

    • retirebyforty January 5, 2014, 11:55 pm

      The income limit went up a tiny bit this year. You might want to check.

  • Rob October 23, 2013, 5:59 am

    Great piece! I’m 37 and we don’t qualify to contribute to a traditional Roth due to income limit. However, my company offers a Roth 401k. I currently split my 12% that I’m allowed to contribute annually: 7% 401K and 5% Roth 401k. I’m wondering if I should go all Roth, but my thought was I would get my taxable income lowered by contributing to the 401k vs Roth.

    Many thanks!

    • retirebyforty October 23, 2013, 6:30 am

      That’s a tough question. Do you want to pay tax now or later? I tried contributing 100% to Roth 401k for a couple of years, but I hated paying all that extra tax so I went back to traditional. You might want to talk to your tax guy to see if he/she has any advice.
      Currently, Mrs. RB40 is splitting her traditional/Roth 401(k) contribution.

  • Dave May 31, 2013, 3:34 pm

    I’m 23 and just recently started learning about the value of saving for my retirement, but I’m really confused on what exactly I should be doing. I want to start contributing to a Roth IRA, but what differentiates a good and bad company to work with?

    Any pointers or links you could give me would be greatly appreciated!

    • retirebyforty June 1, 2013, 2:57 pm

      Hi Dave,
      It’s great that you are starting now. Investing takes a long time to learn and the earlier you start, the better. You’ll make some mistakes, but you will learn from it. My advice is to see how the finance company you work with get paid.
      Many financial advisors are just salesman trying to sell you something. I suggest you try self directed investing first and see if you like it. Most online brokerage are very similar and affordable.
      I think Firstrade and Scottrade are two with very low fees. You should try them and see if you like them. You can always change broker. It’s not a big deal. The most important thing is to start investing ASAP.
      You probably should start with Vanguard funds.

  • Andrea May 4, 2013, 10:16 pm

    I’m late too so I don’t know if this will be seen but here goes.

    I am about to get 10,000 dollars I never expected to get so I wanted to open a ROTH IRA and place it in there because I already have about 112,000 in my liquid savings. Can I place 10,000 dollars in a ROTH to start? I am confused by the limits you can contribute. Can you contribute ANY amount into it when you open it?

    • retirebyforty May 4, 2013, 11:30 pm

      Hi Andrea,
      There is a yearly cap and you can only contribute $5,500 in 2013 (assuming you are under 50.)
      Open an account and place $5,500 to start. Save the rest in your saving account and add to the Roth IRA next year.
      Hope this helps.

  • Dave March 10, 2013, 10:51 am

    Here is my question and help would be appreciated. I am 40 and have continued to contribute the max to my traditional IRA since 1996. The value is currently 100,000.00 and I am wondering if I should stop contributing the max to the traditional IRA and instead start over with a Roth IRA and contribute the max to it each year. Here is the golden question, would it be worth missing out on the compounding effect of not contributing to the traditional IRA which currently has nice balance to instead reap the benefits of tax free investing in the Roth IRA? I am not interested in a conversion because of the tax consequences I would have to face at the time of the conversion. This is a good math problem for someone out there. Thanks and any help would be nice.

  • Patrick January 19, 2013, 7:17 am

    I’m 42 ,single,and have no 401k or IRA.
    I currently make $45k a year.Have no debt and want to put as much as i can into retirement. I know i am starting way late but……

    What would be the best thing to do currently.
    I’m all for setting up an acct with First Trade or any similar Company.

    • retirebyforty January 19, 2013, 11:07 pm

      You should see if your workplace has a 401k plan. If your employer match your contribution, I would invest there first.
      Once you take full advantage of the employer contribution, then you probably should invest in the Roth IRA next.
      Good luck! It’s never too late to start saving.

  • Financial Samurai January 17, 2013, 8:21 am

    My only fear (besides paying taxes up front) is that folks who have no idea about investing trade like a maniac and blow themselves up.

    • Rose January 5, 2014, 4:35 pm

      MMMM, I also fear a value added tax, or essentially a federal sales tax. That would be one way to tax a Roth, and all retirement accounts.

  • SavvyFinancialLatina January 15, 2013, 1:35 pm

    I started my ROTH IRA in 2012. Invested in $3,000 in a Vanguard fund.
    We still have to fund my husband’s. I’m not sure if we are going to fund our ROTH IRA(s) this year. First we save for the down payment of a house, if we save above that amount, I will put it into the ROTH. Here’s to hoping.

    • retirebyforty January 15, 2013, 2:30 pm

      Good luck! It’s hard to prioritize when you are young. I hope you can save up for a down payment soon and find a nice home.

  • [email protected] Credit Report Chick January 15, 2013, 8:32 am

    I love my ROTH IRA and its one of the best financial decisions I’ve ever made. I only regret that I didn’t start earlier in life.

  • Fi Fighter January 15, 2013, 8:03 am

    Getting started early and investing in a Roth IRA was probably the single best financial decision I ever made. It’s an absolute joy watching the portfolio grow and compound over time. It’s even better knowing that the gains aren’t subject to more taxation later, so just sit back and watch it multiply! Oh, and of course, keep contributing to the max each year if you can.

    • retirebyforty January 15, 2013, 2:28 pm

      My Roth didn’t do well because I took on too much risk, but I’m adding to it. It’s a slow process.

  • Julio January 15, 2013, 4:44 am

    Can I deduct the Roth IRA in my Tax Returns?

    • retirebyforty January 15, 2013, 2:27 pm

      No, you can NOT deduct the Roth IRA in your tax return. The big benefit is you don’t have to pay tax on the gain later.

  • Mike January 15, 2013, 4:02 am

    I think a Roth might be a small part of a wiser strategy if you know how to create other places for money. But it looks good never the less.

  • Sarah Park January 15, 2013, 12:16 am

    I didn’t have any idea about Roth IRA. This post is a big help.

    • retirebyforty January 15, 2013, 2:27 pm

      I’m glad to hear that. Let me know if I can answer any question.

    • papadad January 16, 2013, 11:36 pm

      Good article on top questions….from motley fool :


      • JoeTaxpayer January 17, 2013, 8:29 pm

        Nice enough article you linked to. One note, the rule regarding AGI throttling one’s ability to convert a TIRA to Roth has been eliminated. Anyone can convert if they wish, regardless of income.

        The tax laws change so quickly, it’s important to look at the date an article is published. In my own writing, I frequently mention the year and “this is for 20xx,” check the IRS web site or other media for updates.

    • Richard Crandall May 6, 2016, 12:30 pm

      Just considering Roth accounts.

  • JoeTaxpayer January 14, 2013, 8:22 pm

    Keep in mind that retiring 100% Roth is a lost opportunity. In 2012, exemptions and the standard deduction for a couple adds to $19,500.
    This means a couple with $487,500 (can we say $500K?) withdrawing 4% of the account value each year can take their withdrawal from a Traditional pretax IRA and pay no tax. For those in the 25% bracket while working, it would be a shame to get so excited about tax free Roth accounts that they miss this.
    But – to add to your point, the impact of social security taxation can force the above numbers down a bit, and using the Roth to keep those withdrawals below $20,000/yr before taking social security payments is advised.

    • retirebyforty January 15, 2013, 2:26 pm

      Sure, but it’s not any fun to live on $20,000 per year. I assume most people would like to have a comfortable $50,000 income in retirement. That’s pretty close to the 25% tax rate. I’ll have to reread your social security taxation article again. I forgot most of it already. 🙁

      • Chris January 15, 2013, 7:17 pm

        Likewise, currently $33,630 taxable amount would receive a tax of only $3,630 getting you to the $30,000. So, if you get to $1M, the person would be able to hit the $50k/yr withdrawal for 40-50 years without having a worry about running out, and paying the taxes in the 15% (after the standard deduction of $20,000 as a couple.

        Technically speaking, they could withdraw $60,000/yr paying taxes and after 50 years they would just be about $0 in the account at the end of that time.

        OK, I just talked myself into figuring out how to get my accounts up to $1.25M! 🙂

        • JoeTaxpayer January 15, 2013, 9:30 pm

          RTF & Chris –
          If I wasn’t clear, I agree on the merits of Roth. Ideally, if the couple retires with $500K pretax, and the rest in a Roth, they will minimize their tax bill.
          Chris – the way that Social Security becomes taxed creates an effectively higher set of brackets, a single retiree paying 46% while still withdrawing little enough to think she should be in the 15% bracket. This is the least understood bit of finance for most people. For how it works, see my 2 articles at Rothmania.net. I produce graphs for both single and couple, and show the assumptions I make, i.e. the social security benefit, etc. A couple hits 27.5% with 29K or so of income. Yes, I accounted for the std deduction/exemptions, etc. All numbers were produced with tax software.

  • My Financial Independence Journey January 14, 2013, 5:34 pm

    If you’re planning to retire early, accounts that lock your money away until you’re 60 are probably not the best idea. Early retirement requires heavy investment in taxable accounts assuming that you’re planning to live off of your investment income.

    401K matches offer enough incentive for me to invest in them up to the match, but otherwise I remain nonplussed.

    • retirebyforty January 15, 2013, 2:22 pm

      That’s a good point. I still would like to have a big retirement fund though.

    • Rose January 5, 2014, 3:39 pm

      NO! Rule of 72T, or Substantially Equal Periodic Payments, states that you can tap your retirement funds at an annutized rate without penalty at basically any age, for the minimum of 5 years or until 59.5, whatever is greater: http://www.investopedia.com/terms/r/rule72t.asp Anyone who is looking to retire early MUST know about this. It allows you all the advantages of tax deferred/free investing without penalty. Best of all, If I have understood it properly, you can apply SEPP to one of your IRAs, and not necessarily all of them.

      I will be 52 when we retire in full, and will be pulling from regular IRAs to fund early retirement, keeping SS untouched until 70. The funds that I put in at a high tax base will be pulled at a very low tax base, and then put into taxable accounts, or converted to Roths. The point is to pay as little tax as possible so that more of your funds can stay with you for retirement, as well as to minimize future taxable distributions when taking SS so that your SS checks will not be taxed. So much of what the gov’t uses to decide if you are eligible for “aid” or responsible for taxes is based on income, not assets.

      • Rose January 5, 2014, 4:39 pm

        OK. Not really sure how I got a thread started in early 2013 sent to my email for early 2014, but maybe someone will benefit.

        • retirebyforty January 6, 2014, 12:19 am

          I’m reposting some articles and I need to figure out how to stop it from sending the emails. Thanks for your input. I’m sure it will be helpful for some readers.

  • RichUncle EL January 14, 2013, 9:41 am

    I funded my first Roth IRA when I was 19. I wanted to buy stocks and the investment advisor told me he was amazed by what I was doing but then steered me to do the IRA. I am happy I got such good advice from him.

    • retirebyforty January 14, 2013, 2:34 pm

      That’s great! We are planning to teach our kid about investment at a young age also. Hopefully he’ll have earned income by 19 and able to open a Roth IRA.

      • JoeTaxpayer January 14, 2013, 8:24 pm

        19? My 14 year old has been depositing to Roth since 2010. Babysitting brings in some big bucks in our neighborhood.

        • retirebyforty January 15, 2013, 2:26 pm

          14 is awesome. I gotta push my kid to make some money. 🙂

          • papadad January 16, 2013, 11:45 pm

            licking and stuffing envelopes is essential to running a successful real estate rental business (hint hint) and fun for 2 year olds too… and great way to help the Baby RB40 earn some income and start their roth really early…. Something to think about…

  • Mike @Personal Finance Beat January 14, 2013, 9:40 am

    Nice, detailed post. Currently I have my work 401k, and a brokerage account — where I invest mostly in dividend-paying stocks. I have been thinking about stopping the brokerage account contributions, and opening up a Roth instead. Being able to withdraw your contributions without any penalty is huge! And, obviously, that the gains are tax free.

    Do you think that is the right way to go, Roth >>> brokerage? I’m trying to think of any downside …


    • retirebyforty January 14, 2013, 2:33 pm

      If your main goal is to save for retirement, then Roth is the way to go. With a taxable account, you’ll be paying tax on the dividend every year. If you are saving for a big purchase like a vacation or a wedding, then a taxable account will be easier.

    • papadad January 16, 2013, 11:33 pm

      @ RB40 you need to ensure to include that you must have EARNED income equal to the amount that you wish to contribute to a Roth IRA.

      @mike I would never dump all my eggs into the 401K/IRA basket. Government can change taxation rules, withdraw rules etc and leave you in a precarious position.

      I would always keep some in a regular “get to it no matter what” cash account…. the tax differential may be significant but offset that with the security of being able to access when needed…. just food for thought. Diversification rules apply.

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