72 thoughts on “How to start contributing to a Roth IRA”

  1. 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.

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  2. 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.

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    • 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.

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  3. 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!

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    • 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.

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  4. 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.

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  5. 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?

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  6. 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

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    • 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!

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  7. 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!

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    • 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.

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  8. 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.?

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  9. 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?

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    • 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.

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  10. 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.

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  11. Hello,

    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?

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    • 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.

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      • 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.

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        • 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!

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  12. 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.

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  13. 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…

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    • 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!

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  14. 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.

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  15. 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!

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    • 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.

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  16. 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!

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    • 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.

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  17. 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?

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    • 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.

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  18. 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.

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  19. 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.
    Thanks.

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    • 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.

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    • 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.

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  20. 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.

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    • 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.

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  21. 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.

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    • 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.

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  22. 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.

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  23. 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.

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    • 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. 🙁

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      • 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! 🙂

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        • 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.

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  24. 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.

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    • 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.

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        • 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.

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  25. 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.

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    • 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.

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          • 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…

  26. 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 …

    -Mike

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    • 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.

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    • @ 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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