Roth IRA questions

vermiculture

Hello H/A!
I have some questions about a potential Roth IRA I want to enroll in. I am 23, and would like to save for retirement beginning now. I don’t know a lot about this kind of stuff, so I thought I would ask you after searching through the old investment threads. I’m looking at the Vanguard Target Retirement 2050 fund.

Currently, I have a job but my direct deposit money is just sitting in my checking account. My savings account right now has enough to last me for a couple of months. I have one student loan, but it is manageable with my current financial situation.

It is looking like my life is going to be living abroad for a few years, where I will not be making much money at all. This I am excited about, but it means I have some quick questions about my potential retirement plans.

Is it a good idea to open Roth IRA if I really don’t know if I will be able to put in the max amount for the next few years? Once I'm in the target 2050 fund, is it possible to switch out into something else? Can I even be in the Roth IRA if I am unemployed?
Is there a penalty for having the IRA but not being employed; is it just kind of stupid to have the Roth IRA but not be employed? And if that’s the case, would I be better off just putting the money in a savings account?
Am I doing the retirement thing correctly, or am I just wasting my time? I get all kinds of contradicting info from family and friends. Clearly I don't know too much about this, so any help is appreciated.

NotYou

You don't need to be employed to have a RothIRA, it's just a special account you can put money into that (correct me if I'm wrong) taxes you on the way in, but not on the way out after the money has grown all big and what not. You can still put your own money into these accounts, and you should be, regardless of whether your employer is matching it or not.

However, you only have a couple of months of money saved up, and you're going abroard where upon you will not be making much money, right? It sounds like a terrible idea to invest what you currently have. Wait until you have at least 6 months rainy day money before you go investing imo.

Anarchia

The only "penalty" if you have a Roth IRA and currently are unemployed is that you can't put more money in it. Your upper limit on contributions is five thousand dollars (as far as I remember from class) or your yearly income, whichever is lower. Whatever you have in it before then still accrues interest as normal.

And I know less about this, but money you stick in a Roth IRA doesn't have to be stuck in that particular account forever. You can "rollover" one IRA to another, although you may or may not be charged a fee by the companies handling this for you. This is usually done when someone got the IRA through their employer and have since changed jobs, though. You'll want to be careful, because there are limits to how long you can hold on to the money while transferring it like that before penalties kick in. I believe that was somewhere in the neighborhood of sixty days.

And yes, a Roth IRA is taxed on the way in and not on the way out. Useful if, for whatever reason, you believe you'll be in a higher tax bracket when you retire (usually not the case), or if you expect taxes to be raised quite a bit between now and retirement.

Dalboz

I think the upper limit of the Roth IRA is $2K per year. Also, keep in mind that you don't have to contribute the max amount or contribute at all in a given year (it's to your ultimate benefit, but isn't actually a requirement unless you get a crappy firm with weird rules). Also, you don't need to put money in over the course of the year but can do it in one lump sum when your ready when you want. If you can put money into the Roth IRA earlier and can actually afford to now, then it's a good idea because you can usually get a pretty good interest rate on the accounts, which again is to your benefit in the long run since it's compound interest.

You can be unemployed if you are opening your own IRA (at least you should; when you open the account, you should be putting money in right away, and most firms will be eager to take your money). I was still a student when I originally opened mine, and put money in that I had saved from a summer job.

Spherick

Roth IRAs:

-$5,000 max annual contribution or annual wages whichever is lower.

-Does not allow for an above the line adjustment to AGI as Regular Deductible IRAs do, but the earnings and principal are not taxed when withdrawn

-You can rollover IRAs between different funds very easily. A small fee may be assessed by your fund provider

-There may be a nominal yearly charge for your account if you are under a certain dollar amount (usually around under $5,000)

If you think you may need the money before you reach age 59.5, or you will need the money while abroad, I suggest a short term CD for now. As you will be hit with a 10% penalty from the IRS for withdrawing a IRA account early. Unless the money is used for buying a new home, medical bills, and a few other allowable expenses. So if you can afford to put the money away now and not touch it till then, a Roth IRA is the way to go.

If you have anymore questions, feel free to PM me.