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IRAs
Mike Danger
"Diane..."a place both wonderful and strangeRegistered User regular
"Diane..."a place both wonderful and strangeRegistered User regular
I'd like to open up a Roth IRA (I figure I'd rather pay my taxes on deposits now than in the future, and it seems crazy not to do this stuff now (I'm 24, 25 in April)). I had called up my local bank to do this and the teller basically told me "don't talk to me about this, talk to our IRA guy".
The IRA guy gave me a call and when he found out I had < $6000 (I had planned on putting in around $500 - $750 -- I have about $400 from an inheritance and was planning on dropping in some from my savings to bring it up a bit) he basically told me "don't bother, our fees will take away most of it" and suggested I look into Vanguard or T. Rowe Price.
Looking at Vanguard's site, they don't seem to have fees...looking at T. Rowe Price it looks like you pay $20 a year until you have $10k (or maybe $50k?) Does anyone have an IRA with either of these companies? Or is there a better third option? I'm not really sure where to start with all of this, or if I even have enough money to open one.
Edit: To maybe further clarify my thinking: I put about $340 per month into a regular savings account. After I hit $5000 in savings, I was planning on splitting it into $170 in savings, $170 in the IRA. I'm already making the max contribution to my work 401k to get the most money out of my employer.
The IRA guy gave me a call and when he found out I had < $6000 (I had planned on putting in around $500 - $750 -- I have about $400 from an inheritance and was planning on dropping in some from my savings to bring it up a bit) he basically told me "don't bother, our fees will take away most of it" and suggested I look into Vanguard or T. Rowe Price.
Looking at Vanguard's site, they don't seem to have fees...looking at T. Rowe Price it looks like you pay $20 a year until you have $10k (or maybe $50k?) Does anyone have an IRA with either of these companies? Or is there a better third option? I'm not really sure where to start with all of this, or if I even have enough money to open one.
Edit: To maybe further clarify my thinking: I put about $340 per month into a regular savings account. After I hit $5000 in savings, I was planning on splitting it into $170 in savings, $170 in the IRA. I'm already making the max contribution to my work 401k to get the most money out of my employer.
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https://investor.vanguard.com/ira/how-to-open-an-ira
Let 'em eat fucking pineapples!
Of course I'm assuming that when you say you're maxing out your 401(k), you mean that you're getting the full employer match. If you were actually hitting the overall limit ($17k or something), you'd have to open an IRA.
I contribute the annual maximum to my 403(b) with employer match and my income prevents me from opening a Roth IRA. However, I have an older 401(k) from a previous employer sitting at Merril Lynch - is there anything stopping me from converting my old 401(k) into a Roth IRA, taking the hit on taxes now to allow for tax free disbursement after retirement?
I ask, because obviously taxes are more likely to go up, rather than down in the future.
Oh, and just roll your stuff into a Vanguard IRA, you're not gonna beat their returns and lack of fees. I quote Mr. Warren Buffet here, "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
The limit as of this year is $18,000. Just FYI.
I think you should be able to convert it but you'd want to talk to both ends (old carrier and new carrier who'll have the conversion Roth IRA) to see if they have any particular rules about it. Just because something is technically allowed doesn't mean that the financial company themselves will have provisions for it, and there's no standardization amongst any of the companies. (Note: don't call on a Monday if you don't want to sit on hold for hours; that's the busiest day of the week.)
Something to remember for a Roth conversion: often you have the choice of having taxes withheld up front at the time of conversion to cover the tax as the funds are converted from pre- to after-tax. You can do so, but any taxes withheld will have the 10% early withdrawal penalty on them (not the withdrawal amount; just the taxes withheld up front) at tax time. It may be better to just pay all the income tax at tax time and avoid the penalty, but make sure you have enough saved up for that. Talk to a tax adviser or calculate it online ahead of time or whatever.
(As far as I know, my employer doesn't offer a Roth IRA, and yeah, I just contribute the max to get the match, not the actual year max.)
If you have the opportunity to do so the answer to this should be "Your monthly budget x 6".
You're income doesn't actually prevent you from opening a Roth IRA as if you don't have a Trad IRA you can open a Trad IRA with your contribution for the year and then immediately roll it over to a ROTH IRA circumventing the income limits. It's known as a backdoor contribution or a backdoor Roth IRA, though if you do have a Trad IRA account then you can't really do this.
There is no issue rolling over a 401k into a Roth IRA, though I believe you will to have pay the taxes out of pocket. I'm not going to comment on the tax assumption, but one thing to note is that contributions are taken from your top tax rate, while withdrawals start at the lowest. If you have other income this gets more complicated, but it is something to consider.
I had heard in a few different places that you should have $5000 in savings for emergencies, which I thought sounded pretty good. I'm around 70% of the way there now.
I'm living with my folks while I pay off student loans, so my "budget" situation is kind of unusual...that said, the minimum for my loans + car insurance for 6 months is comfortably covered by $5k.
Once you have all the liquid cash you need there's no point in putting the rest in to an account that just loses value over time.
This is exactly where I am right now. It looks like an easy road map is to maximize retirement investment followed by low risk indexed mutual funds a la Vanguard.
Oh, no doubt. I'm just trying to get all this stuff right (i.e. correct) now since I have 60 more years on Earth or whatever in which it can be accruing interest.
Given his age, I'm betting remaining somewhat liquid is ideal for things like First/Last/Sec Deposit or House down payment.
I started a roth IRA for this purpose. You pay taxes on what you put in a roth IRA, but my understanding is that you can withdraw your money early without penalty as long as the withdrawn money does not exceed the principal investment.
I'd look into the specifics of this as my understanding is that before you reach retirement age you can only draw without penalty for very specific reasons (down payment on 1st house, major medical expenses, major educational expenses). It's not like you can use your contributions as an emergency fund without penalty.
Also, if you're funding a retirement account work backwards. Find out what you plan to invest in (e.g. some broad market index fund) and check the min investment amount. No point putting $1K into an IRA if the things you want to buy require a 2.5K or 3K min investment. You could get around minimums by buying etf's but then you'll have to net in trading fees when determining returns.
That's the advantage of a Roth IRA - contributions can be withdrawn at any time without penalty. Traditional IRAs have a penalty before 59. It's because of the tax on contributions - Roth IRA contributions are post-tax (i.e. part of your reported income), so it makes no sense to have restrictions on removing them... traditional IRA contributions are pre-tax, so if you could withdraw them it's effectively creating a tax-free money loophole. Roth has a lot of rules on removing earnings, including the house purchase exception / etc, but as far as I've read anywhere the contributions are free game.
My wife & I went with a Roth for the same reason as above - especially starting out, the vast majority of the money in the account will be contributions and not earnings; so most of that money will remain at least vaguely liquid during the time period when you might have a major expense (house / etc) that might require pulling them out.
Do most people roll those into IRAs
Either into IRAs or into their new 401(k)s or 403(b)s. If you have a current 401(k) or equivalent (457(b), thrift savings plan, etc) that you don't hate you could see about consolidating the old ones into your current one. The incoming carriers are usually glad to help you with the rollover process because that's money coming to them.
That's not what it says anywhere
e.g. https://investor.vanguard.com/ira/roth-vs-traditional-ira
It sounds weird, but another option is to just to leave an old 401(k) where it is. In most cases, employers have to let you do that, I think.
I have one from a job I left 4 or 5 years ago that's plugging along just fine. It just means one more account to monitor, which might or might not bother you. In my case, it's at the same brokerage where I have other stuff (Vanguard), so it's no big deal.
Just throwing that out there.
This is also true, though there's a lot of variation on plans - some kick accounts out eventually if they have less than, say, $5000 in there; some kick out if the money's still there and someone reaches age 65; etc. One extra account to monitor is manageable, though since people don't stay at one job as long as they used to, people can end up with several old 401(k)s floating around, which can lead to losing one in the shuffle. It depends on how much effort people are willing to expend on monitoring it. If they always check all the statements and at least glance over whatever crap gets mailed to them, probably they can handle it. Moif st people don't though and then if the old company gets bought out and transfers the money to some other carrier and/or people move and forget to notify them of the address change, they find themselves years later trying to track down where their money has ended up (why yes I deal with this a lot).
Also it's often the case that 401(k)s will allow loans using money that was rolled over into it also. I don't recommend taking out loans except in emergencies or odd circumstances, but there are times when it can be useful. The maximum that can be taken out in a loan is half the account balance, so a greater balance in one account could mean a larger amount for a loan available if, say, you needed money for a down payment on a house but you haven't sold the old house quite yet.
In addition, if you leave your money with your old 401k plan, you'll have to personally pay the monthly administrative fees, which your old company would have normally paid on your behalf.
Yes, you can withdraw contributions from a Roth IRA without penalty. You will pay taxes at your marginal rate on them.
If you do not have records showing your contributions to the Roth IRA, you may end up paying a penalty. You have to file a Form 8606 with your taxes because the IRA custodian will send a 1099R to the IRS and the IRS will always assume an early withdrawal is penalized.
There's also a whole set of ordering rules on how the IRS will view where the money withdrawn from a Roth IRA comes from.
If you are withdrawing only direct contributions, those may be withdrawn penalty free.
If you are withdrawing the earnings, you will pay a 10% penalty on the earnings.
If you withdraw a conversion or rollover and the rollover is older than 5 years, you may avoid paying the penalty.
The full rules on IRA distributions are in publication 590. (Publication 590-B for 2014 onward).
http://www.irs.gov/pub/irs-pdf/p590.pdf