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I opened a Roth IRA last year because of a Christman bonus I received after a long year.
Now, there's only a few hundred in the account. Slowly I've tried to put aside money toward it, but I've put off making larger contributions until I manage to get my finances under control.
In the meantime, what should I be doing with my IRA? Investing the money? Saving towards a home? Let it sit and accrue interest?
I glanced over the rules of a Roth IRA and I have the option to take out money penalty free if the money goes to purchasing a first home, but is that my only benefit I enjoy?
Could I ask future employers to contribute to it in lieu of a pay increase?
I'd like to know what my opinions are with the account and what goals I can use the money in the IRA towards. All I know is that it benefits me down the road when I'm 65+ and can withdraw tax free.
Far from an expert, but it would really depend on your current financial situation that you allude to. The maximum Roth contribution per year shouldn't really hinder your savings for a house as the maximum contribution guessing on your age is $5,500 per year. That said, I also wouldn't pull what you have for your first house again unless you didn't have a choice. You might also benefit from meeting with a paid financial advisor to help you decide what is best. I say paid because I just met with a free financial advisor and I wasted my time. It ended with my advisor talking me into a mutual fund with 4.5% front load fee which really was not in my best interest at the time. Also if you are looking for assistance with a down payment, look up the phrase "sellers assist" which you can negotiate to help with a down payment if that was your goal.
The general advantage of a Roth IRA is you pay taxes on deposits, not withdrawals. This should save most people money in the long run, as the account is expected to grow and paying taxes now rather than when there's more money means you pay less taxes total.
What i would do is once you have your ira account opened put it into money market fund till you decide what you want to do with the money. I would also try to decide what asset allocation you want to go with like what % of stocks to bonds. Come up with something you will feel comfortable with, then you can decide which funds you want to buy inside of your ira.
Congrats on opening a Roth IRA. It can be a great retirement and savings tool.
A couple questions to help point you in a good direction:
What financial institution did you open the account with? For an account like a Roth
that you intend to keep open for decades, this is a very important choice. Expenses
are a huge drag on returns over long periods, so you want low/no custodial fees. Having
the most appropriate investments available within the account is very important. You want
to have your account at a discount brokerage - not a bank or credit union. I have experience
with Schwab and Fidelity and recommend either, with a nod towards Schwab. If your account
isn't with a discount broker, make plans to move it. Both Schwab and Fidelity have roll over
specialists that will do it for you for no cost.
How old are you?
What is your annual income? What is you outlook for changes in income as your career advances?
How likely is it you will work for companies that offer retirement accounts, potentilly with matching in the
future?
A Roth account has some flexibility with no penalty withdrawals. You can withdraw for a 1st home purchase
and you can withdraw amounts you contributed (not investment returns) after they have been in the account
for 5 tears. You will have complete access to the money after 59 1/2. All that said, a Roth is intended as a retirement
account and works best for that purpose. The power in a Roth is in the tax free investment returns, which makes
the time horizons and investment choices to maximize the benefits rather narrow. You want at least a 5 year
horizon (more is better) and you want to use investments with a long term horizon (i.e. mostly stock based
investments). If neither of those apply to the plans you have for the money, a Roth doesn't have much or any
advantage over just saving at the local bank.
Flesh out your profile and plans a bit more and you'll get some good ideas and encouragement here for your
new Roth.
Roth IRAs are wonderful! I recommend them to everyone...well I recommend them to a lot of people once, then I stop nagging ![]()
My advice would be to setup automatic deposits into your Roth IRA. As Ram2500PW said the maximum contribution you can make is $5,500 per year if you're under age 50. If you're over age 50 you can contribute $6,500 per year. Assuming you're under 50 that would come to about $458 per month or around $229 per two weeks or $115ish every week (I'm ignoring cents for these figures). If at all possible I absolutely recommend automatically transferring whichever amount is applicable from your bank account to your Roth IRA every payday. If you can't do the full amount to max out the account, try to do as much as you can.
As bada_bing suggested make sure your account is at a discount brokerage firm rather than a bank, which would likely charge higher fees. I've personally had good experiences with TD Ameritrade and Fidelity, but I'm sure Schwab is good too.
You can make a withdrawl for a qualifying first time home purchase, but I don't recommend it. Your retirement is very important. Try to save for a home in a different account and leave the Roth IRA funds alone so they can grow.
Another benefit of a Roth IRA is that you can withdraw your contributions tax and penalty free, but not your earnings until you reach age 59 1/2. However, again, try not withdraw contributions if you can help it because you really need them in there working for you.
A big advantage of Roth IRAs is that unlike most other retirement accounts, you never have to take contributions. This means that if you save plenty of money on your own, have a pension plan, ample income from other retirement accounts, etc., you can leave your Roth IRA to a beneficiary when you die.
Within your Roth IRA you can make all sorts of different investments or you can leave your money alone in the money market account it will be sitting in when you deposit and only earn interest that way. However, that's not generally a good idea since your interest rate won't even keep pace with inflation. You really ought to invest at least some of it.
The first step is to figure out the allocation that works for you. How much do you want in equities (stocks, mutual funds, ETFs)? How much in fixed income (bonds, CDs)? How much in cash?
Generally younger people tend to opt for more growth-oriented portfolios that are heavier on equities, while older people at or nearing retirement age tend to opt for more fixed income investments.
If you're younger and thinking about equities, I would recommend commission free ETFs. An ETF (Exchange Traded Fund) is essentially an index of stocks. It has the benefit of easy, cost effective diversification, and comes with lower fees than most mutual funds because it isn't actively managed.
As far as whether or not you can get your employer to contribute for you, that's pretty unlikely. It's not really like a company 401K where your employer might do a match. Roth IRAs are completely independent from your company, which in many ways is itself a benefit since you don't have to worry about what to do with them if you change jobs. Roth IRAs also typically have more investment options and often fewer fees than a 401K, but obviously it all depends on how/who is managing each account. Honestly I'd generally recommend a Roth IRA in addition to a 401K if you have one, and generally my advice would be to first contribute to any 401K up to the company match, then max out your Roth IRA, then add any remaining contributions you want to make to a 401K.
But I'm not trying to give you specific investment advice, just general tips and starting bits of information you can use as a springboard for your own research. Anyway congrats on taking those steps to secure your retirement and good luck!
Thanks for all of the advice thus far.
The account is with TD, so I have the option to open an Ameritrade account. Schwab and Fidelity have minimums that my paltry account don't qualify for just yet.
I'm 25 for reference, currently working in the Real Estate field.