The Reasons I’m Opening a Roth IRA for the First Time (and You Should Too!)

Back in 2009 I created an account at Vanguard, opened up my very first Roth IRA, and invested in a low-cost index fund. So did Mrs. PT. It felt great!

Just in time too. We needed to contribute before we filed our taxes if we wanted the contribution to count towards 2008 limits. At a time when the company 401k match was no longer there for some (like me), it made sense to be going the extra mile with a Roth IRA.

It felt really good to have finally met this goal (see Roth IRA goal). It had been a long time coming. Ironically though, it was very quick and easy to do. Here’s the how and why on setting up a Roth IRA:

Stepping Up to the Roth IRA

Up until this point in my life, I’d done my retirement savings using two types of accounts: my company 401k and a traditional IRA. The traditional IRA was used as my main retirement account prior to participation in a 401k (you usually can’t do both at the same time).

Once I got into the 401k scene, I made sure I got the match. And now, for the first time, I’m transitioning my extra retirement contributions (beyond my 401k contributions) to a Roth IRA.

Keep in mind though that it’s not a requirement to take it in these steps. You can open up a Roth IRA right now and start saving money for retirement!

Why Open a Roth IRA?

Three reasons I opened up a Roth IRA:

  1. I’d like to contribute more to my retirement annually than my 401k limits will allow. Like I said above, I’m maxed out on my 2008 tax-deductible 401k contributions. The next logical option is the Roth IRA.
  2. I want more investment options than my 401k (currently through Fidelity) will allow. The funds available in my company 401k mix are good, but maybe a little high in cost. I want to buy into low-cost funds.
  3. I want my retirement funds to be diversified from a tax perspective. The 401k is taxed on distribution (when you retire and start taking out money) and the Roth IRA is the opposite. It uses after-tax funds going in but allows you to take distributions tax-free. Having both allows you to hedge your bets on your future tax rate.

How Much to Contribute and What to Invest In?

The answer to the first question is, “as much as possible” and up to the maximum allowable contribution. We started our accounts with $3,000 each and planned to add the additional $2,000 over the next few days (we’re moving money around, but want to have it invested prior to the date we file our taxes so we can attribute it to current year limits).

The answer to the second question is really a topic for another post. I can tell you though that we’ve invested in low-cost index funds. Vanguard has several to chose from. Unsure about the market? You can actually place your Roth IRA contributions in stable money market funds, amongst many other options.

Where to Open the Roth IRA

I chose Vanguard as my investment manager. However, you can open a Roth IRA with several different types of financial companies: your bank, major investment firms, or discount brokers. All you need is your basic personal information and your bank account and routing numbers to make the initial transfer.

Vanguard’s mission is to “help clients reach their financial goals by being the world’s highest-value provider of investment products and services”. That “highest-value” translates into lowest-cost when it comes to index funds.

Vanguard is highly regarded amongst most personal finance experts, bloggers, and CFPs as the best place to invest in an IRA or taxable account. When I spoke with Kiplinger and NAPFA back in January, they suggested Vanguard.

For more places to open a Roth IRA check out this list of the best online stock brokers for cheap stock trades.

My Plan for Next Year and Beyond

This definitely isn’t a one-time deal. What particular fund I invest in may change, but I plan on making the allowable maximum contribution to my Roth IRA each year until retirement. Next year, that will be another $5,000. At some point, I’ll probably consider setting up an automatic contribution to the account.

Final Note: Keep in mind there are income limits and contribution limits to tax advantaged retirement accounts like the Roth IRA. Definitely do your own research. A good place to start is the IRS guide to IRAs.

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6 Comments

  1. Avatar financial advisor says:

    As you said, the government can always change the rules and tax laws (and tax rates) are constantly changing. I feel this makes it even MORE important to have every type of account you can, so that you have money in multiple “buckets” in which you can pick and choose to contribute to, and eventually, to withdraw from.

  2. Jason – I usually advise against letting the tail wag the dog, so to speak. So, just cause the rule is there, doesn’t mean you have to force the contribution when you weren’t planning on it already.

    Basically, if you have the extra cash, and were already looking to invest, have met your 401k match, have no big debts, have a nice e-fund, I’d say yes, the Roth is a great idea.

    You never know what the future holds. You may become eligible at various times throughout your life, and the govt could change the rules.

  3. Avatar Jeff Rose says:

    PT-

    Congrats man! I know the same feeling I had from funding my first Roth IRA, as well. Look forward to you eventually pulling off that “trifecta” 🙂

  4. Vanguard’s a great choice for your Roth IRA. I’ve tried TIAA-CREF, too, but Vanguard is my top coice. Congrats on funding your Roth IRA!

  5. I love my Roth IRA. We’re looking to open one for my husband, and I’m looking into a solo Roth 401k for me as well.

  6. Avatar Jason @ MyMoneyMinute says:

    I’m with you on the Roth contributions, especially since your employer stopped their matching 401k contributions. Congrats on fully-funding those Roths!

    Curious on your opinion:

    What if you were below the income limit for Roth IRA contributions for 2008, but expect to be above the limit and not qualify for Roth IRA contributions in 2009?

    Would you still advise someone to give to an IRA for just one year’s worth of contributions, knowing they probably won’t get to contribute to it again?

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