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sabrinamari"OK, I'll bite. Why do I need a Roth IRA when I can barely pay my monthly bills now? And what's an IRA anyway?"
I'm so glad you asked! Roth IRAs are one of the coolest tools in the financial world. Every adult who either earns an income or whose spouse earns an income can set one up for himself/herself. Even teens with part-time jobs can do it with a little help from an adult. They are EASY to set up, easy to manage by yourself---even if you have no experience with IRAs or retirement accounts whatsoever---and in my opinion, they are better than Traditional IRAs for most people (but not for everyone---we'll go through this later).
OK, but what are IRAs? IRAs, or Individual Retirement Accounts, are savings accounts for your maturity. They let you put away money for that time when you stop working and have even *less* ability to pay bills than you do today.
(Think about that for a minute---whatever financial stress and panic you've been managing this month---imagine how you'll cope later, when you and your partner are too old and/or frail to work!)
You control your IRA yourself---they are NOT dependent on whether or not your job or your spouse's job offers a retirement account. *You* choose when to start them, where to start them, and what to invest them in. Don't worry about this---these decisions are EASY to make if you have few retirement investments (or none at all) and I will walk you through them in this blog.
For the moment, imagine this [WARNING: Gamer/Geek analogy coming up]: Your IRA is a Bag-of-Holding that expands to fit whatever is put inside, no matter how much it grows. Inside, your investments will become bigger and bigger and bigger...and if you choose a Roth IRA, they will grow and grow and when you are ready to take the money out, you will pay no taxes. None. Nada! All the growth that happens to your money will be yours, yours, my preciousssss....
If you choose a Traditional IRA, you will pay taxes on the money when you take it out. And since taxes in the United States are probably at historical lows (although this is not certain), paying taxes later will probably cost you more than paying taxes now. BUT...if you choose to start a Traditional IRA, you will get a tax break NOW: in other words, you can deduct Traditional IRA contributions from your taxes this year, since you will be paying taxes on the money later.
If you choose a Roth IRA, you will NOT get a tax deduction now. You will pay regular tax on all your income, including the money you invest in your IRA. But later, when you have hundreds of thousands (or millions and millions) of dollars, you will pay NOTHING....NOTHING! BWAAAAA HAAAA HAAAA HAAAA!
If you are relatively young, choosing a Roth is a no brainer. Pay your taxes now and let that money grow and grow for many decades, knowing that *all of that growth will be yours*. If you are older, or have a very high income, or have other particular issues, a Traditional IRA may be better.
Go here to learn more about the differences between Roth and Traditional IRAs:
http://retireplan.about.com/od/rothandtraditionaliras/a/iravsroth.htm
But back to our Bag-of-Holding. Inside your bag will be various mutual funds of your choosing. A mutual fund is a collection of stocks, usually chosen to fit a particular theme. This is sort of like buying sets of provisions for your D & D campaign. Imagine that your bag of holding has a kitchen set (tools to cook with), a set of weapons (with which defend yourself) and a wardrobe (with which to dress yourself). You might also have a set of magical items to pull out when under especially challenging conditions. You will need them all (and more) to keep yourself alive and in good fighting condition no matter what monsters and challenges you encounter along the way.
Your IRA-of-Holding might contain a mutual fund that holds stocks from the 500 biggest US companies (the core around which you build your investment portfolio), a mutual fund that specializes in the stocks of small companies (which will probably do well while the large companies are struggling) and a mutual fund that specializes in bonds (to stabilize your portfolio in times of financial crisis). It will also contain other sets of stocks you might need to keep your portfolio alive and in good condition no matter what challenges the stock market faces.
Simple facts you need to know:
1. Most of you can put away up to $5000 this year (2008) in either a Roth or Traditional IRA if you are under 50 years of age ($6000 if you are 50 or over). If your Adjusted Gross Income (AGI) is more than $99,000 as a single person or $156,000 as half of a married couple, you will be allowed to put away less. Your AGI is listed (and clearly labeled) on line 37 of your 2006 1040 income tax form and line 21 of your 2007 1040 income tax form. For the EZ form, scan the page until you see the line for your adjusted gross income. It will be easy to spot.
Go here to find out what you are allowed to put in an IRA based on your Adjusted Gross Income:
http://retireplan.about.com/od/rothiras/a/roth_phase_out.htm
If your AGI is more than $114,000 as a single person or $166, 000 as a married person, you aren't allowed to fund a Roth IRA at all.
2. You can STILL put money in a 2007 IRA even though it's 2008! You can do it until April 15th (Tax Day), as a matter of fact. The limits are a little different---for 2007, you can only put away $4000 (if you are under 50) or $5000 (if you are over 50).
OK, this is really important: put money in your 2007 IRA *before* you put it in your 2008 IRA. Once Tax Day has come and gone, your chance to put money away for 2007 is gone forever, and all that lovely compounding interest you could have earned on it vanishes into thin air. You have a whole year plus until Tax Day of the following year to put money in a 2008 IRA.
3. REMEMBER: If you don't invest in a year's IRA before April 15th of the following year, you lose the chance to invest in it forever. It's gone. No compounding interest...no preciousss growth of cash....
"Well, so what?" You could say. "I could only put in maybe $500 or $1000 anyway! That won't grow much!"
Yeah, right. If you put $2000 in an IRA for a 13-year-old (maybe earned from a newspaper route or summer odd jobs) and never touch it again---never adding to it either---that kid will be a millionaire by the time he's 65.
THE BIG TAKE HOME MESSAGE:
That $5 you spent today on lunch and a drink or a pack of cigarettes would have become THOUSANDS OF DOLLARS over time if you had put it in your IRA instead of spending it today.
Every random purchase you make today costs you THOUSANDS of dollars if you take into account the money you will never earn on it from now until you retire. Yeah. That impulse purchase is like shooting yourself in the foot.
Stay tuned for Part 2: "How can I open a good IRA online all by myself?"
I'm so glad you asked! Roth IRAs are one of the coolest tools in the financial world. Every adult who either earns an income or whose spouse earns an income can set one up for himself/herself. Even teens with part-time jobs can do it with a little help from an adult. They are EASY to set up, easy to manage by yourself---even if you have no experience with IRAs or retirement accounts whatsoever---and in my opinion, they are better than Traditional IRAs for most people (but not for everyone---we'll go through this later).
OK, but what are IRAs? IRAs, or Individual Retirement Accounts, are savings accounts for your maturity. They let you put away money for that time when you stop working and have even *less* ability to pay bills than you do today.
(Think about that for a minute---whatever financial stress and panic you've been managing this month---imagine how you'll cope later, when you and your partner are too old and/or frail to work!)
You control your IRA yourself---they are NOT dependent on whether or not your job or your spouse's job offers a retirement account. *You* choose when to start them, where to start them, and what to invest them in. Don't worry about this---these decisions are EASY to make if you have few retirement investments (or none at all) and I will walk you through them in this blog.
For the moment, imagine this [WARNING: Gamer/Geek analogy coming up]: Your IRA is a Bag-of-Holding that expands to fit whatever is put inside, no matter how much it grows. Inside, your investments will become bigger and bigger and bigger...and if you choose a Roth IRA, they will grow and grow and when you are ready to take the money out, you will pay no taxes. None. Nada! All the growth that happens to your money will be yours, yours, my preciousssss....
If you choose a Traditional IRA, you will pay taxes on the money when you take it out. And since taxes in the United States are probably at historical lows (although this is not certain), paying taxes later will probably cost you more than paying taxes now. BUT...if you choose to start a Traditional IRA, you will get a tax break NOW: in other words, you can deduct Traditional IRA contributions from your taxes this year, since you will be paying taxes on the money later.
If you choose a Roth IRA, you will NOT get a tax deduction now. You will pay regular tax on all your income, including the money you invest in your IRA. But later, when you have hundreds of thousands (or millions and millions) of dollars, you will pay NOTHING....NOTHING! BWAAAAA HAAAA HAAAA HAAAA!
If you are relatively young, choosing a Roth is a no brainer. Pay your taxes now and let that money grow and grow for many decades, knowing that *all of that growth will be yours*. If you are older, or have a very high income, or have other particular issues, a Traditional IRA may be better.
Go here to learn more about the differences between Roth and Traditional IRAs:
http://retireplan.about.com/od/rothandtraditionaliras/a/iravsroth.htm
But back to our Bag-of-Holding. Inside your bag will be various mutual funds of your choosing. A mutual fund is a collection of stocks, usually chosen to fit a particular theme. This is sort of like buying sets of provisions for your D & D campaign. Imagine that your bag of holding has a kitchen set (tools to cook with), a set of weapons (with which defend yourself) and a wardrobe (with which to dress yourself). You might also have a set of magical items to pull out when under especially challenging conditions. You will need them all (and more) to keep yourself alive and in good fighting condition no matter what monsters and challenges you encounter along the way.
Your IRA-of-Holding might contain a mutual fund that holds stocks from the 500 biggest US companies (the core around which you build your investment portfolio), a mutual fund that specializes in the stocks of small companies (which will probably do well while the large companies are struggling) and a mutual fund that specializes in bonds (to stabilize your portfolio in times of financial crisis). It will also contain other sets of stocks you might need to keep your portfolio alive and in good condition no matter what challenges the stock market faces.
Simple facts you need to know:
1. Most of you can put away up to $5000 this year (2008) in either a Roth or Traditional IRA if you are under 50 years of age ($6000 if you are 50 or over). If your Adjusted Gross Income (AGI) is more than $99,000 as a single person or $156,000 as half of a married couple, you will be allowed to put away less. Your AGI is listed (and clearly labeled) on line 37 of your 2006 1040 income tax form and line 21 of your 2007 1040 income tax form. For the EZ form, scan the page until you see the line for your adjusted gross income. It will be easy to spot.
Go here to find out what you are allowed to put in an IRA based on your Adjusted Gross Income:
http://retireplan.about.com/od/rothiras/a/roth_phase_out.htm
If your AGI is more than $114,000 as a single person or $166, 000 as a married person, you aren't allowed to fund a Roth IRA at all.
2. You can STILL put money in a 2007 IRA even though it's 2008! You can do it until April 15th (Tax Day), as a matter of fact. The limits are a little different---for 2007, you can only put away $4000 (if you are under 50) or $5000 (if you are over 50).
OK, this is really important: put money in your 2007 IRA *before* you put it in your 2008 IRA. Once Tax Day has come and gone, your chance to put money away for 2007 is gone forever, and all that lovely compounding interest you could have earned on it vanishes into thin air. You have a whole year plus until Tax Day of the following year to put money in a 2008 IRA.
3. REMEMBER: If you don't invest in a year's IRA before April 15th of the following year, you lose the chance to invest in it forever. It's gone. No compounding interest...no preciousss growth of cash....
"Well, so what?" You could say. "I could only put in maybe $500 or $1000 anyway! That won't grow much!"
Yeah, right. If you put $2000 in an IRA for a 13-year-old (maybe earned from a newspaper route or summer odd jobs) and never touch it again---never adding to it either---that kid will be a millionaire by the time he's 65.
THE BIG TAKE HOME MESSAGE:
That $5 you spent today on lunch and a drink or a pack of cigarettes would have become THOUSANDS OF DOLLARS over time if you had put it in your IRA instead of spending it today.
Every random purchase you make today costs you THOUSANDS of dollars if you take into account the money you will never earn on it from now until you retire. Yeah. That impulse purchase is like shooting yourself in the foot.
Stay tuned for Part 2: "How can I open a good IRA online all by myself?"
