Tuesday, May 20, 2014

Retirement planning for 20-somethings: The Roth IRA

One of my life list items is "Learn about retirement funds, invest!". I'm checking that list item off this month, and I'll be writing about retirement funds and investing in depth below - you've been warned!

I think I first started giving retirement a second thought when I read 20-something Marissa's post on Missris in October of 2011 about her own retirement research, which led her to open a Roth IRA.  But it wasn't enough to make me take immediate action. I taught in Spain for a year, I came back to Madison and worked for a year, and then in May 2013 I finally opened a Roth IRA. What led me to do this?

Financial advice for 20-somethings

The reading I've done about retirement recommends the following steps for 20-somethings:

1. Set aside $1,000 for emergencies.

2. Pay off any credit card or loan debt.

3. If your employer has a matching program for your 401(k), participate. That's free money.

For example, let's say your employer matches up to 6%. This means if you contribute 6% of your income to your 401(k), then your employer will also contribute 6% of your income to your 401(k)! Free money!

4. If you make less than $129,000*, open a Roth IRA.

IRA stands for Individual Retirement Arrangement/Account. There are actually 11 types of IRAs, but the two most common are Traditional and Roth.
*If you file single in 2014. You must make less than $191,000 to contribute to a Roth IRA if you file married/joint. Check limits each year.

Traditional IRA vs. Roth IRA

Before I begin to dissect the Roth IRA (since it's pertinent to my situation), I'll share some resources where you can learn about the differences between Traditional and Roth IRAs (for you curious folk).

Roth IRA

So the Roth IRA is a personal account you can open independently to save for retirement.

There is a maximum amount that you can contribute to your Roth IRA each tax year. The maximum contribution amount is $5,500 for 2013 and 2014.  As you can guess, it's recommended to contribute the maximum to your Roth IRA each tax year.

You cannot deduct your contributions to a Roth IRA from your income. This means that if you make $30,000 and contribute $3,000 to your Roth IRA, your income when you file taxes is still $30,000 (not $27,000).

A huge plus is that all of your contributions and earnings are completely tax free when you start using the money during retirement, if you follow the regulations (you are age 59½ and your Roth IRA has been open for at least 5 years). So if some of your Roth IRA is invested in Google and you make a ton of money over the next 40 years - it'll never be taxed!

Check out the IRS's page all about Roth IRAs to learn more.

Why You Should Open a Roth IRA by April 14 - Forbes

How to open a Roth IRA

You can open a Roth IRA at some banks and credit unions, but I opened my account online. Three main investment companies where you could open a Roth IRA are Fidelity Investments, Vanguard Group, and T. Rowe Price.  There are also many discount brokers, one of which I used to open my account online (Sharebuilder). Each broker (and company) will have different account minimums and trading fees, so take some time to look around and compare. In hindsight I think I made my choice too quickly, now that I'm learning a lot more about Roth IRAs, but it's okay for now.

Recommended reading:

Investing your Roth IRA money

Back to my story. So it was May of 2013 that I opened a Roth IRA account on Sharebuilder, and put in $500 to start. That part was super easy, opening the account.

And then I started to take a look around. I had to invest this money somewhere by myself, and most of the trades cost money to make. What do I invest in? If I add money to the Roth IRA monthly, does that mean I'll have to do a separate trade each time too? Won't it not be worth it then? Should I only make trades once a year? Twice a year? And there was all of this fancy finance lingo I didn't understand: Capital appreciation, yield, ETFs, index, gross expense ratio, order type: market or limit -- ahh, what have I done?!  I'm out of my league!

So there the $500 sat. And sat. And sat.

In the back of my mind it was okay to let it slide, because I was still paying on my student loans. Yet when I became debt free in December 2013 that $500 in my Roth IRA still sat untouched and uninvested.

After some hints in February and March (I don't remember exactly what got me moving, but it was probably some blog posts I'd read), I added an action item for April: Research retirement/Roth IRA investing online for an hour each week. While I only nearly reached two total hours that month, I felt I'd learned enough to bite the bullet and invest some of this money. I also kept reading again and again that you should save for retirement yesterday. Open a Roth IRA and invest today!

So earlier this month I added some more money to the Roth IRA, and then bought shares of two mutual funds that didn't have a trading fee.

I wanted to buy shares of a recommended Vanguard mutual fund, but the minimum initial investment is $3,000. So I'm going to make smaller monthly contributions to my Roth IRA, and when I have enough I'll invest it in that Vanguard fund. I plan to make the maximum contribution this tax year.

Some advice I read and appreciate was to not check your Roth IRA every day, week, nor month. A few times a year is all it needs. Investments that grow over time can have daily losses, so if you're constantly checking you'll drive yourself crazy.

My investing future

My research has only just begun - I barely know anything about all of this investing business. I still have to learn more about retirement accounts (aka where is the retirement account from when I worked for the State of Wisconsin? Floating in cyber world? How can I see/access the money?).

And I have tons to learn about investing: How often should I make trades? What funds are best to invest in? Should all the money in my Roth IRA be invested, or should I leave some untouched?

Luckily the web has lots of resources. You can learn more about anything if you find the information and read it. These three sites have been the most helpful thus far in my retirement/Roth IRA learning endeavors:

Any recommendations as I continue learning about investing/retirement accounts? Are you saving for retirement?
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  1. Saving for retirement is so important, but it can be SO confusing and overwhelming and confusing. I'm still not sure I totally understand it and I've been actively seeking out information for years!

    1. Well thanks for sharing the knowledge you gain on your blog as you go along -- so helpful! I really don't think I would have a Roth IRA today if I didn't read your blog : )

  2. This was really interesting. I have been thinking about this sort of thing a lot recently. I have some sort of Swiss pension-ish thing, but it is mandatory and passive, so I don't know all the details and want to have something that is more permanent (and in English).

    Did you happen to come across anything concerning putting foreign earned income into IRAs?

    1. Just this from the IRS, though it's not the clearest. Yeah, I feel you on the English part. Some of my paycheck right now is going into the Korean pension system or something, which we get back after finishing the contract. I should really ask to see my pay stubs and have someone translate each line, but I just make sure something gets deposited into my bank account on the 17th. Hah

      Some of the investment companies and discount brokers have live customer service chats on their websites, so you could potentially pick their brains about foreign earned income --> IRAs without having an account.