College teaches us a lot, unfortunately very little is taught about how to fund your retirement. That would make too much sense, wouldn’t it? All that student loan debt and they don’t even teach us how to invest in the stock market, open an IRA, or plan for our financial future. Most people know about a 401K as it’s offered by a lot of employers and relatively easy to setup. But, another great investment vehicle for your retirement savings will be an IRA (aka Individual Retirement Account).
Roth IRA’s are one of the best ways to ensure you end up wealthy in retirement.
What Is an IRA?
There are two kinds; Traditional & Roth IRA’s. The main difference between the two is the tax implications; Traditional IRA’s are similar to 401k’s in that they’re tax-deferred. If you are already involved in a 401K with your employer a Roth IRA may be another way to diversify your retirement accounts.
Roth IRA’s use your post-tax money to contribute, the advantage is that when you cash out (after 59 ½) there are no tax implications! You can watch the money grow over time and you won’t be taxed on your gains within in your IRA! If you need to withdraw from the fund before 59 1/2 you are allowed to for certain situations.
- $5,500 contributions per year.
- Roth IRA’s give you more flexibility than a 401K. IF you need to withdraw the money you can withdraw your direct contributions (not your earnings) to use. Obviously, if you pull the money out you will lose out on compound interest.
- If you want to contribute $5,500 over 12 months you’d need to save $458/month.
I’m not endorsed by any of these sites but do have my IRA through Vanguard, as you’re able to buy/sell Vanguard funds & ETF’s with ZERO transaction fees (most sites are $6.99 – $9.99 a trade) so this can be beneficial in the long run.
Roth IRA Limits
According to Vanguard, the max salary to be able to contribute to IRA for 2017:
How To Open A Roth IRA
As I’ve mentioned Roth IRA’s are a great investment vehicle and one I feel is underutilized. One reason I think that is because people are unaware of this investment choice and also it’s not as easy to set up as a 401K. You can open an IRA with any brokerage account with a minimum investment (usually $500 to $1,000) such as E-Trade, Fidelity, TD Ameritrade, Vanguard etc. All of these will be able to offer you a variety of ways to invest in stocks, bonds, ETF’s and mutual funds.
For this example, I will show screenshots of opening a ROTH IRA through Vanguard.com. I have no affiliations with Vanguard but I do have my Roth IRA & Brokerage accounts with them.
- Log onto www.vanguard.com
- Click “Open an account” in the top right corner
- Click the bubble for “Open new account) on the next screen
- Enter info about yourself (Open “Retirement Account & Select Roth IRA. Fill out personal info)
- Add bank account info (routing and checking number to fund account)
How To Fund Your Roth IRA
You need to fund the IRA. Once you connect your bank account it’s a simple as clicking on “Contribute to your IRA” and entering an amount. The transfer will typically take 2-3 business days. Remember an IRA has a maximum contribution limit of $5,500 (under 65 years old), you can contribute that in any interval; one-time lump sum, bi-annually, quarterly, monthly or whenever is convenient for you. No matter when you contribute just make the effort to fund as much as you can depending on your financial situation.
If you’re under 65 and want to max out your yearly contributions:$5,500 total /12 months = $458 month / 30 days in a month = $15/day.
If you can’t do that don’t worry, just contribute what you can…making it a habit is one of the most important things! Also, you technically have 15.5 months to contribute to your IRA as the deadline is always April 15TH of the following year.
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