Category Archives: Roth IRA

Roth IRA Discussion Overcoming Fears Part 1

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Do you have a Roth IRA, yet?

If not, today I’m going to try to convince you to both open up a Roth IRA and to start contributing to it!

But before I start my discussion, do you meet the following basic requirements?

  1. Did you have earned income this year?
  2. If you are single was your income less than $107,000? or if you are married (and filing jointly, is your income less than $169,000)?  I’m ignoring the income limitations a bit and keeping it simple.  check the irs.gov site for more details if you are interested.
  3. I’m assuming that you work in the US and are an US citizen, if you are not, then the Roth IRA probably doesn’t apply to you (sorry)

Okay, on with the discussion!  The following are concerns from people who I have talked to during various points in time over the past few years.  Just to make this article flow more smoothly, I’m to orchestrate the following in a two person dialogue style, for simplicity.  So it will be me (MR) and my composite friend that I will call V.

MR.:  Why don’t you have a Roth IRA?
V….:   I don’t want to tie up my money in an account that I can’t tap into until I retire.  I might need that money.
MR.:   Actually V, the money you contribute can be taken out at any time without a tax penalty or other government fees.

V….:   What about the waiting 5 years and some type of complex distributions system or waiting until I am 59 1/2 rules?  Why 59 and 1/2 and not 60?
MR.:   I have no idea why 59 1/2, sorry very strange choice in my opinion, but what the rules identify for the 59 1/2 and 5 years and some type of complete distribution system, is on the earnings!  The “earnings” is the amount that your investments equals above the total amount that you deposited into the account (the deposits are called contributions in IRS lingo).

V….:   So you mean to tell me that I can deposit (contribute) the entire $5,000 limit for the year, then a month later pull the entire $5,000 out, let’s say for some type of emergency, and I’m not breaking any rules?
MR.:   Yep and let’s say that you contributed $4,000 for the last three-year for a grant total of $12,000 worth of contributions.  You can take that entire $12,000 without any type of government problems.  Sweat deal if you think about it, and it’s one of the reasons that I use my Roth IRA for a 2nd level Roth IRA emergency fund.  I’ll probably never need it, but it’s nice to know that it’s there.

Do you have a Roth IRA, and are you putting money into this great investment vehicle?

Cheers,

MR

 

Why I Enjoy Investing In A Roth IRA

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First let me start out by saying that I’ve been neglecting my Roth IRA.  I’ve been neglecting it by not contributing to it in the past two years.  Ironcially, I really do enjoy investing in a Roth IRA though!

I’ve been neglecting it, and instead building my regular brokerage account balance.  One reason that I haven’t contributed to it is because I’m trying to build up an dividend portfolio in my regular brokerage account, and in the process I decided not to put the money in a Roth IRA.

But secretly, the real reason that I haven’t been contributing is because I’m trying to increase my account balance via investing means, actually more like active trading.  Oh sure, I have most of my money in my Roth IRA invested in a solid dividend stock because Roth IRAs are the perfect dividend shield   But I also have about 10% to 25% invested in stocks that I trade weekly or during big dips in the market.  I also have a cash position to take advantage of big dips during down stock market days too.  It’s a fun activity and lately, I’ve become more refined at it.  I’ve found that the less desperate that I am since I have some money saved up already, the more cool I am when I make my purchases.

 

Buy Low Sell High

Yep, since I’m pretty cool headed with the small percent of the Roth IRA that I actively trade, I’m able to buy low and sell high.  I never hit the absolute high or the absolute bottom, but I still make my margins which makes it fun.

The advantages of playing in my Roth IRA are as follows:

  • Any capital gain that I incur isn’t taxed!
  • Any dividend that is distributed isn’t taxed either.
  • The amounts are small amounts and if I lose money it won’t bother me much
  • I use the money to buy during dips in the market, this has work out great!
  • I don’t have to worry about keeping track of all my stock transaction (although I still do keep all of the trading slips that are mailed to me).
  • Since I keep a part of my Roth IRA money in cash, that cash serves as a stealth emergency fund

In chess, a Roth IRA is like the queen piece.  It’s very powerful and far reaching!

 

The disadvantages of playing in my Roth IRA are as follows:

  • I can’t take any capital gain losses if they were occurred.
  • Once I pull the money out for an emergency, I only have so long to put the money back in else wise I can’t put it back in.  While this isn’t a true negative, I miss out on future tax free growth that the money could provide… and this would be a tragedy!
  • My Roth IRA can make me rich some day, oh wait… that’s not a disadvantage!!!

 

As you can see, just from a fun perspective, the Roth IRA is the best thing since sliced bread!

MR

Roth IRA Benefits for Kids

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Because of  the wonderful Roth IRA benefits for kids, once my kids start to earn some income (aka get a job), I’m going to have them open a Roth IRA.  A small problem is that currently my kids are ages 7 and 11, so I many have to come up with a clever way for them to earn some money!

Unfortunately, I can’t afford to put the maximum allowed ($5,000 each) in both of their future Roth IRA accounts, at least without severely affecting the growth of my own net worth.  So instead, I intend to put one or two thousand in each of their accounts per year.  Of course, it depends on my own future income stream.

What Are Some Roth IRA Benefits For Kids?

  1. Money that is added to a Roth IRA will grow tax-free!
  2. Money that is contributed to a Roth IRA can be taken out any time both tax and penalty free.  Note, the earnings on the contributed money cannot be taken out without a incurring a 10% penalty and income tax on the earnings.
  3. If you put the money in stocks that yield dividends, the dividends also will be tax free!
  4. You can contributed the money from your account, but that amount you add need to be what they earned or less for that given year.
  5. You can take $10,000 of earning out for purchasing a home if you are a first time home buyer and qualify under certain rules!

The benefits listed above are powerful reasons to consider creating a Roth IRA for kids, but the real hidden advantage is that contributing to a Roth IRA starts a family tradition and habit for your kids!  If have your child go though the process with you every year, hopefully they will learn that the contribution process is just a normal, annual activity!  This can be a powerful tool for wealth creation for them.  Hopefully they will realize that you are paying into their Roth IRA for they retirement someday, so hopefully they will think twice before withdrawing it.

While you can use the Roth IRA for college expenses too, I prefer not to do this since the earning will be taxes (although the 10% penalty is waived for such expenses).  That said, they can still use the contributions from the Roth IRA tax and penalty free (but then again they can use the contributions for anything tax and penalty free).  Personally, I prefer to use a 529 plan.  The 529 vs Roth IRA route to save for college really depends on how much you make and is a topic that I’ll blog about in the future.

Another non-financial benefit is that this give your child exposure to stocks and other investments.  Is there a better way to learn about investments other than getting your hands dirty doing it?  I think this could be a great learning tool for them.

Well, you now know the benefits of a Roth IRA for kids!  If  you have any question please leave them in the comment section below or email me (via my contact page).

Wishing you the best,

MR

 

 

 

Roth IRA Contributions versus Roth Investment Gains

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Roth IRA Contributions versus Roth Investment Gains

I have some friends at work that don’t understand what I believe are some very important aspects of a Roth IRA.  Some I’m going to identify an overlooked aspect of Roth Ira because of the unusual word “Contributions”. 

Yes we all know the definition of the word contribution, but it’s still a little foggy how it relates to Roth IRAs.  To keep this discussion simple and because it’s the most common type of contributions, I’m only going to talk about “Direct Contributions”

So what is a direct Contribution?  

These are contributions that you deposit into a Roth IRA from the earnings in your checking/savings account, and other already taxed income.  These type of contributions are NOT from rolling money from another IRA into it (if it were a transfer from another IRA, then it would be called a Rollover contribution)!

So think of direct Contributions as money that you deposit in your Roth IRA from the money you made from your job, in other words, your earned income…

The money portion of your direct Contribution into a Roth IRA can be withdrawn at any time both tax and penalty free!  It’s tax-free because it has already been taxed!  And it’s penalty free because with your contributions, there is nothing to penalize.

Here is an example to make it more clear:

Let’s pretend that MR has contributed $5,000 to a Roth IRA for each of the last 3 years.  He now has an emergency and need to tap into the Roth IRA, which is currently valued at, oh let’s say $20,000!

So three years of $5,000 means the total direct contributions comes to a total of $15,000 but since there is $20,000  in the Roth IRA, that would mean that the investment gains portion would be $5,000.

So if I had an emergency after 3 years, I can take out the $15,000 amount that I contributed to the account and do whatever I want with it.  However, if I try to take out the remaining $5,000 that is left; well that $5,000 would be taxes and my current income tax rate, and an early withdrawal penalty would apply!

I hope this example clears it up, if not please free to email me asking more, or leave a comment asking your question!

Tell me what you think of this great saving/investment vehicle?

-MR

One caveat!  After 60 days, you can’t put your contributions back into the Roth IRA account. While this is a bit of a bummer, it’s still an incredible investment instrument!