Hello,
I recently opened a Roth IRA, and I'm interested in investing, but is now the best time? I've heard a lot of conflicting information?
And what would be the ideal amount?
If you have enough to set aside, yes! The earlier you start, the better, due to compound interest. Amount? That's totally up to you. How much and when you contribute is really contingent on your current situation, but I suggest researching dollar-cost averaging (DCA).
Depending on your tax bracket a Roth IRA is one of the greatest retirement tools. You have access to pick your own investments with low expense ratios and they portable if you want to switch brokerages. The max is $6,000 a year and as Diandra said DCA is a great way to fund it throughout the year. Depending on your time horizon for retirement you can throw caution to the wind, at this point we are back at pre-covid market highs so you would be up 49% if you had invested in the S&P500 on March 23rd and held on to it. I don't recommend timing the market but staying focused and disciplined is key when investing.
If you think your tax bracket will be higher in the future then Roth would be the way to go, if you think it will be ower and your income is low enough you should probably pick a traditional IRA. There can be a number of other factors so I would recommend you do a fair bit of research before deciding which, if either you should choose. You can actually contribute to both up to your eligible limit (6k for many).
Per @Tony D.
If you think your tax bracket will be higher in the future then Roth would be the way to go, if you think it will be lower and your income is low enough you should probably pick a traditional IRA. There can be a number of other factors so I would recommend you do a fair bit of research before deciding which, if either you should choose. You can actually contribute to both up to your eligible limit (6k for many).
I like this answer as it is simple, but I think it really misdirects a lot of people. So I will give an example.
Example: Using Federal tax rates fro 2019 only. We have an 18 year old individual who is in 12% tax bracket and will later be in the 10% tax bracket upon retirement at age 60. For simplicity sake we won't be using the tax ladder but will make it an absolute percentage. Also the increase in stocks annually we'll set to the historical average of about 7%.
So first situation. Put $1000 into traditional IRA and pays no tax. It will grow to about ~17,144.26 and this amount will be taxed at 10% so you'll end up paying 1714.43 in taxes
Second situation Put $1000 in roth and pay tax now at 12% of $120 but not pay taxes later.
So simply on a tax stand point Roth is always better because inevitably even if the tax bracket is higher now and lower later amount you pay in tax will be higher because of the larger amount produced by the Traditional. So if you're really only worried about how much tax you pay to the government than Roth is always the way to go.
So why do I like @ Tony D.'s answer its because of growth. If you do have a lower tax bracket later than now probably the accelerated initial growth will leave you in a better position than a Roth if indeed your tax bracket is lower when you do take it out.
However, it's far to simple because people who are really good at saving often think they'll end up in the lower tax bracket but the combination of pensions and RMDs may force them into a higher bracket with little control over the matter. So I'm glad @ Tony D. said to do a fair bit of research as it is something you shouldn't decide on a whim.
Well that my 2 cents and a different view on the matter.
I think there may be some confusion between total tax paid and tax rate here. Ultimately it is about about how much you have when you withdraw in the end. While there are many variables one should take into consideration, and there are many different scenarios, the tax rule of thumb is a bit more robust than I think is implied.
Let's consider the compliment of your effective tax rate, call it "K" for how much you keep (for example if your effective tax rate is 20% than your "keep" rate K is 80%). Whether you are taxed up front as in a Roth or at the end when withdrawn as in a Traditional IRA the amount you will have after taxes is approximately
KPG
where K is your effective Keep rate, P is the invested principal (currently about 6k per year but will surely vary with time and age) and G the effective growth over that time (let's keep it simple and not get into the math for G but for those curious a one time investment at a 7% investment return rate G is about 2^D where D is the number of decades invested in the market),
If your tax rate is higher earlier then you use a traditional IRA as K will be larger when you take the tax out later. If your tax rate is lower earlier then you use a Roth as K will be larger when you take the tax out at the beginning.
Example 1
Tax rate now: 15%
Keep Rate Now 85%
Tax Rate Later 25%
Keep Rate Later 75%
Go with a Roth
Example 2
Tax Rate Now 20%
Keep Rate Now 80%
Tax Rate Later 10%
Keep Rate Later 90%
Go with a Traditional
As I think has been clearly acknowledged though there are many other factors that can come into play. At the very least do some online reading and -if you can- talk to a professional.
@ Tony D
Is absolutely right inevitably it comes down to research and if possible to talk to a professional because it all depends on how you approach the problem.
Side note. No confusion on my end between tax rate and tax paid I was merely stating a different approach.
I don't expect to be at a higher tax rate when I retire, so I might avoid the Roth.
Hi Mary Ellen, that is possibly the case for many people (I hope it is true for me) but they still contribute to a Roth (like me) for other reasons. Yet if what you say is true and you fall into the majority of situations that will likely be the right decision.
Go @Tony D. Great answer. Totally in agreement.
always save no matter what is happening.
always save no matter what is happening.
if only schools could instill this into our children
everyone seems to promote to young people to save for house or save for car but no one stresses that there has to be saving for retirement that does not get used for the house or the car.
Agreed that schools should actively instill financial literacy in our children. Anyway I know there are many organizations that are attempting to make this possible in classes.
Here is a free resource for youths.
https://y4y.ed.gov/financial-literacy-for-all
If you have the extra funds, I would invest it in IRA.
Let's keep it simple. A Roth is what you see is what you get since you are putting in after tax dollars.
I need to learn how to invest in IRA
@ Nancy W.
Let's keep it simple. A Roth is what you see is what you get since you are putting in after tax dollars.
Simple is great. But some things to consider for the curious.
Roth's have an income limit. If you're past that, you're not allowed to contribute to a Roth.
Even if it's after tax money a normal traditional IRA is fine as it will generally count as a deduction (becoming essentially pre-tax money). This is useful if you have money to deposit and you owe a bit on federal taxes.
Let's not forget regular brokerage accounts. If you hold stock for more than a year there is a 0% tax bracket on capital gains, which makes it essentially the same a Roth with different strategies.
Which account do you guys recommend to open a ROTH IRA?
Per @ Judy L
Which account do you guys recommend to open a ROTH IRA?
I imagine you're asking which brokerage to open a Roth IRA with. In such cases, I do recommend larger brokerages.
If you truly plan to be a passive investor and do indexes I would say Vanguard is a great place to open with.
If you plan on trading a bit using the Roth IRA - TD Ameritrade in my opinion has the best training resources.
Schwab and Fidelity both have fractional shares if you're planning to trade but don't have as much money to start with. Fidelity has better trade settings and tends to be a bit faster than Schwab. Schwab if you open an account with at least $5000 you can just use their roboadvisor which doesn't charge (though it does keep more in cash) but they will automatically create a portfolio based on your risk tolerance.
Lastly, there isn't really a mistake when opening a brokerage. You can always roll over the account to another one if the one your in isn't good. I've used all of these at some point hence these are all my opinions.
Also, awesome that you're investing.
Investing in retirement is a great idea, most people choose to invest about 15% of there income.
Yeah about 15% is the way to go
Yea definitely worth it if you have the funds!
