Today, March 27, 2012, you’ll witness the rare spectacle of over a hundred finance writers speaking in one voice: we all want you to open a Roth IRA. (If you already have a Roth IRA, go kick $100 into it and spend the rest of the day reading blogs or whatever.)
Why are we all writing about Roth IRAs today? The Roth IRA Movement is the brainchild of Jeff Rose, a certified financial planner and blogger at GoodFinancialCents.com. Rose recently gave a speech to a class at his alma mater, and he asked the 50 students if they knew what a Roth IRA was. Not how many had a Roth IRA, just knew what it was. Nobody raised a hand. (Probably there was one young person who did know but looked around and didn’t want to be branded as the nerd who knows what a Roth IRA is.)
Rose found this infuriating, but wondered whether it really mattered. After all, there is a lot of annoying grownup stuff that college students deserve to be blissfully ignorant about. Finally, however, he decided it did matter:
“The final conclusion was ‘Yes!’, it is a big deal,” he writes. “More young adults need to know what the Roth IRA is and how it can have a tremendous impact on their life.”
So here goes. For the record, when I was in college, I had no idea what a Roth IRA was; all of my “investments” were made in the guitar and pro audio departments at Styles Music, Claremont, California.
The Roth IRA is simple
Why are finance types always going on about Roth IRAs, anyway?
The Roth IRA, despite its impenetrable name, is the simplest retirement savings account in America. To recap how it works: you contribute after-tax money to the RothIRA, up to $5000 a year, and the money grows tax-free and can be withdrawn tax-free in retirement. When I say “after-tax” money, I just mean you don’t get an immediate tax break for contributing to the Roth IRA; you get it later, in retirement.
At this point, the conversation usually devolves into endless hand-wringing about the tax advantages and disadvantages of Roth IRAs versus the other kind, traditional IRAs. I am not going to say a single word on the matter, because look at what else Roth IRAs can do:
- When you contribute to a Roth IRA, it doesn’t affect your tax return. You don’t even need to tell the IRS about your Roth contributions, just like you don’t have to tell them how much money you put in your savings account. (You don’t have to tell them about any interest you make in your Roth IRA, either.)
- You can withdraw your contributions from a Roth IRA any time, with no tax or penalty. In other words, say I open a Roth IRA and put $100 in it. I look at it in a few months and it’s grown to $105. I can withdraw my original $100, but not the $5, without penalty. This means that for a young saver, a Roth IRA can double as an emergency fund. (Your brokerage will keep track of how much of your RothIRA is contributions and how much is earnings.)
- Roth IRAs play well with other types of retirement accounts like 401(k)s. Most workers can, and should, contribute to both, because it provides tax flexibility in retirement. (If you like, you can read “tax flexibility” as “the potential to give the IRS the finger, legally.”)
- If you’re reading this before April 17, you can contribute to last year’s Roth IRAtoday. You could open a Roth IRA this week, contribute $5000 for 2011, and contribute another $5000 for 2012. It will also give you younger-looking skin.
Nobody has ever said, “I wish I hadn’t opened that Roth IRA.” Seriously, I Googled it.
What to do
If you had told me this in college, I would have said, “Sounds great! I have band practice, so I will do it later. Or, like, never.” Well, I’m holding you by the shirt collar, so stick around one more minute.
Opening a Roth IRA invites procrastination. There’s no burning reason to do it today, and it sounds complicated. So I found some easy ways to get it done right now, online, even if you only have five bucks to contribute.
What you’ll need:
- Your checkbook, or at least the routing number and account number of your checking account.
- Your social security number.
Three places to open a Roth IRA today:
If you have less than $1000 and can’t contribute $100/month: Ally Bank. You can open a Roth IRA savings account or CD at Ally with no minimum balance and no fees. This is a savings account, not an investment account, but if you’re just getting started, your savings rate is much more important than what you invest in. You can figure out investing a little later. I’ll help.
If you have less than $1000 but could contribute $100/month: Betterment. The simplest investment account I know. No minimum opening balance, but you have to set up an automatic contribution of at least $100/month. Modest annual fee (0.35%).
If you have $1000 or more: Vanguard. Of the big mutual fund companies, Vanguard offers the cheapest target-date retirement funds. The minimum investment is $1000. These funds hold a similar portfolio to what you’d get at Betterment, but at a lower cost.
(Disclaimer: I, Matthew, receive nothing for recommending these institutions, but they’re all Mint.com partners.)
There, that’s it. Oh, one more thing. I’ve just been kidnapped, and my captors say they’re going to make me watch Jersey Shore DVDs 24-7 until you open a Roth IRA. Please, do it before I start saying things like, “That Snooki is just misunderstood.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.