Pragmatic Finance

If there is one thing I really regret financially is not starting a Roth IRA years ago. A Roth IRA is a retirement account that grows your investments tax free. The money you place in there is after taxes but you won’t pay any taxes on any of it if you pull it out after your 59 1/2 and it has been open for five years. This is fantastic if you think you are in a lower tax bracket now than you think you will be when you get older. This makes it especially attractive for younger workers that are just starting to save for retirement, such as myself, who will almost assuredly make much more money later in life than they do now.

If you have an employee sponsered retirement program where they match your contributions, such as a 401k, then you will probably want to contribute to that before your ira. You can’t beat free money. If you don’t fit my profile you might want to check out a comparison of traditional versus roth iras. In order to qualify for a roth, your income must be under $160,000 for married filing jointly and $110,000 for single.

For IRA’s you are allowed to contribute $4,000 per year total to all iras, assuming you’ve earned that much income. So, for example, if you contribute 4k to a roth ira, you can’t contribute any to a traditional ira. In 2008 it will increase to 5k. Also, you can fund an additional thousand if you are older than 50. You have until April 15 to fund the previous year’s contribution. This also means that anytime after January 1st until tax day you can fund the current or previous year.

One of the biggest advantages of Roth IRAs is that you can take out your principal contribution at any time without penalty. The only downside being that you won’t be able to go back and replace that previous year’s contribution that you took out. You can also take out up to 10k of your earnings for a first time house purchase.

You can put just about any investment into an IRA, including stocks, bonds, cds, mutual funds, and index funds. Heck, I think there is even ways to put real estate, treasury bills, and limited partnerships into them. If you are just starting out you might want to purchase one of the retirement mutual funds from either Vanguard, Fidelity, or T. Rowe. The retirement funds consist of a mixture of domestic stocks, foreign stocks, and bonds. They have a target date and are adjusted to be aggressive when your young and more conservative as you get older.

For some more information about target year retirement funds check out my post on Simplifying Your IRA. I discuss many of the options available and why I chose Vanguard’s Target Retirement 2045 Fund (VTIVX).