Now that I’m back on social media (if you missed it, I took a social media fast that you can read about here), I’m back to weekly Q&A Sessions. And this week, there was a question that I kept getting over and over again. So I feel that it’s one that I need to spend a little extra time on.
How do I get started with a Roth IRA?
I received this question and various variations of it this week, and so we’re going to dive in.
If you aren’t currently saving for retirement or are interested in saving money in a Roth IRA, this post is for you!
1. Know the limits.
Roth IRAs have an income limit. You can’t make above $129,000 if you’re a single filer, and you can’t make above $204,000 if you’re a married filer. So long as you make below those limits, you can open up and contribute to a Roth IRA.
2. Why a Roth? I have a 401(k).
Most 401(k)s are traditional 401(k)s, meaning that you’re deferring paying taxes on that money in exchange for lowering your current taxable income. The difference with a Roth is that it uses post-tax dollars. So you’ve already paid tax on that money you’re contributing and won’t have to pay taxes on it when you withdraw at retirement! I always recommend that if your employer offers a match, then to contribute up to that match in your 401(k) and then contribute what you have left over to a Roth until you max it out (more on that below).
The “rule of thumb” when it comes to saving for retirement is to allocate 15% of your income towards retirement every paycheck. So if your employer will match 6%, contribute 6% to your 401(k) and then contribute 9% to your Roth IRA until you hit the max.
P.S. If you don’t already track your Net Worth, this is the free site (there is a paid version as well) that we use to track our Net Worth.
3. Be aware there’s a contribution limit.
The limit for 2023 is $6,500. That means you can only contribute up to $6,500 to a Roth IRA in 2023. You have until April 15th of, 2024 to contribute, but the max that’s allowed is $6,500. But that’s per individual, meaning that if you and your spouse have a Roth IRA, that’s a combined $13,000 for the household saved and invested!
Many folks balk when they see that you can only contribute $6,500 to their Roth IRA. “That isn’t enough!” I hear this all the time, but on the contrary, it’s plenty. The best thing about a Roth IRA is that you’re paying taxes NOW versus when you retire. Think about it if you retire a millionaire, you’re in a completely different tax bracket than you are right now, earning $55,000 a year. So instead of paying taxes on that money when you have more money and thus are in a higher tax bracket, you’re paying it now in a lower one.
This is actually why the contribution limit and income limit exist. It’s to keep people from taking advantage of lowering the tax burden. But it’s also what makes this an amazing account as part of your overall retirement plan.
4. Be aware that there’s a second step to take.
Okay, so many folks aren’t aware that you have to do something beyond just contributing to a Roth IRA. So let’s say you contribute $100 this week to your Roth IRA. And that’s all you do – you transfer the money and then move on. But guess what? The money isn’t invested yet!
You have to buy something with the money you contributed! And it’s totally up to you what you buy. Individual stocks, bonds, ETFs, or mutual funds. The choice is yours!
Depending on how much you have set aside to invest, I recommend going with either Fidelity or Vanguard. I have Vanguard, and my husband has Fidelity. Both are easy to use, but Fidelity has a much lower threshold for buying in than Vanguard. So unless you have $3,000 ready to invest with Vanguard, I would start with Fidelity. You can always roll it to Vanguard later if you decide.
5. But what do I buy with it?
So this is totally up to you, but I fully understand how overwhelming this decision is! I was so overwhelmed by it that I didn’t do anything for YEARS! And I don’t want that to be you, so here’s my best advice.
I read Investing Made Simple, which helped me figure out what to buy and how to do my own research. Since I’m not a CFP, I can’t legally give anyone specific investing advice. But I’ll tell you what I do…😉
My “core” portfolio is made up of ETFs and Mutual Funds. Once I got that core portfolio balanced, I then branched out to a few more risky investments like individual stocks (The Motley Fool is a great site to follow if you’re interested in investing in individual stocks – but keep in mind if that’s all you invest in you’re opening yourself up to a LOT of risks. So make sure you only go after individual stocks after you’ve built up your own “core” portfolio.)
Here are a few examples of some ETFs at both Vanguard and Fidelity you could buy:
- FSKAK (Fidelity)
- FXAIX (Fidelity)
- VTI (Vanguard)
- VTSAX (Vanguard)
- VOO (Vanguard)
Here are a few examples of mutual funds you could buy at both Vanguard and Fidelity:
- FZROX (Fidelity)
- FZILX (Fidelity)
- FXNAX (Fidelity)
- VTSAX (Vanguard)
- VTIAX (Vanguard)
- VBTLX (Vanguard)
The key to making purchases is to look at the expense ratios (the lower, the more money you get to keep) and the overall performance of each ETF or Mutual Fund.
6. But I’m afraid the stock market will crash.
It probably will. 😱 I know I might have just shocked you by saying that, but it’s true. The market goes up and down all the time. You have to be in it for the long haul – the longer you’re in the market, the easier it is to rebound from market decline and investing mistakes. It’s not fun watching your money disappear. I know that firsthand, but you must focus on the long-term gains. Build up that core portfolio and analyze it yearly to ensure it’s on track with your current goals. Don’t adjust every week or month but look at every year and then make any changes that need to be made.
For example, say your “core” portfolio comprised FZROX, FZILX, and FXNAX. And your target for this portfolio was:
- FZROX 54%
- FZILX 36%
- FXNAX 10%
When you review your core portfolio, you’d want to make sure that the breakdown between these three was close to the target. You may never get it perfect, but the key is to get it as close as possible. If you notice you’re way off course, make those corrections. It’ll take time to make the corrections to get you closer, but that’s okay.
I hope this helped anyone on the fence about opening up and contributing to retirement. It doesn’t have to be scary. You can do this! Remember time in the market beats out how much you contribute to the market any day of the week.
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