Roth-Ira, Making Your First Million

It  boggles  my mind how many people out there have no idea what a Roth-Ira is. They simply assume the only tax efficient way to invest is through company sponsored 401k plans.  Oh how people are wrong!  Roth-Ira’s are the bread and butter of any wise investment plan.  It is the only investment vehicle where you invest post-tax dollars and will never be taxed again on the money you initially put in or future earnings.

Now, to make this clear, let me back up.  When I say a Roth-Ira is an “investment vehicle,” I’m saying that’s it’s a method for holding other investments.  A Roth-Ira by itself is not an investment.  One would utilize a Roth-Ira for a wide variety of investment choices.  It’s one awesome investment tool!

Let’s get down to the basics:

– A Roth-Ira is an investment vehicle that holds investments within it. It’s a vehicle for other investments.  Think of a Roth-Ira like a car.  The passengers within the car would then be your investments like CD’s and stocks.  A Roth-Ira is only an account that holds investments within it.  You can invest in a wide range of investment choices including: stocks, mutual funds, CDs, money market funds, index funds, and ETF’s.

– It can be opened virtually anywhere. Banks, online brokers, mutual fund companies, pretty much anywhere you look you can open a Roth-Ira.  For banks, I recommend a small scale credit union in your local area.  For discount brokers, I recommend the Vanguard Group.  And for mutual fund companies, I recommend the Vanguard Group again haha.  Yes, Vanguard is pretty much “baller status.”  They have the lowest fees by fast and have the widest range of fund options out there.  Just do yourself a favor and start investing through Vanguard.  They truly are on your side.

– You get your choice of investments to place within the Roth-Ira. This is where the beauty is!  You can have literally ANY type of investment in your Roth-Ira account.  If you are conservative, I recommend CD’s though your local credit union.  If you’re a little riskier like me, I recommend index/mutual funds though a discount broker.  And if you’re seeking adrenaline, you can purchase individual stocks through a broker.  Isn’t freedom amazing?

– Roth-Ira contributions are post-tax dollars, so you never pay tax on your investments ever again! People get this confused all the time.  A Roth-Ira is the only investment vehicle that take your post-tax money, invest it, and is never taxed again.  Yes, you heard me right.  Even your capital gains are never taxed.  This means your money grows tax-free indefinitely, so start investing TODAY.

– You can withdraw your  contributions, penalty and tax free. This really is an awesome benefit to a Roth-Ira.  It’s a peace of mind for me when money gets tight.  I almost see it as a backup emergency fund.  Although I have an official emergency fund, it’s nice knowing that I can take out money from my Roth-Ira tax-free unlike 401k plans which you can never touch.  I want to make it clear though, although you can take out your contributions, you may not touch the interest made.

– Catch up contributions available. This is an added benefit for older investors.  If you;’re age 50 or older, you may contribute an extra $1,000 to your Roth-Ira account.  The federal government understand that one may not have invested in their younger years so they provide a way to “catch up.”

– Relatively high income limits. Unless you make an obscene amount of money, Roth-Iras are great for millions of American investors.  The government has set income caps for investors, preventing high earners from tax sheltering their money.  As a single, you can contribute to your Roth-Ira if your income does not exceed $122,000.  If you’re married, your household’s income cap is $179,000.  It is highly improbable that you will ever make this much, so the average American does not need to worry.  If you were making that much money in the first place, who needs a Roth-Ira anyways right?!

– Ability to open multiple Roth-Ira accounts at multiple locations. Although the maximum you can invest to a Roth-Ira is $5,000 for 2011, you can have multiple accounts at various institutions.  However, this is not wise.  It can get complicated and messy when it doesn’t have to be.  Also you run the risk of exceeding your yearly contribution cap.  And this means huge tax implications!  So keep things simple and open all your accounts in a single location such as a local bank or online broker like TradeKing.

– Low or no management cost. This is a huge selling point for a Roth-Ira.  They have little to no management and upkeep fees.  Many brokers and banks have a minimal annual fee on an account but many waive this.  And if you keep it relatively low cost with index/mutual funds, you’re looking at fees ranging from .01-1%, depending on what you choose.  For example, I like to stay widely diversified, so I hold a “fund of funds” in my Roth-Ira.  It’s the Vanguard 2050 Target retirement fund.  It has a fee of .19%, which is  negligible  to me.  I recommend you search out the lowest fees possible in your quest for Roth-Ira funds.

Now, where to open a Roth-Ira account?

You have a  myriad  of investment choices.  You literally can open one almost anywhere.  It all comes down to what investments you want to make.

If you’re looking for strictly conservative investments like CD’s, I would say just walk down to your local credit union and open an account with them.

If you’re looking for mutual funds, ETF’s, and index funds, I would recommend Vanguard.  I use them for the majority of my retirement accounts.  They have the lowest management fees out of anyone I know.  Also, ETF trading is FREE with Vanguard.  I’m an advocate for ETF investing vs. individual stocks picking, which I also call gambling haha.  There’s no such thing as easy, quick money.  Investing for the long haul is the only way to do it!

If stocks is your game, go with TradeKing.  They are rated one of the top three online discount brokers.  I have a personal “play money” account with them.  They have low trading fees ($4.95) and no hidden fees.  Their trading platform is great and they have a wide variety of investments including stocks, mutual funds, bonds, real estate funds and many more.

Well, that concludes my introduction to Roth-Ira accounts.  I hope it was informative and useful for you.  This is the easiest way to make your first million and take a giant leap toward securing your financial future.  Take this knowledge, go out and start investing in the best financial vehicle out there, a Roth-Ira!