Opening a Roth IRA for the First Time

I just created an account at Vanguard, opened up my very first Roth IRA, and invested in a low-cost index fund. So did Mrs. PT. Sweet! Just in time too. We needed to contribute before we filed our taxes if we wanted the contribution to count towards 2008 limits.  In a time when the company 401k match is no longer there for some (like me), it makes sense to be going the extra mile with a Roth IRA.

If you are unsure which IRA best suits your needs, CLICK HERE to use and their IRA wizard. This tool allows you to compare IRA types and different discount brokers.

It feels really good to have finally met this goal (see Roth IRA goal). It’s been a long time coming. Ironically though, it was very quick and easy to do. Here’s the how and why on setting up a Roth IRA:

Stepping Up to the Roth IRA

Up until this point in my life, I’ve done my retirement savings using two types of accounts: my company 401k and a traditional IRA. The traditional IRA was used as my main retirement account prior to participation in a 401k (you usually can’t do both at the same time).

Once I got into the 401k scene, I made sure I got the match. And now, for the first time, I’m transitioning my extra retirement contributions (beyond my 401k contributions) to a Roth IRA.

Keep in mind though that it’s not a requirement to take it in these steps. You can open up a Roth IRA right now and start saving money for retirement!

Why Open a Roth IRA?

Three reasons I’m opening up a Roth IRA:

  1. I’d like to contribute more to my retirement annually than my 401k limits will allow. Like I said above, I’m maxed out on my 2008 tax-deductible 401k contributions. The next logical option is the Roth IRA.
  2. I want more investment options than my 401k (currently through Fidelity) will allow. The funds available in my company 401k mix are good, but maybe a little high in cost. I want to buy into low-cost funds.
  3. I want my retirement funds to be diversified from a tax perspective. The 401k is taxed on distribution (when you retire and start taking out money) and the Roth IRA is the opposite. It uses after-tax funds going in, but allows you to take distributions tax-free. Having both allows you to hedge your bets on your future tax rate.

How Much to Contribute and What to Invest In?

The answer to the first question is, “as much as possible” and up to the maximum allowable contribution of $5,000 (2008 and 2009). We’ve started our accounts with $3,000 each and plan to add the additional $2,000 over the next 10 days (we’re moving money around, but want to have it invested prior to the date we file our taxes so we can attribute it to 2008 limits).

The answer to the second question is really a topic for another post. I can tell you though that we’ve invested in low-cost index funds. Vanguard has several to chose from. Unsure about the market? You can actually place your Roth IRA contributions in stable money market funds, amongst many other options.

Where to Open the Roth IRA

I chose Vanguard as my investment manager. However, you can open a Roth IRA with several different types of financial companies: your bank, major investment firms, or discount brokers. All you need is your basic personal information and your bank account and routing numbers to make the initial transfer.

Vanguard’s mission is to “help clients reach their financial goals by being the world’s highest-value provider of investment products and services”. That “highest-value” translates into lowest-cost when it comes to index funds. Vanguard is highly regarded amongst most personal finance experts, bloggers, and CFPs as the best place to invest in an IRA or taxable account. When I spoke with Kiplinger and NAPFA back in January, they suggested Vanguard. For more places to open a Roth IRA check out this list of the best online stock brokers for cheap stock trades.

My Plan for 2009 and Beyond

This definitely isn’t a one-time deal. What particular fund I invest in may change, but I plan on making the allowable maximum contribution to my Roth IRA each year until retirement. For 2009, that will be another $5,000. At some point I’ll probably consider setting up an automatic contribution to the account.

Final Note: Keep in mind there are income limits and contribution limits to tax advantaged retirement accounts like the Roth IRA. Definitely do your own research. A good place to start is the IRS guide to IRAs.

<p class=”alert”>If you are unsure which IRA best suits your needs, <strong>CLICK HERE</strong> to use and their IRA wizard.  This tool allows you to compare IRA types and different discount brokers.</p>
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Last Edited: January 23, 2014 @ 11:23 am
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.