Issue #103: What do you say we talk about IRAs today?

July 21, 2021 • Issue #103

Hi y’all —

Life is full of hard choices.

When my alarm goes off at 8:30 every morning, for example, I have to choose whether to drag myself out of bed or hit snooze for a few more minutes. When I’m buying tickets for a Jonas Brothers concert, I have to choose which guy’s side to sit on (Nick’s, obviously, if I can afford it). And when I’m standing in front of a Slurpee machine and my favorite flavor is broken, I have to choose whether to pivot to a Big Gulp or go to another 7-Eleven to track down a working machine.

As President Olivia Rodrigo would say… God, it’s brutal out here.

Another choice I’ve been confronting lately is whether to open an individual retirement account, called an IRA, or Roth IRA. I’ve read enough about them that I think I’ve decided I want one in addition to my 401(k), but how should I choose between a traditional and a Roth IRA? When I go to open an account, what should I be looking for?

Ed Slott, CPA and author of Fund Your Future: A Tax-Smart Savings Plan in Your 20s and 30s, told me the answer to my first question is a no-brainer.

“The greatest money-making asset any individual can possess is time, and young people just have more of it, so they should capitalize on it,” he says. “They have the ability to begin growing their retirement savings from the first dollar, all tax-free, by using a Roth IRA as opposed to a traditional IRA.”

This is because with a traditional IRA, my contributions are pre-tax: I deduct them from my taxes when I put them into the account, and I pay taxes on them upon withdrawal. With a Roth IRA, I pay taxes on the contributions when I put them into the account. I don’t have to pay taxes when I take the money out.

Slott says a traditional IRA may be appealing to older, wealthier workers because of that deduction rule. If they’re on the cusp of moving into a higher tax bracket, they may want to use IRA contributions to bring their taxable income level down (and therefore keep them in the lower tax bracket). But for me or other people just starting out in their careers, it’s probably not so much of a concern.

“It’s worth giving up that deduction to have all your retirement money growing and compounding, tax-free, for the rest of your life,” Slott adds. “If you don’t do that, and instead go for the short-term gain of the tax deduction, your money will still grow tax-deferred — but all of that growth and compounding will eventually be shared with the IRS.”

Another potential perk of opening a Roth IRA is the fact that I can withdraw my contributions from it without paying taxes. Traditional IRAs work really hard to get me to wait ‘til retirement to access the cash — if I withdraw before age 59 ½, I have to pay taxes and a 10% penalty.

With Roth IRAs, I already settled up with Uncle Sam. The contributions are mine to use for whatever I want, like a down payment on a house, says Matt Rogers, CFP and director of financial planning at eMoney Advisor.

Obviously, it’s still best to wait to use the money for retirement. But the point is that I have flexibility if I need it.

There is, however, a catch. Roth IRAs have what’s called a five-year rule. While I can withdraw my contributions at any time, I can’t take out any earnings until my Roth IRA has been open for five years. I also need to be at least 59 ½. Otherwise, I'll generally have to pay. 

“It’s one way to force you to save your money as opposed to dipping into your Roth,” says Rafael Rubio, president of Stable Retirement Planners.

As far as the actual mechanics of opening a Roth IRA, Rubio said to ask my financial advisor for a recommendation or check to see if my bank offers one. Slott told me to think of it as a carafe of wine — the container doesn’t matter quite as much as the contents do.

Luckily, my coworkers have done most of the legwork for me. Money’s got a list of best Roth IRAs right here that includes all the big hitters (Fidelity Investments, Charles Schwab, Vanguard).

While considering my options, I should keep an eye out for account fees and minimum balance requirements. Then I’ll need to choose what to invest the funds in. Rogers said an ETF or mutual fund might be a good starting place for a beginner like myself.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

I should look into opening a Roth IRA because of my age and the tax treatment.  

But it is possible to have both a traditional and Roth IRA. In fact, it’s common — one poll from 2017 found that 71% of households with Roth IRAs also had traditional IRAs. I just need to be cognizant of the contribution limits. For 2021, I can’t put more than $6,000 TOTAL into my IRAs. (For people 50 and up, the limit is $7,000.)

According to Rogers, the most important part of this is to begin.

“The key thing is to invest early. Don’t get hung up on ‘Roth or traditional?’ [and decide] ‘I’m going to skip it entirely,’” he says. “Just get in there and start investing as soon as you can.”

VIA GIPHY

RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

Actress/singer Ariana Grande is giving away $1 million in free therapy in a partnership with online counseling service BetterHelp. In an Instagram post, she wrote that “while acknowledging that therapy should not be for a privileged few but something everyone has access to, and acknowledging that this doesn't fix that issue in the long run, i really wanted to do this anyway in hopes of inspiring you.” I love it, and I love her evergreen advice to just keep breathin' and breathin' and breathin' and breathin'.

INTERNET GOLD

five things I'm loving online right now

1	A man in Michigan recently found 160 bowling balls from the 1950s buried in his backyard — and he’s putting them to work. The Detroit Free Press reports: “He plans to use the balls as edging for his landscaping, or to make sculptures. He also donated eight balls for a nearby church to use in a bowling ball cannon at a pig roast. He will also be giving some to his stepfather, who plans to use them as custom furniture legs.” Resourceful!
2	I know we’re all about Inside these days, but don’t sleep on Bo Burnham’s Vines.
3	Even the Teletubbies got vaxxed.
4	A secret Nintendo cafe in Tokyo is finally open to visitors… who can guess the address. The cafe, named 84, was founded by an ex-Nintendo employee and packed with memorabilia, including a sketch of Pikachu by famed Pokémon designer Ken Sugimori.
5	As a notebook hoarder, I feel seen.

401(K)ITTY CONTRIBUTION

send me cute pictures of your pets, please

VIA SCHOLAR NONI

Meet Posey, a serious cat who is chilling underneath a planter and considering opening a Roth IRA so the IRS can’t claw back any retirement savings.

Suddenly I’m craving a Slurpee…

See you next week.

P.S. Do you have a Roth IRA? What’s your favorite Vine? How many bowling balls would you have to find in your backyard before you freaked out? Drop me a line at julia.glum@money.com and/or @SuperJulia on Twitter. I may feature your comment in a future issue!

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