IRA: How/Where Do I Start?

[VioletVixen]

Hello,

How do I go about opening an IRA? I am married and neither of us have an IRA. Can we each have our own, or do we have to have one combined account? Where is the most popular/recommended place to open an account?

Thank you!

[MDM]

You could do worse than https://investor.vanguard.com/ira/vanguard?WT.srch=1

[VioletVixen]

Thank you, MDM. Is Vanguard the most popular choice among mustachians? :)

[Indexer]

Thank you, MDM. Is Vanguard the most popular choice among mustachians? :)

MMM has recommended them a few times, and they normally have the lowest costs.  They have VERY low costs if you stick to their index funds.

You can each have IRAs.  There is no such thing as a combined/joint IRA.  You should look at traditional IRAs VS Roth IRAs.

[drtownhouse]

Agree with Vanguard. Seems like you might be new to IRAs? You probably know the basics: with a traditional IRA you don't pay tax on your contributions (they are deductible unless your income is too high), they grow tax free, and then you pay income tax on them when you withdraw. You make after tax contributions to a Roth IRA, it grows tax free, and you withdraw tax free.

A lot of people here seem to like the traditional IRA because of the Roth conversion ladder, where you can get the best of both worlds. Mad Fientist describes it well: http://www.madfientist.com/retire-even-earlier/

However, there is one very important thing to consider for couples with relatively high incomes and access to 401ks, which is mentioned in the comments of the Mad Fientist link above:

“If you file your taxes as Married Filing Jointly or as a Qualifying Widower in 2013, your income needs to be below $95,000 for you to be able to fully deduct your contributions to a Traditional IRA. If your MAGI is between $95,000 – $115,000 then you are in the “phase-out” range and the amount you can deduct starts “phasing out”. At $115,000 you are unable to deduct the contributions you make to a Traditional IRA.”

If you make so much that you cannot deduct traditional IRA contributions, then you're basically limited to the Roth. This isn't bad because you can always access your contributions to a Roth IRA, tax and penalty free.

Another helpful link I've seen floating around these parts: https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

[VioletVixen]

Yes, I am new to IRAs and saving for retirement in general. I know the basics of Roth vs. Traditional. However, when you say I always have access to my Roth contributions tax/penalty free, does that mean AFTER age 59.5 ONLY? I am trying to decide if I should have both a Roth AND a Traditional IRA. I was planning to put my "emergency fund" in the Roth (just enough for 6-12 months of expenses that I can have no-penalty access to if I need it) and then put the rest into the Traditional.

I will have to read up on the Roth conversion ladder, thanks for the link. :)

Our income is less than $95,000, so everything we put into a Traditional IRA is fully deductible, correct?

[MDM]

...when you say I always have access to my Roth contributions tax/penalty free, does that mean AFTER age 59.5 ONLY?

In this case, always actually does mean always.  You can withdraw your Roth contributions the day after you make them, or the day before you die, or any time in between - always tax/penalty free.

I am trying to decide if I should have both a Roth AND a Traditional IRA. I was planning to put my "emergency fund" in the Roth (just enough for 6-12 months of expenses that I can have no-penalty access to if I need it) and then put the rest into the Traditional.

Yes, you can do that.  It appears you already know this, but just in case: you can contribute to both a tIRA and a Roth in the same year, but the total contribution is limited to $5500 for that year (per current IRS limits).

[VioletVixen]

I was reading that you have to have the Roth account for 5 years before you can withdraw contributions tax/penalty free...https://investor.vanguard.com/ira/ira-distribution-rules  Is that true, or can I withdraw contributions immediately, as you say?

Does an employer-sponsored Roth 403(b) have the same rules, or is it different than a Roth IRA? The only contributions I have made so far is about $5,000 to my employer's Roth 403(b). I do not yet have an IRA, but I wanted to open one before April 15th so I can get the tax savings. Right now I know that I should put the max ($5,500) into a Traditional IRA to get the tax benefit; however, for next year I may want to build up my emergency fund too. Do people generally use a Roth account for an emergency fund, or do they just keep it in the bank? Does it matter if the account is a Roth 403(b) or a Roth IRA (do I have the same tax/penalty-free access to both)?

[MDM]

I was reading that you have to have the Roth account for 5 years before you can withdraw contributions tax/penalty free...https://investor.vanguard.com/ira/ira-distribution-rules  Is that true, or can I withdraw contributions immediately, as you say?

Good question.  See http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html: "In conclusion, although taking out a former Roth IRA contribution as a distribution may be (1) an unqualified distribution, it is also (2) not taxable and (3) not subject to any additional penalties. When subsequently filing your taxes, remember to fill out IRS Form 8606 as indicated above to show the IRS that you are only taking out your original basis."

Does an employer-sponsored Roth 403(b) have the same rules, or is it different than a Roth IRA?

It's somewhat different.  E.g. see http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#distns.

The only contributions I have made so far is about $5,000 to my employer's Roth 403(b). I do not yet have an IRA, but I wanted to open one before April 15th so I can get the tax savings. Right now I know that I should put the max ($5,500) into a Traditional IRA to get the tax benefit; however, for next year I may want to build up my emergency fund too. Do people generally use a Roth account for an emergency fund, or do they just keep it in the bank? Does it matter if the account is a Roth 403(b) or a Roth IRA (do I have the same tax/penalty-free access to both)?

Opinions are mixed on the e-fund question.  One defensible strategy is to start by keeping it in a bank, but dissolve that bank account if/when your Roth IRA contributions get to some multiple, e.g. 2X, of your desired e-fund.
The reason for 2X would be for you to have access to at least 1X, even if your Roth investments lose 50%.  Just because you may withdraw the contribution amount tax/penalty free doesn't mean you can withdraw it if your investment has lost money.
Due to the difference in how withdrawals are categorized (see above links), for e-fund purposes it would be better to use the Roth IRA than the Roth 403b

[TomTX]

Hello,

How do I go about opening an IRA? I am married and neither of us have an IRA. Can we each have our own, or do we have to have one combined account? Where is the most popular/recommended place to open an account?

Thank you!

Just to be clear, IRA stands for INDIVIDUAL Retirement Account.

You cannot have a combined account (but you should probably choose each other as the beneficiary if you die)

[Indexer]

I was reading that you have to have the Roth account for 5 years before you can withdraw contributions tax/penalty free...https://investor.vanguard.com/ira/ira-distribution-rules  Is that true, or can I withdraw contributions immediately, as you say?

Does an employer-sponsored Roth 403(b) have the same rules, or is it different than a Roth IRA? The only contributions I have made so far is about $5,000 to my employer's Roth 403(b). I do not yet have an IRA, but I wanted to open one before April 15th so I can get the tax savings. Right now I know that I should put the max ($5,500) into a Traditional IRA to get the tax benefit; however, for next year I may want to build up my emergency fund too. Do people generally use a Roth account for an emergency fund, or do they just keep it in the bank? Does it matter if the account is a Roth 403(b) or a Roth IRA (do I have the same tax/penalty-free access to both)?

You can always take your contributions to the roth out tax free.  Given that there are a couple 5 year rules.  If you convert money from a traditional IRA/401k to a Roth IRA then you have to wait 5 years before you can take those contributions out tax free.  In order to take out EARNINGS you have to have had the account for 5 years and be over 59 1/2.  Also if you roll money from a Roth 401k/403b to a Roth IRA it resets the 5 year clock on earnings unless you previously had a Roth IRA.  So if you had a Roth 403b for 20 years and rolled it into a new roth IRA the 5 years gets reset.  However if you had a Roth IRA open with $1 in it for 20 years and you rolled a (EDIT to be super exact)ROTH 403b you had for 2 years into that Roth IRA the whole thing gets treated like you had it for 20 years and you can ignore the 5 year rule.  In summary if you are doing a Roth 403b/401k always open a Roth IRA with at least some money in it so you don't have to worry about this.  ;)

Roth 403b is an employer plan.  Its not exactly easy to tap in an emergency so I would keep that in my very long term bucket.  Employer plans(esp. 403bs) normally require paperwork to take money out and even then it can take weeks or even a month.  Plus they will probably make you take loans before withdrawals so now there are loan fees.  You can use the Roth IRA as an emergency fund... I do it myself.  With a Roth IRA at the bank you can access it any business day or at Vanguard/Fidelity you can access the money in a few days by transferring it to your bank.  I use a Roth as the bulk of my e-fund but I also keep a few grand at the bank that way I'm not touching the Roth for 'little' emergencies.  Now since it is an emergency fund you probably want to stick to safer investments.
Money Markets, High Yield savings accounts(in a Roth), CDs(keep in mind penalties), Short term bond funds, or I even do VASIX.  Its a mutual fund, but super conservative(80% bonds) and diversified(about every stock/bond in the world) and in its worst year ever it was down about 10.5%.  So I just keep a little extra in it to compensate in the event it ever was down 10%, and historically it has blown the pants off all the other options that were mentioned.

[drtownhouse]

Yes, I am new to IRAs and saving for retirement in general. I know the basics of Roth vs. Traditional. However, when you say I always have access to my Roth contributions tax/penalty free, does that mean AFTER age 59.5 ONLY? I am trying to decide if I should have both a Roth AND a Traditional IRA. I was planning to put my "emergency fund" in the Roth (just enough for 6-12 months of expenses that I can have no-penalty access to if I need it) and then put the rest into the Traditional.

I will have to read up on the Roth conversion ladder, thanks for the link. :)

Our income is less than $95,000, so everything we put into a Traditional IRA is fully deductible, correct?

The deduction limits are based on whether you have access to an employer retirement plan (e.g., 401k/403b/TSP). IRS has the limits on its site here: http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

I just noticed that you have access to a Roth 403b. So, under 2014 you would click this option: "IRA Deduction if You ARE Covered by a Retirement Plan at Work - 2014"

If you are married and file taxes jointly with your spouse, you can fully deduct the traditional IRA if your Modified Adjusted Gross Income (MAGI) is below $96,000. Contributions to a traditional 403(b) or 401(k) lower your MAGI and AGI. The traditional IRA contribution lowers your AGI, but it does not lower your MAGI.

In other words, if you earn $105,000 per year and contribute $15,000 to a traditional 403(b) and $5,000 to a traditional IRA (and do nothing else), your adjusted gross income is $85,000. Your MAGI is $90,000. Your traditional IRA is fully deductible.

If you earn $115,000 per year and contribute $15,000 to traditional 403(b) and $5,000 to traditional IRA (and do nothing else), your AGI is $95,000 and your MAGI is $100,000. In this case the traditional IRA is not fully deductible.

I hope someone will chime in if any of this sounds incorrect. And of course, you'll want to double check based on your personal situation. There are other factors that affect MAGI.

I found a TurboTax link on MAGI: https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/What-Is-the-Difference-Between-AGI-and-MAGI-on-Your-Taxes-/INF22699.html. IRS would be a better source, though.

[VioletVixen]

MDM/Indexer/drtownhouse/TomTX: Thank you all for your very helpful advice and great explanations/examples.

I just need something clarified...so if I roll over money from a traditional IRA/401k to a Roth IRA (for example, if I did the Roth conversion ladder), I HAVE to wait the full 5 years before I can take those contributions out tax free? But if that money was already in a Roth 401k/403b and I rolled it into a Roth IRA (that I hypothetically already had open for 5+ years), I could take it out immediately? I'm so confused about how and when I can access Roth funds! I think I've read too many variations and now my mind is swimming.

[Indexer]

MDM/Indexer/drtownhouse/TomTX: Thank you all for your very helpful advice and great explanations/examples.

I just need something clarified...so if I roll over money from a traditional IRA/401k to a Roth IRA (for example, if I did the Roth conversion ladder), I HAVE to wait the full 5 years before I can take those contributions out tax free? But if that money was already in a Roth 401k/403b and I rolled it into a Roth IRA (that I hypothetically already had open for 5+ years), I could take it out immediately? I'm so confused about how and when I can access Roth funds! I think I've read too many variations and now my mind is swimming.

Good question.  Here is an example that should clarify everything.

I have a Roth 401k with previous employer worth 10k.  The roth portion of the 401k is 5k(4k is contributions, 1k in earnings), and the pre-tax portion is 5k.  Employer contributions are always pre-tax so its normal to have some pre-tax money mixed in a Roth 401k.  I complete a rollover of the entire Roth 401k(including pre-tax) into a Roth IRA. 
The transaction will be categorized as a 5k rollover of Roth to Roth, and a 5k conversion from pre-tax to Roth.  I will pay taxes on the 5k conversion, but NO penalties.  On my rollover forms from the old 401k custodian it will list 4k in Roth contributions, 1k in Roth earnings that haven't been taxed(sometimes called Roth pre-tax), and 5k in pre-tax money.
Now the entire 10k is in my Roth IRA.  The breakdown is as follows.

10k total. 
4k in contributions I can take out NOW. 
1k in earnings I can't take out till i'm 59 1/2 and I've had the account 5 years. 
5k in conversions that I can access in 5 years.

[VioletVixen]

Thank you, Indexer, that example helps. So it's only the earnings that I would ever have to wait until 59.5 to tap into?

[Indexer]

Thank you, Indexer, that example helps. So it's only the earnings that I would ever have to wait until 59.5 to tap into?

In a Roth IRA that is correct.  Conversions you have to wait 5 years, but the only thing with a 59.5 limit is the earnings.