Author Topic: Some questions about Roth IRAs  (Read 2596 times)

blub

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Some questions about Roth IRAs
« on: March 31, 2014, 08:01:39 PM »
I just opened a Vanguard Roth IRA and I have a handful of questions:

1. I was pleasantly surprised to find that I can still contribute for 2013 (deadline is in two weeks). I'm currently planning to max the 2013 contribution right away but, because the market's peaking, wait on making contributions for 2014. Is that sensible?

2. My wife also just opened an identical account and we're planning to do the same for her account. Am I correct in understanding that it's legitimate to max out one Roth IRA for each spouse, when we file jointly?

3. Do these contributions need to be reported on our 2013 tax return? My research has indicated no, but I'd like confirmation.

4. Once we've bought assets with the money in these accounts, will we have any flexibility in changing asset allocations, buying different index funds, etc.? This question may not make a lot of sense, because I'm still pretty clueless, so I'd be interested in any thoughts even tangentially related.

5. I understand that the gains in a Roth IRA are tax-free, so it's best to hold assets there which would normally be bad for taxes. In light of that, can anybody comment on what sorts of assets are optimal to put in a Roth IRA? Is there any rule of thumb for making those assessments? I think I will stick to Vanguard ETFs (let me know if that's unreasonable), if that helps narrow it down.

Thanks in advance! I've already learned quite a bit from this great community.

Joel

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Re: Some questions about Roth IRAs
« Reply #1 on: March 31, 2014, 08:19:44 PM »
Buy the vanguard total stock market index as much and as soon as possible. The market always is at its peak, and will go up in the long term.

eman resu

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Re: Some questions about Roth IRAs
« Reply #2 on: March 31, 2014, 09:16:59 PM »
I just opened a Vanguard Roth IRA and I have a handful of questions:

1. I was pleasantly surprised to find that I can still contribute for 2013 (deadline is in two weeks). I'm currently planning to max the 2013 contribution right away but, because the market's peaking, wait on making contributions for 2014. Is that sensible?
Maxing 2013 right away is super sensible. For 2014: if by "wait" you mean you will make regular, periodic contributions over the year rather than immediately maxing, sure. If you mean trying to time the market and make one max contribution later in the year, I'm not such a big fan of that.  There's existing threads on this site about the pros/cons of lump sum vs. dollar cost averaging. I think the consensus is that history/math/risk all say to lump sum... but no one knows what will happen, right?  You gotta do what will keep you from abandoning your plan if the market doesn't do what you want/think. 

2. My wife also just opened an identical account and we're planning to do the same for her account. Am I correct in understanding that it's legitimate to max out one Roth IRA for each spouse, when we file jointly? Check out IRS pub 590. Filing jointly might allow you to max both, if one of you has less taxable compensation than required, and the other can make up the difference. It doesn't guarantee it; you may be affected by other restrictions.

3. Do these contributions need to be reported on our 2013 tax return? My research has indicated no, but I'd like confirmation.
Roth, right?  No contribution reporting.

4. Once we've bought assets with the money in these accounts, will we have any flexibility in changing asset allocations, buying different index funds, etc.? This question may not make a lot of sense, because I'm still pretty clueless, so I'd be interested in any thoughts even tangentially related.  I only hold a couple mutual funds in my Vanguard acct, so my direct experience is limited. Exchanging targeted retirement funds for total stock / total bond funds was no issue.  The answer is "yes, with restrictions when applicable" but that's all I can offer.

5. I understand that the gains in a Roth IRA are tax-free, so it's best to hold assets there which would normally be bad for taxes. In light of that, can anybody comment on what sorts of assets are optimal to put in a Roth IRA? Is there any rule of thumb for making those assessments? I think I will stick to Vanguard ETFs (let me know if that's unreasonable), if that helps narrow it down. Do you have taxable accounts making tax efficiency a concern?  Do you need to worry about this?  I like the simple, three index fund portfolio because I am an unsophisticated investor. Like I wrote, I used a target retirement 20XX fund that most closely reflected my desired allocation until my balance was high enough to exchange for the underlying funds themselves. I don't know anything about ETFs, sorry.

Thanks in advance! I've already learned quite a bit from this great community.

Cwadda

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Re: Some questions about Roth IRAs
« Reply #3 on: March 31, 2014, 09:25:32 PM »
1. Yes, max for 2013. If you have the money available and you're willing to build your assets, you could max for 2014 right away as well.

2. Contributions to both a Roth IRA and a traditional IRA are limited to the total amount allowed for either of them ($5,500 for tax year 2013 $6,500 if over 50 years of age, i.e. if split evenly between the two, $2,750 could go to the Roth IRA, $2,750 to the traditional).[7] Generally, the contribution cannot exceed your earned income for the year in question. The one exception is for a "spousal IRA" where a contribution can be made for a spouse with little or no earned income provided the other spouse has sufficient earned income and the spouses file a joint tax return.[8]  Source: http://en.wikipedia.org/wiki/Roth_IRA

3. No

For questions 4 and 5, read this http://jlcollinsnh.com/stock-series/. The best way to understand what you're doing is to educate yourself. You can take advice from strangers, but educating yourself is the best thing to do for the long term.

blub

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Re: Some questions about Roth IRAs
« Reply #4 on: March 31, 2014, 10:04:10 PM »
Thanks, these answers are all very helpful.

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If you mean trying to time the market and make one max contribution later in the year, I'm not such a big fan of that.

Yeah, I was considering timing a lump sum investment to a lull in the market. I will reconsider and take a look at the discussions you mentioned, thanks.

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Do you have taxable accounts making tax efficiency a concern?  Do you need to worry about this?

I have a Betterment account and I am thinking about opening a taxable Vanguard account. Maybe I shouldn't be worrying about this for now. Sounds like I shouldn't be too concerned about getting locked in to bad investments: once I learn more I can probably set up better asset allocations.

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For questions 4 and 5, read this http://jlcollinsnh.com/stock-series/

Thanks a lot, checking this out now.


teen persuasion

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Re: Some questions about Roth IRAs
« Reply #5 on: April 01, 2014, 07:12:36 AM »
3. Do these contributions need to be reported on our 2013 tax return? My research has indicated no, but I'd like confirmation.

You don't need to report them on your tax return, but if they are your only retirement account contribution (no 401k), they could make you eligible for the retirement savers credit, if your AGI is in the right range. Any retirement account contribution (401k, tIRA, or Roth) counts.
« Last Edit: April 01, 2014, 07:15:03 AM by teen persuasion »