Quick, save now! Easy Roth IRA options
If you live in the United States, you have just seventeen more days to do something very important. No, I’m not talking about filing taxes, although you certainly don’t want to forget that.
April 17th is also the deadline for maxing out your tax-advantaged retirement contributions for 2011.
Yes, that’s right. I know this is April 1, but it’s not a joke: the government actually gives you three and a half extra months to get your retirement-saving act together.
More specifically, there are two main kinds of retirement accounts that give you a tax break: employer-sponsored and independent. You can only contribute to employer-sponsored plans — 401(k)s and 403(b)s — through paycheck deductions, so that ship has sailed, at least for 2011.
But independent accounts — IRAs and Roth IRAs — allow prior-year contributions right up until Tax Day. In fact, you don’t even have to have an account already set up — you can start a new one and contribute up to the 2011 limit all at once, right up through April 17, 2012.
I’m going to focus on Roth IRAs here, because I think they’re the better choice for most people, especially here at the last minute. (The only way a traditional IRA is better is if you both need, and are eligible for, the tax deduction right now, and if that’s the case you’re probably already on top of it.)
There are just three requirements:
- You must be a legal adult. You can contribute to a Roth IRA at any time from age 18 on — there is no upper limit. You have an annual contribution limit of $5000 if you’re 18 to 49, and $6000 if you’re 50 or older.
- You must have earned income. You — or your married spouse — must have earned the amount you wish to contribute to your IRA(s) from employment, including self-employment, in 2011. (Unfortunately, that’s married under federal law, so same-sex spouses, even if legally married in your state, must have each individually earned the income they want to contribute.) Other kinds of income — interest, dividends, capital gains, rental payments — don’t qualify.
- You must not have earned too much income. If you’re single, or married but separated (including a separate residence), your Adjusted Gross Income must be less than $107k to contribute the full amount, and less than $122k to contribute at all. If you’re married and file your taxes jointly, your AGI must be less than $169k to contribute in full, and less than $179k to contribute at all.
If those three things describe you, and you can scare up even just a few hundred dollars, open up a Roth account right now and designate that money as a 2011 contribution. If you can afford the whole $5000 (or $6000) per person, do it.
Why? Because almost no one in the United States today is adequately prepared for retirement, and that probably includes you. Because there isn’t a downside. Because your older self will thank you.
Yeah, those dollars have to come from somewhere, and if you weren’t planning for it, that might be a problem. If you got, or will be getting, a tax refund this year, this is a great place to put it.
Here’s another solution: use part of your emergency fund to fund your Roth. Because with a Roth IRA you can always withdraw any amount that you put in, without taxes or penalties. The only part that’s locked down is the earnings — such as interest, dividends, or gains from stock sales.
Now the idea, of course, is to leave your contributions in the Roth until after you retire, and taking them out again to pay for an emergency isn’t going to help with that. But what you can do is pull from your emergency fund now, make the contribution before the deadline, and then adjust your budget so that — barring calamity — over the next few months you build your emergency fund back up again. Meanwhile, you know that if things get really bad, that money is still available to you.
Where to open your first Roth IRA
If you’re pulling from your emergency savings, you probably want to keep your Roth in something stable for a while — that is, not the stock market. A CD is also not ideal, because of early-withdrawal penalties. So you’d want either a money-market or savings account.
- Do you already have a credit union account somewhere? Check to see if their Roth IRAs have a savings account option. If not, I can recommend Alliant Credit Union: I have an account there, and they offer a no-fee Roth IRA savings account currently earning 1.00% APR — an excellent rate in today’s environment. If you belong to a local PTA, you’re eligible for membership.
- No kids? Well, anyone can open a Roth IRA savings account at Ally Bank. Their rates fluctuate minutely but tend to be reasonably high — as of this writing, 0.84% APR. They are a for-profit corporation, but in my experience — I’ve had accounts there for several years now — their business model is much more customer-friendly than, say, Chase or Bank of America.
- If you have at least $3000 to contribute right now and would like to make investing easy later, I suggest opening an account with Vanguard. Like credit unions, Vanguard is non-profit and shareholder-owned — in other words, ‘not out to screw you’. Their IRA is free if you accept electronic statements. You can leave your contribution in the base money-market fund until you’re ready to invest in something more volatile.
If you have an account with some other institution that you like, by all means use that — I just don’t want anyone to get bogged down trying to choose among dozens of banking and brokerage options.
Opening a Roth IRA is easy — it usually takes about ten minutes online. You’ve got seventeen days; don’t miss the boat!