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Author: mulesnx Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Convince me to put money into a ROTH Date: 3/28/2006 2:09 PM
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I have spent most of my money on real estate, not even thinking about alternative investments. Recently I have purchased some stocks which are doing average. I am 25 and am looking for other investments. ROTH accounts seem like they really don't pay back much (I think I am drawn to higher risk and higher yield investments). Can someone please convince me that it is worth putting the money into an account like this.

If I start putting the maximum amount in at my age, I think I figured I could have around $400K when I retire. That is not going to do anything 30 years from now!

Also, I am very new to this, and don't even know how to put money into a ROTH. Can I do it through etrade? Maybe some basic articles on ROTH accounts would help too.

Thanks
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Author: SooozFool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50765 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 3:07 PM
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>>If I start putting the maximum amount in at my age, I think I figured I could have around $400K when I retire. That is not going to do anything 30 years from now!<<

Ah, but . . .

(1) Just because you contribute to a Roth doesn't mean you can't save and invest in other savings and investment vehicles as well. Plus, contribution limits will likely be raised in the future. Plus, if you catch on with an employer who has a Roth 401(k), that'd really enhance the contribution limits.

(2) Earnings inside a Roth grow tax-free and, more important, are withdrawn tax-free in retirement. So the $400K you reference, whatever its buying limitations, is worth a heckuva lot more than $400K in other investment vehicles -- including real estate which, once sold, still generates gains (in most instances) and thus taxes to be paid. The Roth is *real* money; Uncle Sam keeps his mitts out of that pot once you've made your contributions to it. Will it be enough by itself for your needs? Maybe not, but it'll be a very valuable place to stash a part of what you save over your lifetime.

(3) You can open up Roths in all kinds of places, including Vanguard and Fidelity. Because you are young and willing to take risks, perhaps you should consider investments inside a Roth that are better "grown" inside a tax-free environment, such as perhaps real estate investment trusts (REITs), or perhaps shares in an emerging markets stock index (very volatile, but with long-term growth potential). I would also seriously consider target retirement funds, which are funds-of-funds that are more aggressively balanced for those retiring many years from now.

Perhaps you need to think about your total asset allocation picture and goals, and work backwards from there to figure out which investments are better off placed inside a Roth (for the tax-free growth that goes on inside a Roth account), and which are better off held in taxable accounts or a 401K, if you have access to one. What to invest in (which is part of your question) is a different issue from where best to hold that investment (which is also part of your question).

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Author: Dullchisel One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50766 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 4:49 PM
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If I start putting the maximum amount in at my age, I think I figured I could have around $400K when I retire. That is not going to do anything 30 years from now!



How are you computing this $400K? If you put $5k a year into a Roth and your investment within that Roth earns an average of 7% a year for 40 years, you'll have $1,073,048 in 40 years. At 30 years it would be about $510,000. And it's tax free. The limitation on how much you would have is a function of what you invest in and how will they do. If your investment average what the market has done over history (bout 10%), it would be worth $2,439,000 at 40 years or $909,000 at 30 years.

The Roth should be in addition to other things, such as an employer 401k or a taxable investment account. A 401k lets you contribute up to $15K a year now and the contribution is tax deductible. This will grow your portfolio faster and larger but is all taxable when withdrawn.


DC


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Author: mulesnx Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50767 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 6:02 PM
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Ineligible: If you exceed the income limitations for a Roth IRA, consider partial contributions, and putting the balance in a Traditional IRA. Your contributions will not be tax deductible, however you will still benefit from the potential of tax-deferred growth

I just noticed that if you make over a certain amount of money that you are ineligible for ROTH accounts. I do not currently, but plan on making more money that allowed for a ROTH account. Would it be foolish to invest now if I will not be allowed to contribute within a couple of years?



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Author: Dullchisel One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50768 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 7:36 PM
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I just noticed that if you make over a certain amount of money that you are ineligible for ROTH accounts. I do not currently, but plan on making more money that allowed for a ROTH account. Would it be foolish to invest now if I will not be allowed to contribute within a couple of years?


I think it is worth it. You can contribute up to $4K for 2005 up until April 17. Then $5k a year until you are ineligible. So, if you can contribute for a couple more years, that would be $14k. If it then just sits there and grows for 30 or 40 years, it would be better than a jab in the eye with a sharp stick by far.

Personally, I wish I had realized I could have Roths before now. I am retiring Friday, but my wife will work for at least 3 more years. As it works out, we can both contribute based on her wages and I intend to do so for 05, 06, 07, 08 and 09. That'll put in about $50k between us. I will then let it grow and not touch it unless needed. It'll be a pretty good chunk of change in 20 years. Tax free. Kind of a safety net.

It works for me. To each his own.

You'll probably get some more responses from the Fools around here with more experience. See what they come up with.

DC


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Author: Fool2Believe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50769 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 7:53 PM
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DC, you stated: [w]e can both contribute based on her wages and I intend to do so....

I thought that you could only contribute to an IRA if YOU have income greater than or equal to your contributions. How does your wife receiving income mean that you can contribute?

Regards,
Mike


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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50770 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 8:02 PM
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I thought that you could only contribute to an IRA if YOU have income greater than or equal to your contributions.

Regards,
Mike
______________________________________________________________________

A. It has to be earned income.

B. It can be your wife's earned income. The total IRA contribution can not exceed your combined earned income.

buzman



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Author: Fool2Believe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50771 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 8:07 PM
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Excellent. Thank you for clearing that up for me.

Regards,
Mike


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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50772 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/28/2006 8:22 PM
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I just noticed that if you make over a certain amount of money that you are ineligible for ROTH accounts. I do not currently, but plan on making more money that allowed for a ROTH account. Would it be foolish to invest now if I will not be allowed to contribute within a couple of years?


I think they call this counting your chickens before they hatch.

We all plan to make more money. Sometimes it happens, and sometimes it doesn't, but it's silly to throw away perfectly good saving and investing opportunities because you might make more some day. 'Some day' has nothing to do with today.

I can tell you that I've made more than the allowable income since before Roth's were introduced. That said, in the 2 years in which I did not work a full year, I made enough less that I was eligible, so in those years, both DH and I contributed.

I figure that anything I can save is that much closer to the goal. I see no point to throwing away a good opportunity because I might not be able to contribute every year. Once the money is in and contributed, it stays there. You don't have to take it out because you're over the limit in another year. You just don't contribute that much.

I've been watching your posts, and I think you need to step back and look at the whole picture. You've been able to buy real estate at a young age, and you think that means that other investments aren't as good. That may or may not be true, but I sure wouldn't keep all my eggs in oen basket.

You also seem to think that real estate only goes up. It goes down as well, and some of us have lived through those cycles multiple times.

Over the long haul, real estate does appreciate, but it tends to be a low average like 4 or 5%. Our first rental property actually quadrupled in value in the first 4 years we owned it. Had we sold at that point, it would have been a great gain, but we liked the positive cash flow, and kept it for another 12 years. Since it effectively stayed at that same valuation all that time, the actual return over the number or years we owned it was a much lower number even though it had quadrupled.

You're young, and you have time on your side. Use it to invest and use it to learn.

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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50773 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 12:13 AM
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You can contribute up to $4K for 2005 up until April 17. Then $5k a year until you are ineligible.

The contribution limit is $4000 for the OP in 2006 and 2007...then $5K for 2008. I'm not sure where you are getting your "$5k a year until you are ineligible" number from...

Maybe you are thining about your own situation -- given that you said you are about to retire, you likely are 50+. For those 50+, the contribution limit is $5K in 2006 and 2007...then $6K in 2008...

Acme

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Author: Dullchisel One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50774 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 8:12 AM
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DC, you stated: [w]e can both contribute based on her wages and I intend to do so....

I thought that you could only contribute to an IRA if YOU have income greater than or equal to your contributions. How does your wife receiving income mean that you can contribute?

Regards,
Mike


Mike ..
See Spousal IRA
http://www.fool.com/money/allaboutiras/allaboutirasglossary.htm#c

DC

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Author: Dullchisel One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50775 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 8:21 AM
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The contribution limit is $4000 for the OP in 2006 and 2007...then $5K for 2008. I'm not sure where you are getting your "$5k a year until you are ineligible" number from...

Maybe you are thining about your own situation -- given that you said you are about to retire, you likely are 50+. For those 50+, the contribution limit is $5K in 2006 and 2007...then $6K in 2008...

Acme



ACME

Your limits are correct. I was ballparking it. I suppose I should be more careful about that and point that out if it is the case.

DC

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Author: HobbyDave Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50778 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 3:26 PM
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ROTH accounts seem like they really don't pay back much (I think I am drawn to higher risk and higher yield investments). Can someone please convince me that it is worth putting the money into an account like this.

Perhaps you're not aware of what a ROTH account is? It is just a stock account that doesn't ever tax you. Nothing more, nothing less (well, except for the contribution limitations, and the limitations on when you can take the money out).

I'd suggest reading a few articles on ROTH accounts (very easily found through Google), and it should help you understand more. If you can put money in now, then that is a good idea. It doesn't matter that you might not be able to some year. Some money is better than none.

I think I figured I could have around $400K when I retire. That is not going to do anything 30 years from now!

30 years from now it will still be a decent piece of change, even after inflation.. and since it's tax free, it's even better. And I certainly hope that it will not be your only investment plan. It is a side product that is not taxed, and is therefore efficient. Once you take advantage of it, move onto other investments.

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Author: WBuffettJr Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50780 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 4:13 PM
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ROTH accounts seem like they really don't pay back much (I think I am drawn to higher risk and higher yield investments).

I think you are confused about what a Roth is (or maybe I am confused about your post?). It's just a brokerage account where you put money to invest. The only difference is when you sell stocks for a gain you don't have to pay taxes on them. You could invest the money into high risk penny stocks that may triple in value in a week if you want to, that is up to you.

You are correct that once you hit a certain income you can no longer contribute to your Roth. That is why it is imperative you contribute all you can while you can. I will hit in income limit in two years, which is why I am maxing out my Roth and my wife's Roth every single year for now.

WBJ
BTW, I'm about the same age as you.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50781 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 4:30 PM
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ROTH accounts seem like they really don't pay back much (I think I am drawn to higher risk and higher yield investments).

A "Roth" is just a specific class of account. You can put just about anything in the account, if the custodian allows -- even real estate.

You can be as risky or as conservative you like in a Roth.

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Author: beaker7 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50783 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/29/2006 11:39 PM
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Note that by maxing your 401k your MAGI may be reduced enough to make you continue to be eligible for a ROTH...a nice tag team combo.

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 50785 of 74759
Subject: Re: Convince me to put money into a ROTH Date: 3/30/2006 12:17 AM
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Can someone please convince me that it is worth putting the money into an account like this.
___________________*,*___________________

Nope, not even going to try!

If you got questions about how they work, I would be happy to answer those. We can discuss strategies about tax efficient portfolio allocation using one. If you want to know about being young and buying real estate thinking it can do nothing but go up--- but after ten years the property is 3% more than paid for - Been There. (but you got that covered) During that time stocks appreciated 288% and inflation ~40%.

Is a Roth right for every one - NO.

How would I know if it is right enough for You to convince you - You won't even know - today or tomorrow. Not until it would be time to use it. Then, if you did need it and it wasn't there -

then what?????

DrTarr


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