How To Start a Roth IRA Successfully

Many people often think in the back of their heads that it would be a great idea to start a Roth IRA, but they let it stay there in the back of their heads because it’s easier to do other things than plan for an optional retirement plan, especially if one is already deducting money for retirement through a 401(k) and 403(b).

By doing this, though, you’re missing out on an utterly incredible investment opportunity that, if you’re under thirty, could easily be the key to retiring before your sixtieth birthday (that’s what I’m planning, anyway). If you’re older than that, don’t sweat it; a Roth IRA can still be a big help.

I don’t need to repeat how great Roth IRAs are; simply put, it’s the best deal that the government will probably ever give to the middle class for investing in their future. It’s non-taxable income for those who are smart enough to take advantage of it; you can have money rolling in during your retirement years and not pay a dime of taxes on it.

Here’s a plan that I developed that will get you into a great Roth IRA before the end of the year. I’m basically following this plan myself, as I am looking to start one of my own this year. I am making two pretty basic assumptions: I am assuming you want to make a $4,000 annual contribution to the fund (which will give me a Roth IRA well in the six figures by retirement – and far, far beyond if I assume any sort of healthy growth), and I’m also assuming that I’m using Vanguard, which has a $3,000 minimum to get started (they want investors that are serious, and they treat you very well).

First, open a high-yield online savings account immediately. I recommend ING Direct for their great customer service, great interface, and competitive interest rates – they’re the bank I use. The real reason for doing this is to find a relatively secure place to put some money aside until you reach the $3,000 limit.

Now, set up a $75 weekly contribution to that account. Just set it up as an automatic weekly deduction to your new account from your checking account. Eventually, you will switch this deduction to come from Vanguard, but that will be later in the year.

So far so good? Now wait nine months. In nine months, your account will build up to $3,000. Depending on precisely when you get started, I wouldn’t even look at the balance of that account until the end of September.

When your balance is above $3,000, sign up for a Vanguard Roth IRA and transfer that amount over. If you start saving immediately, your target for signing up will be in mid-October. I encourage you to look carefully at their retirement options; their Target Retirement options seem pretty good to me (I’ll be looking at the Target 2040 or Target 2045 funds).

Once you’ve started your Roth IRA, switch your $75 a week deduction over to that instead. Of course, if you don’t have an emergency fund, you might want to also continue putting some into your savings account, but emergency funds are another story.

When you reach the end of the year, you’ll come very close to your $4,000 contribution limit for the year; you might want to adjust your final payment so that the contributions do total $4,000 for the year.

That’s all you have to do. Suddenly, you’ll have a Roth IRA also building for your future, along with all its flexibility: the ability to withdraw your contributions early and the tax-free status of your earnings when you reach 59 1/2 and have had the account for five years. It’s a sweet deal, and now there’s an easy plan for getting it done – what are you waiting for?

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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