Retirement Investing Crash Course : IRAs

While I can keep my 401(k) where it's at if I want, I still need to set up a retirement account for my new job. This is the start of a three part series on retirement investing.

In this series I will cover

• IRAs, what are they and what is the difference between a Roth IRA and a traditional IRA


• A comparison of the major companies where you can keep your IRA


• An overview and comparison of investing styles

Please Note: I am not a trained financial expert. I'm not even an un-trained financial expert. I am a computer programmer who suddenly has a salary and a realization that I need to get my money in order. Please talk to a financial adviser or at least get a second opinion before following any of this information.

What Is an IRA and How Does It Work

Like many people, I knew that IRAs are a good way to save for retirement. Also like many people, I didn't know the details of how they worked, or how to make them work for me.

For the 2008 tax year you can contribute up to $5,000 to your IRA, unless you're making a huge amount of money. If you are making enough to be disqualified from IRA contributions, I'm not really sure why you're reading this...go pay for an financial planner already.

An IRA is an "Individual Retirement Account". You put money in and then choose how to invest it. Where you have your IRA account will determine what you can invest in (eg. Vanguard's options are different than Fidelities, etc.). Some options may include money markets, CDs, Stocks, Bonds, Mutual funds and Index funds.

Roth IRA vs. Traditional IRA

Contributions to a traditional IRA are made with pre-tax dollars. You have to pay tax when you pull the money out at retirement. With few exceptions, you cannot take money out of your Traditional IRA until retirement time.

Contributions to a Roth IRA are made with taxed money. You do not have to pay taxes when you pull the money out, including on the earnings. You can take out the amount that you have contributed at any time for any reason without penalty.

Proponents of Traditional IRAs often say that they don't trust the government to keep Roth IRAs tax free until retirement, they would rather get the tax deduction now. Proponents of Roth IRAs will counter than if the government tried this they would need to grandfather in all existing Roth IRAs. I think that the government would simply phase out the Roth IRA program if they decided they wanted to change it...but our government can be an unpredictable beast.

The real guessing you have to do when deciding which IRA to use to maximize your returns is what your tax bracket will be when you retire compared to what it is now.

If you will be in a higher tax bracket when you retire a Roth IRA may save you on taxes. If you are in a higher tax bracket now, then you may want the tax reduction now.

I personally think that when I retire I will be in a higher tax bracket. I think that a combination of inflation and career progression will have me withdrawing more per year when I retire than I am making now.


On Monday, a comparison of some of the major companies which will help you manage your IRA accounts.

Job Transition Process : 401K and Insurance

Friday is my last day at my current job. Monday I'll start my new work from home job.

With the transition I need to make sure to take care of a couple of important things, namely my 401K and insurance.

UPDATE : Both sections have been updated with their respective resolutions

401K

At my current job I have $1,194.76 worth of funds in my 401K. That isn't enough for them to keep me in it. Sadly I've put in $1312.52 so far and haven't had it open long enough for the company match to have vested yet.

I need to decide if I'm going to roll it to a traditional IRA or a Roth IRA. Once I know which type I want I'm going to need to choose a company to get it through. That'll be a something to research today. The only thing I know right now is that I don't want to cash it out.

I believe that I have 30 days to get it rolled over.

UPDATE : It turns out that I will be able to keep my 401K right where it's at. I won't be able to make any more deposits though, so I'll still need to open an IRA of some sort for my new job.

Insurance

I should've asked more questions at both jobs. I'm not sure if my current insurance will disappear on Friday when I leave work, or if it'll continue through the month. I would assume that it would stop the moment I stop working for the company.

I won't be filling out the insurance paperwork at my new job till Monday, which means I might need to pick up some basic insurance for a weekend. If that's the case I'll try to find something with a super high deductible, just in case of an emergency.

I would just risk for the two days except that :

1) In 2006 my wife had been without insurance for a week or so. The same day her new insurance started we were in an accident and she broke her toe.

2) My wife is taking a ~500 mile (round trip) car trip this weekend to go to a cousin's wedding and I'm going camping. Both of those activities have a higher than normal chance of accidents occurring.

UPDATE : The insurance here is monthly, so I've got old-work insurance till the last day of July, so that's good. On the down side, I found out that new-work insurance coverage doesn't start until September first.

I looked into the COBRA plan as suggested by chackoc in the comments. COBRA for the four of us was going to be $900+ for the month of August.

We found and bought a one month policy with Assurant Health. My wife used them once before for a few months between coverage and found them easy enough to work with. We got a 100/0 % plan with a $1000 deductible for $220.64 including the $20 setup fee.

That'll cover us if something big happens and we'll be able to handle paying $1000 with our savings if something small happens.

Financially Stable. Now what?

As I've become more familiar with personal finance blogs, I've slowly come to realize that I am very blessed. Most of the finance blogs are about getting out of debt and reaching the point where we are now.

• Our Credit Cards are paid off


• We have money set aside to pay off our student loans before they start charging interest (and it's making interest for us in the mean time).


• Our car payment is 0% interest, so there's no rush to pay it off ahead of time.


• We have more than $2000 sitting in ING doubling as an emergency fund and a start on a house down payment.


• We're putting away 15% of my salary into a 401k


• Shoot. We've even got a budget.

Ok. Great! Now what?

Now What?

Well, we want a house, so we're putting more money aside each month for that. We know that we're still spending more than we need or want to and we're trying to trim the fat. That one's a continual process though.

Beyond still saving, I'm not really sure what our next stratigic move is supposed to be. If we had a house it would probably be investing. There are plenty of sites that talk about investing. My problem with that is that we want our money back in 6 or so months for a house down payment -- I don't want to make that short term of investments, I want long term stuff.

In other words I have no idea what the next step is. Maybe it's time to buy a new car (I kid!).

Comprehensive Financial Planning: Initial Thoughts

I've been slowly getting up to speed on how money works, on the importance of budgeting and appreciating the principle of compound interest. In this learning process I've realized that there are several expensive milestones which I should be planning for now. As I look at these events, I realize that I need a comprehensive financial plan.

Some Large Financial Milestones

• House


• Kids College


• Sons' Missions


• Helping my kids become financially stable


• Retirement

Some of these are so near it's scarry (House). Others are so far off it's hard for me to be able to estimate how much I need to save. All of them will require large amounts of money. Some (retirement, college) can get extra help from special types of accounts (529, 401k, IRAs, capital gains vs. earned income taxes) if I plan wisely.

Complicating Financial Factors

There are complicating factors for me to consider when thinking about these financial events. Markets will change, my job will probably change, I don't know how many kids we'll be having.

Side Note : Inheritance assets

On a trip last weekend to visit my grandpa-in-law I was also reminded that there are some people in my life who will be leaving something to me in their wills. My father and grandpa-in-law have potentially large assets, possibly my grandpa too.

Inheritance assets are hard to include in a comprehensive financial plan since there's no way to know when someone is going to die, or how much their assets will be worth when they do.

How To Get Started

I don't know how I'm going to make my comprehensive financial plan. I think that I'm on the right track to create it though. The first steps are to 1) get my day to day financies in order then 2) understand the events I need to be planning for then lastly 3) make educated guesses and estimates about the situation.

In a few weeks you should see an initial revision of my plan. If you have any suggestions before then, I'd love to hear them.