The Best Financial Decision You Can Make in the Next 12 Hours

There are definitely a few things that I look back on and say, “My parent’s were right.” When it comes to finances, one of those things was their suggestion to open and heavily contribute to an IRA, aka an “Individual Retirement Account.” I did so very early on, right after graduating college, and have been contributing ever since.

However I can’t say I’ve always contributed and invested the max each year, and that’s something I definitely look back on and wish I had. That’s why the point of this post is to convince you to stop what you’re doing and right this very second open a Roth IRA.

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Roth IRA vs IRA

There are differing opinions on an IRA vs a Roth IRA. A Roth IRA is the same basic retirement account but with a twist. With an IRA you contribute money and get a tax deduction for it. In 20 or 30 or 40 years when you sell your investments however you have to pay taxes on it.

With a Roth IRA, you contribute money like you do into a savings account, no tax deduction. However when you sell your investments down the road, you get all of it 100% tax-free. If you buy Facebook or twitter stock at $20 and in 40 years it’s at $2,000, then all of that money is yours. No taxes at all. You can see a comparison of the two here.

There are different opinions but I lean towards the "Roth IRA" camp.

There are different opinions but I lean towards the “Roth IRA” camp.

There are a few extra steps you have to take to ensure you do it properly but for the most part it’s pretty simple. For me personally and for most people age 18-30, I’d recommend the Roth IRA. As most people in that age bracket are still early in their careers and will be making more money later on in life, it makes sense.

Plus, take an honest look at the government (really any government) and how mismanaged and stretched thin they are. Tax rates continue to go up because politicians  continue to spend. Do you honestly think tax rates will substantially go down? My bet is they’ll go up, so if you can protect yourself against that, you should. That’s why a Roth IRA makes sense to me. When I take my money out it will be tax-free, and I like that.

The Deadline

You have until April 15, 2015 (tax day) to make contributions to your IRA, that count for the 2014 tax year. That’s important to note. The rules with IRA’s and Roth IRA’s is that you can only contribute so much per year, this year it’s $5,500 for a Roth IRA. But the account MUST be opened in the 2014 tax year, aka, December 31, 2014, aka TODAY… in order to make contributions retroactively to 2014.

** Updated Note  January 2, 2014-

I’ve gotten some feedback that says it’s even okay to OPEN the Roth IRA by April 15th. This includes a personalized note from TD Ameritrade who apparently saw my tweet and read this blog post. Pretty cool!

They told me that for Roth IRA’s it is still okay to OPEN the Roth before April, 2015 and still count it toward tax year 2014.

This is contrary to what I’ve read and researched, including RothIRA.com

However this info comes straight from the source of TD Ameritrade. In addition a reader commented he had spoken with Vanguard on the phone and been told the same thing.

So in case you missed the December 31st deadline, don’t worry. You still have until April 15 to OPEN a Roth IRA and credit it toward tax year 2014!

For the most part you can NEVER go back and contribute to a previous year. 2011, 2012, 2013… those years have passed, and you are not able to write a $5,000 check to catch up. (Technically at age 50 there is a way to contribute more via something actually called a “catch up contribution”, but this is just a basic overview so I won’t confuse you with more details.) The point is, if you don’t want to miss out on the 2014 investment year, you need to open your Roth IRA before the end of today.

However don’t despair if you don’t have a Roth IRA because it’s absolutely never too late to start. You can open one and still make contributions for the 2014 tax year for another three and a half months.

December 31st, 2014 is the deadline!

December 31st, 2014 is the deadline!

That means that if you’re getting your finances in order, paying Christmas bills or just genuinely don’t have the money to save or invest right now, you have a full three months from now to contribute, and it counts for 2014. Its one of the very few times in your savings life that you’ll be able to proverbially go back in time. However…

Don’t Miss the Opportunity

I understand thinking about investments and numbers on New Year’s Eve is not at the top of your list. But if nothing else, I’m offering you advice from personal experience. I’d guess I’m probably in a small percentage, maybe 10% or so of people around 30 or younger who have a Roth IRA and consistently contribute… and even I think I’m behind everyone and running to play catch up.

I can’t say that I’ve maxed out my contributions every year since I opened it, but looking back, I definitely wish I would have found a way to do so. Do everything you can to get the full benefit of the 2014 tax year. That’s an entire year of investment opportunity and 20, 30 or 40 YEARS of compounding interest that’s lost forever.

I personally use a couple of different companies for Roth IRA’s and am a big fan of index funds, specifically through Vanguard. However most of Vanguard’s funds require at least $3,000. If you weren’t planning on opening a Roth IRA, then realizing you all of a sudden need $3,000 and you probably are thinking, “Sounds great Steve but I’ll pass.”

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A Roth IRA provides a way to lessen your taxes. Not many investments can offer that.

However, the company I used to open my first Roth IRA, and still use for some of my investments, is TD Ameritrade. I’ve found that for times when I wanted to contribute cash but did not want to make an immediate investment, it worked well. In the case I made the contribution, I had it sit in the “Money Market” portion of the account, just like a bank account, and then dealt with it later on.

Click here to open a Roth IRA with TD Ameritrade

For opening a Roth IRA without a lot of money, I’d highly recommend TD Ameritrade. They require no specific dollar amount to invest, and you can get an account open in just 10-15 minutes. Seriously, don’t blow this off, and don’t “Get to it later.” Stop what you’re doing or take a few minutes on your lunch break and do this. You don’t need to have any money at all really, to open the Roth IRA and you can figure it out in February, March or April what, if anything you want to contribute for 2014.

By opening a Roth IRA you’ll already be ahead of probably 90% of your peers and while I can’t guarantee you’ll thank me later… I’m pretty darn confident you’ll thank me later.

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4 Comments

  1. Ken
    December 31, 2014 / 12:16 pm

    Ok, just so I have this correct… BOTH a Roth IRA and traditional IRA will lower your taxable income for the current tax year based on your contribution amount. But when you say you pay tax now for the Roth, what do you mean? Earnings grow tax free for both accounts, so how and when do you pay tax on Roth acounts? So confusing…

    • December 31, 2014 / 2:11 pm

      Ken not quite. A Roth IRA will not lower your taxable income for the current year. Earnings do NOT grow tax free for both accounts. Think of it this way:

      IRA: You get a tax deduction when you contribute. Just like you get a tax deduction when you donate to charity. However when you take our money/investments in 20 or 30 or 40 years, you are taxed on that income.

      Roth IRA: The opposite. No tax deduction for contributing. However all of the income/investments you make when you withdraw in 20 or 30 or 40 years is all yours to keep.

      • Ken
        December 31, 2014 / 2:15 pm

        Ok gotcha, thanks. I’m planning on my income being fairly low come retirement time so I’d be better off paying taxes when I take distributions than I would now. I plan to live off dividends in retirement.

        • January 2, 2015 / 8:55 pm

          That’s certainly a good plan if you can make it work Ken. Living off dividends is a great way to achieve a level of financial freedom!