fling93 loves fishies

Don't Wait, Open an IRA!

Argh! I still haven’t filed my taxes, and even worse, I still haven’t written my long-planned blog post on the Roth IRA!

Okay, until I get to it, here’s the gist of what it’ll say:

• If you don’t already have a Roth IRA, open one now and contribute to it!
• If you already have a Roth IRA but haven’t contributed to it for 2003, contribute to it now!

In a weird quirk of the tax laws, you actually have until April 15th to deposit your Roth IRA contribution for the 2003 year, although you could also contribute for the 2004 year as early as the beginning of this year (yes, there’s an overlap). Generally, it’s advantageous to contribute to it as early as possible (yes, I’ve personally already made my 2004 year contribution), but it’s better to contribute late than not at all, and note the restrictions on IRA contributions per year, while increasing (thanks to the EGTRRA), are still much more restrictive than your typical 401(k) plan, so it’s pretty important to contribute every year that you can.

This all assumes you are eligible (if you make less than six figures, you’re generally okay). Also, note that if you still have credit card debt, it’s better if you pay off that debt first because the interest they charge you will be much higher than you can earn. Similarly, if you aren’t already contributing the maximum to your 401(k) plan or equivalent, it’s better to fund that first. Note that capital gains and dividends earned within Traditional IRAs are tax-deferred and aren’t taxed at all in Roth IRAs. 401(k)’s are even better — they’re tax-deferred and the contributions are fully tax-deductible (again, I’ll explain what they all mean in my “real” post). Sometimes your employer will even offer matching funds to boot! So it’s generally the thing to fund first, and then funding a Roth IRA with money left over after that (or a Traditional IRA instead if you’re not eligible for a Roth).

Anyway, the IRA contribution limit for 2003 and 2004 is $3,000, increasing to $4,000 in 2005, $5,000 in 2008, and then finally indexed to inflation thereafter. If you don’t have that much available, go ahead and contribute as much as you can. Remember that this is money strictly for retirement — there are strict rules and penalties on withdrawal for other uses, so don’t use this as your emergency savings. I’ll get into the whys of everything later, but the short of it is that it saves you a lot of money, especially if you’re young.

If you don’t have an IRA open yet, check with your bank or brokerage. If you don’t even have a bank or brokerage yet, well, you better open one soon. Don’t worry too much about picking the right one, since you can always roll the money over into a new IRA at a different institution. I personally use Merrill Lynch Direct with a joint account at Schwab, and have found them to be pretty comparable with each other, and don’t really have any complaints. I’ve heard good things about Fidelity as well. If you know what you’re doing and are willing to sacrifice some convenient niceties to get the lowest cost (and the cheapest access to the best index funds in the world) it’s tough to beat Vanguard. I wouldn’t mess with the discount brokerages, who target day-traders and are increasingly raising fees for those who don’t trade often enough.

On the other hand, <shameless plug alert!> if you want the hand-holding of a full-service brokerage account (note that it’ll cost you a bit more), try out my dad and brother at Merrill Lynch. </shameless plug alert!> Ask for my brother, Ben, and let him know that fling93 sent ya. Hopefully he’ll then agree to trade me Mark Prior, Tim Hudson, Mariano Rivera, and Phil Nevin for a veggie burrito and a player to be named later in our fantasy baseball league (can’t imagine why he isn’t jumping at the chance).

Anyway, sorry I can’t go into more detail now. I’ll try to elaborate this weekend (after I file my taxes!).