Is a Roth IRA right for you?

If you are not familiar with a Roth IRA (Individual Retirement Account), it is similar to our Roth TSP. You deposit money into the Roth IRA after taxes and that money grows tax free. As of 2018 you are able to contribute up to $5,500 a year. For those ages 50 and above, you are able to contribute up to $6,500 a year. Now I know that $5,500 doesn’t sound like a lot of money but allowing your money to compound over time can really add up. Now if you haven’t figured it out already from my previous posts, I like charts. So in that spirit, in the one below I will assume an 8% annual interest rate over 20 and 30 years, provided you deposit $458 a month ($458 x 12 months = $5,496).

Years	Total Principle	Interest Earned	Maturity Value
20	$109,920.00	$161,649.83	$271,569.83
30	$164,880.00	$522,255.19	$687,135.19

I know you are probably thinking why would I want to invest in a Roth IRA when I have to option of a Roth TSP? Plus with the Roth TSP I can deposit up to $18,500 a year versus $5,500.  Well with a Roth IRA you have greater flexibility in how you choose to withdraw your money. While it is true you won’t have access to your money until age 59 ½ without penalty, you can withdraw your principle at any time as along as you have had the account for 5 years. But, you have to leave the interest earned untouched until that magic age. Unlike the TSP you are not obligated to make withdrawals at age 70 ½ so that money can continue to grow.

Best way to include the Roth IRA in my plan 

In order to incorporate the Roth IRA into your current retirement plan I recommend that you contribute to your TSP until you reach the 5% match. Then above that start contributing to a Roth IRA until that is maxed out. Then go back to your TSP and increase the contributions beyond that 5%.

Where to Invest

There are several low cost companies where you can open a Roth IRA. www.fidelity.com, www.troweprice.com, www.vanguard.com, www.schwab.com.  It only takes a few minutes to open an account online and it is easy to do. If you are wondering what to invest in, try looking at Targeted Retirement Funds. Where you pick the year closest to when you plan to withdraw or retire and just set it and forget it, letting the investment company you chose manage the fund for you. If you want more control over your investment try looking at Index Funds, Exchange Traded Funds (ETF’s) or Mutual Funds. Funds are less risky to invest in than single stocks since one fund can include investments into hundreds of companies.

Do you qualify to invest?

For 2018 you are eligible to invest in a Roth IRA if your Adjusted Gross Income (AGI) for single/head of household and make $120,000 or less. Married filing jointly and make $189,000 or less. Also if you are a non-working spouse, you may qualify for a spousal Roth IRA as long as your family meet the income limits. Visit www.irs.gov for more detailed information.

As usual it is up to you to decide if a Roth IRA will work with your retirement plans.

Ms. Smart