When starting to invest one of the first things that you’ll have to decide is how you want to invest.
Will you choose a tax advantaged retirement vehicle like the 401k or Traditional IRA?
Will you use a Roth IRA that is funded with post-tax dollars?
Will you go down the road of taxable investing through a brokerage account?
Will you use something new like peer-to-peer lending?
All of these are things you are important to consider when setting up your retirement accounts, as it can affect many different aspects of your financial picture.
For me I don’t consider myself a super-savvy investor, but I do feel like I’ve got a pretty good hold on what I want to do for our savings and retirement accounts. I want to invest in mostly passive index funds, and invest in the following account types – in this order:
- Invest in Roth IRA to max: First, I want to invest in our Roth IRA to the max of $6000 per investor – $6000 each for my wife and I.
- Invest in company 401k to max: Next we’ll be investing in my company 401k up until the max. I’m not sure we’ll be meeting that maximum this year because of other expenses that have come up.
- Investing in taxable accounts: Next we would be investing in taxable investments, most likely through an account with Betterment, Wealthfront or one of the discount online brokerages.
So why am I starting our investing via a Roth IRA?
Why We’re Investing With A Roth IRA First
There are a few reasons why we’re investing with a Roth IRA first.
- Tax advantages: We really like the idea of investing our money in a Roth IRA, letting it sit there, and never having to pay a dime more in taxes on the contributions or earnings as long as we wait until retirement to withdraw it.
- Tax diversification: The Roth IRA is a part of our tax diversification plan, where we invest in both pre-tax and post tax investments so as to hedge our bets when it comes to current and future tax rates and which will be higher or more to our advantage. We’re investing a portion in Roth, and a portion in our 401k which will be taxable at withdrawal.
- The Roth allows for flexibility: One thing we like about the Roth IRA is the fact that you can take out your contributions at any time without having to pay it back like the 401k. While it isn’t a good idea to be withdrawing your retirement funds, it can be good to know that in a pinch you can withdraw those contributions. (Note: You can’t withdraw earnings without penalty, only contributions).
- College savings and home purchase withdrawals: The Roth IRA also allows account holders to withdraw from contributions and earnings to use the funds to pay for their first home, or for college bills. Normal early withdrawal penalties are waived in these cases.
- Easy to start, and tons of options: Opening a Roth IRA is super easy and can be done within a half hour to an hour if you want. Plus companies like Vanguard are making it easier to start, reducing their minimum investments in a wide range of funds to only $1000 to start. Most people should be able to scrape together $1000 to start their Roth IRA! In addition, the companies are making a wide range of investments available to account holders, with many more choices than a traditional 401k.
- Roth can be passed down to heirs tax free: While it wasn’t one of our main reasons for choosing the account, the fact that your heirs can withdraw the money tax free from the account upon your death is a plus. The withdrawals are tax free, just like for you.
So those are some of the pluses of the Roth IRA, and why we’re choosing to invest in those accounts first. Of course, we’re hoping to also invest in our company 401k after our max Roth contribution has been reached, as well as possibly some other taxable investments later on if we have a good year and can max out both the Roth and 401k (unlikely).
Roth IRA Rules
If you’re looking to invest in a Roth IRA as well, here are some posts you might find helpful.
- What Is The Best Place To Open A Roth IRA?
- Roth IRA Conversion Rules
- Should You Convert Non-Deductible IRA Contributions To A Roth IRA?
- 2019 Traditional And Roth IRA Contribution Limits And Phase Outs
- Should You Use A Roth IRA For College Savings?
- 7 Mistakes To Avoid With A Roth IRA
So are you investing in a Roth IRA? If so why? If not, why not? Tell us your thoughts on whether the Roth is the best place to start investing in the comments.
Nice post Pete.
I do max out my Roth every year.
What I wasn’t clear about – and this is a great feature – is that contributions are always tax and penalty free. Originally, I thought you had to wait five years, but that applies to the earnings portion.
I agree that you shouldn’t be withdrawing your retirement funds, but this can be considered a type of last-ditch emergency fund.
Peter Anderson says
Yup, i think it can be a good thing to do with at least a portion of your emergency fund, although I wouldn’t put your main one in a Roth as there is obviously more risk than a savings account.
Roth IRA’s are wealth builders. The only change I would make is a 401K with an employer match should be First Priority until the match disappears, then the Roth, and then the 401K unmatched.
Peter Anderson says
Yup, that’s what our situation is currently – we have a 401k, but there is no match, so that comes after the Roth. If you have a 401k match- go for it – instant 100% return!
Derrik Hubbard, CFP says
Thanks for the article, Peter.
Another advantage to the Roth is that there are not any required minimum distributions during the life of the owner, as there are in a traditional IRA.
Beginning in 2010, there are no income limitations to Roth CONVERSIONS, so you can convert a portion of your traditional IRA each year into a Roth. I would recommend anything you still have left in the 10% and 15% brackets.
Derrik Hubbard, CPF
Read our blog at
Some 401k plans have a Roth option for the employee contributions (the match from the employer is still traditional pre-tax dollars). Another great way to take advantage of the Roth benefits, if available.
Chris @ cfcents.com says
The Roth 401(k) is also great because of the higher contribution limits compared to Roth IRA. The issue with the 401(k) is that you might get stuck with higher costing funds and limited choices as compared to the IRA.
question – can you invest 6K in roth as well as 6K in traditional ira if you are already contributing to company 401K?
Peter Anderson says
Traditional and Roth IRA have a single $6000 limit for both combined.
Financial Planner says
I agree that you shouldn’t be withdrawing your retirement funds, but this can be considered a type of last-ditch emergency fund