How The Roth IRA Came To Be

Back in the olden days, if you wanted a secure retirement, you needed to rely on Social Security or perhaps a nice, fat pension. But those days are gone. There are not companies out there that are going to stand behind a defined annuity at the end of your career, no matter how long your years of service or how serious your level of dedication. But in 1997, the Roth IRA was conceived and an alternative to the traditional retirement account came into being.

The Roth IRA was named for Senator William Roth, a legislator from Delaware who first proposed the concept along with Senator Bob Packwood in 1989. Roth was a graduate of Harvard Business School and Harvard Law School, so it was clear that he knew his stuff. For the majority of his Senate career, Roth served as chairman of the Senate Finance Committee, so he had enormous knowledge of financial law and held great sway over the creation of new legislation.

The main innovation of the Roth IRA that departs from the traditional IRA is the tax structure and all the mobility of money that the tax structure allows. The Roth IRA is an individual retirement account, like the name indicates, that can be set up by a broker. You can also set up an individual retirement annuity as a Roth IRA, through an insurance company as an endowment contract.

These days, as a single person, you can contribute up to $5,500 to a Roth IRA per year. If you are over 50, you can put in $6,500. The merits of limiting Roth contributions are debatable, but that is for another, more political discussion.

When it was codified into law, in 1997, the Roth IRA was a piece of the Taxpayer Relief Act of 1997. Senator Roth wanted to bring back the traditional IRA, which was junked in 1986, along with its upfront tax deduction.

Basically it gives an individual the chance to contribute after-tax dollars to an IRA and then withdraw that money tax-free later in life. The contributions are not tax-deductible, like a traditional IRA, because they are after tax dollars. But the benefits of having that money tax-free in your 60s and 70s are enormous.

The annoying catch to all this is that Congress might end up changing the rules by the time you are 59 and a half. You might end up with a Roth IRA in your golden years, but the tax-free withdrawals may be a thing of the past. If you open a traditional IRA now, you can get the tax benefits right now, by deducting your contributions. If you decide on a Roth IRA, you are waiting years, sometimes decades, to realize the tax benefit, while assuming the risk that the rules around deductions might change in the coming years.

These decisions are always hard to make. Which is why it is essential to learn as much as you can about tax sheltered retirement plans and all the problems that might arise. The onus of education is on your. Might was well get started.

How You Can Invest Without a Lot of Money

Invest Without a lot of Money
You’ve done your research. You have picked the stocks and markets in which you want to place your money. You’ve even brushed up on the stock market lingo, but you don’t have thousands of dollars to drop. Good news, you don’t have to have thousands to invest.

Making your first investment is an exciting and terrifying task. However, many people are under the impression that, in order to invest, you need to have a lot of money. That is just not the case. In fact, many successful investors have started small and worked their way up. Here are a few ways to start your investing journey small:

Get a plan through your employer

Placing money into a mutual fund or 401(k) through your employer is a no-brainer. There is no minimum required investment for many of these plans. You will simply have it automatically placed into the 401(k) from your paycheck. Many employers also offer a matching contribution as well. Usually you have to stay with the company a certain number of years or have put a certain amount in the 401(k) to have the company match your contribution, however, it is definitely worth it. If you put $1,000 in, the company will put $1,000 in as well, giving you $2,000. Some companies offer a percentage match or up to a dollar amount as well (capping at $5,000, for instance).

Schwab Index Funds

Investing firm Charles Schwab offers five conventional stock-index mutual funds and three bond-index funds. Each of these has a $100 minimum. It has U.S. stock market fund options, international-index fund and bond-market funds. Any or all of the three would make for great portfolio holdings and none of them require a huge amount of money to get started.

Actively managed fund

Some investing firms will waive their regular minimum if you agree to making a recurring deposit. For instance, if you don’t have a lot of money to invest now (only $100), you would agree to have $50 withdrawn from your account monthly for a specific period of time.

Online Brokerages

Online brokerages have made it easy for many people to start investing. With as little as $500, you can open an account. Some online brokerages don’t require any minimum deposit. With these brokerage accounts, there are ways to pay no commission and buy/sell investments for very little money (about $10 is standard).

Acorns Investing

If you have never tried it, Acorns is an app through Intuit. It allows you to create a portfolio based on your investment goals. You can set up recurring deposits or you can start with a small amount (as little as $5). Acorns also allows for a “Round Up” investment. This means that every time you swipe your credit or debit card, the app rounds up and places the change in your investments account.

Any account with only $100 or $1,000 won’t do you much good. If you want to gather a decent amount of cash, you will have to save as much money as you can. When you have extra money, place it towards your investments.

Do you have any additional funds or investments that don’t require a high minimum? Let us know! We’d love to hear from you. 

Photo: Flickr: 401(K) 2012