IRA advice

Disclaimer:  We are not professional financial advisors.  Talk with a certified fee-only financial planner who has fiduciary responsibility or do your own research before making important financial decisions.

Next week I’ll post a rant about SIL’s truly awful retirement options at her workplace and how mad it makes me that a non-negligible number of school teachers are getting scammed.  This week I’m instead posting the advice we gave them to put money in an IRA outside their work rather than the unmatched and worse-than-edward-jones 403(b) option that she has at work.

If the couple makes less than 99K, they can each contribute up to $5,500 to a traditional IRA (or $11K) each year.  This would mean that they would get a discount on their taxes this year but would have to pay taxes on the earnings in retirement.

If they make less than 186K, they can each contribute up to $5,500 to a ROTH IRA (or $11K).  This would mean that they wouldn’t get a tax break on what they contribute this year, but they wouldn’t have to pay taxes on the earnings in the future.

In terms of which is better– generally if you think you’re going to be in a higher tax bracket in retirement, you should pick the IRA Roth, if you think you’re going to be in a lower tax bracket in retirement, you should pick the Traditional.  It’s hard to say what the tax situation is going to be like in 40 years.  Personally we do about 50% because on the one hand we’ll be making less money in retirement, but on the other hand at some point they’re going to have to raise taxes in the US to pay down the debt and tax rates are historically low right now.  If you want lower taxes now, pick Traditional, if you want lower taxes later, pick Roth.

The best place to invest for an IRA is in Vanguard https://investor.vanguard.com/ira/how-to-open-an-ira?lang=en because they have the lowest fees in the industry.  One potential problem is that they make you start with $1000, and if you don’t have $1000 to invest right away your options are to either save up until you do have $1000 (you have until tax day of the next year) or to go with another provider.  Etrade is a good choice if you don’t have $1000.  Fidelity is another possibility.  Vanguard is definitely the easiest to work with.  I’m pretty sure that you can set-up a monthly auto-deduction from your savings account for these (but you may have to hit the minimum for Vanguard first), but it might make more sense to save up in a separate account and make the purchase all at once each year (so there are lower purchase costs).

The best investment choice is a low fee broad-based index fund or exchange-traded fund.  These are basically mutual funds where instead of paying a manager to pick out funds, just try to match the market for a broad-based set of stocks and sometimes bonds.  These will generally match the market that they’re paid into or mimicking.  If you want to do some active management, you can pick out a Vanguard stock fund and a Vanguard bond fund and get the percentages based on your retirement and then rebalance each year when you add new money.  What matters when choosing funds is not their “Returns since inception” or even the returns at all (since they don’t predict future returns and can be manipulated in ways that make the same funds look higher or lower earning based on when they start counting) but the fees.  You want low fees and broad diversification.

A much easier thing to do is to pick your date of retirement and buy a Vanguard Target-date fund.  A Target-date fund is a mix of broad-based index funds for stocks and bonds that becomes less risky as you get closer to retirement.  (You can do this even if you’re using etrade or fidelity– fidelity has their own target date funds, but they have higher hidden fees than do Vanguard’s.)  These are great because you pick one number– the year you think you’re going to retire– and it takes care of rebalancing and changing your mix of stocks and bonds for you.  Most of our retirement money is invested in Vanguard Target-date funds. It costs a little bit more than just buying the funds it uses, but a small enough amount more (~1/10 of 1%) that we’re willing to pay for the convenience.

tl:dr:

If you make under 186K jointly, you can buy up to two $5,500 Roths (no tax break now, tax break later).  Under 99K you could instead get traditional IRAs (tax break now, taxes later).
If you have at least 1K to invest, then buy a target date fund from Vanguard to put in the IRA with the date of your expected retirement.