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Things You Should Do Before You Open a Roth IRA

Feb 01, 2019

In the age of the internet it seems to have spread that everyone should have a Roth IRA. If you go to any financial blog there’s a high percentage chance they will have an article about a Roth IRA - (shameless plug to my article about Traditional vs Roth IRA).

Over my years of meeting with people, I have found that you might want to prioritize a few of the items below before opening a Roth IRA:

Credit card debt
  1. If you have high-interest credit card debt, work on paying this down first.
    • Depending on the interest rate, you may be better off paying this down vs investing.
    • If you think you could earn a better rate of return investing vs paying off your credit card, perhaps you can balance out paying down your card and investing in a Roth IRA to take advantage of both investing early and paying off your card
  2. One thing to keep in mind is you could be negatively affecting your credit score.
  3. Let’s say that negatively affects the interest rate when you set out to purchase a house by 1%. The difference in how much you will pay over 30 years on a $500,000 home will be $100,000.
  4. The potential benefits of investing in a Roth IRA likely won’t outweigh the interest you’re being charge plus the potential negative effect on your credit score.
Not enough money in savings
  1. If you don’t have 3x your monthly expenses in savings
  2. What happens if you have an expense come up that you weren’t prepared for? What happens if you become disabled? Most disability plans won’t pay you until after 3 months
  3. The savvy person will tell me, but I can take the principal out of my Roth IRA without penalty so if I have an emergency I will be ok.
    • Well, what if the market is down 30% when you need the money
  4. Getting through training is tough. You might have to fly around the country for interviews, then you’ll probably have to move once you do finishtraining, put deposits down on apartments, closing costs for your 1st house, etc, etc –
You aren’t confident in your ability to DIY (do-it-yourself) investing
  1. I get the whole do it yourself thing. Trust me, that’s me all day. I have my own DIY bookmark folder of all the projects I want to do
  2. A few years ago, we wanted chickens since between my wife and I we eat 5 eggs/day. 
  3. There was no way we were going to buy a chicken coop from the store. I was going to build it myself! I must say it turned out beautifully.
  4. But I know my limits. When it comes to our cars I know there’s too much at risk for me to fix some things myself. I don’t want my wife to be driving our daughter around and break down because I was too stubborn to pay a little extra to have a mechanic fix it
  5. If you aren’t sure how to open a Roth IRA or not sure how to invest the money don’t feel embarrassed by that.
  6. Just because everyone is telling you it’s easy that doesn’t mean it’s easy for you.
  7. I’ve seen people who have opened a Roth IRA and the money is just sitting there in cash after several years, not invested.
  8. Don’t be hesitant to seek help when you’re learning something new
You’re not taking advantage of the match inside of your employer retirement account
  1. If your employer matches 3%, you need to put 3% of your income there before opening a Roth IRA
  2. That’s a 100% rate of return on your money
  3. Tough to beat that in a Roth IRA

Every financial decision you make, even though it was well intended, can’t be looked at in a vacuum. I’m all for opening a Roth IRA, but don’t rush it if you’re not financially prepared to do so.

Best,
Tanner



Contact Tanner

Tanner R. Fedell - Independent Financial Consultant
Phone (469) 708-9260 Secure Tax (612) 256-3002
Company Website • Personal Bio • Linkedin • Facebook

North Star Consultants - Celebrating over 110 years of business
7929 Brookriver Dr, Dallas, TX 75247 - Suite 760

Additional Resources

Jackie Fuller - Practice Assistant
jackie.fuller@northstarfinancial.com
Phone (512) 610-1803

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North Star Consultants Texas, Inc. - Insurance Products and Services | CRI Securities, LLC - Securities and Investments | Securian Financial Services, Inc. - Variable Products and Securities | North Star Consultants of Texas offers securities and investments through CRI Securities, LLC and Securian Financial Services, Inc., Members FINRA/SIPC. | CRI Securities, LLC is affiliated North Star Consultants of Texas and Securian Financial Services, Inc. Securian Financial Services, Inc. operates under separate ownership from North Star Consultants Texas and North Star Consultants Texas, Inc. North Star Consultants Texas, Inc. doing business as North Star Consultants of Texas in the state of Texas.

Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.

Tanner is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services LLC. 2385283/DOFU 1-2019

1) Qualified distributions must meet a five-year holding period and satisfy one of three additional requirements: reaching age 59 1/2 , disability or death. Five years is measured from January 1 of the year of your first Roth(k) contribution. Plan provision may impact withdrawal availability.

2) Investors' anticipated tax bracket in retirement will determine whether or not a Roth account versus a traditional retirement account will provide more money in retirement. Generally investors who are in a higher tax bracket at retirement relative to their current tax bracket while making contributions to a Roth account benefit more than an investor who is in a lower tax bracket at retirement.

3) For a Roth IRA, earnings withdrawn prior to reaching age 59½ and/or not meeting the five-year holding period may be subject to a 10 percent penalty in addition to income tax. After-tax contribution amounts are generally returned income tax free; however, for Roth conversions, if converted amounts are not held for the five-year period, distributions may be subject to a 10 percent penalty