What should I do after I've maxed-out my Roth IRA contribution for the year?
I started a Roth IRA last summer when I started a high-paying (for the area I live in) internship. I'm 26 years old, I'll be finishing college next semester, and as of a few months ago, I've been converted to full-time at the company with a starting salary of $63,000. I expect to max out my Roth contribution in the next few months. The company offers a 401(k), but they don't offer a match. Are there any rules against opening another Roth account somewhere, or is there a more advisable approach for someone with my risk tolerance (fairly high) and time horizon (fairly long)?
Congrats on all your success and saving and investing discipline.
The Roth is a savings vehicle within which you can invest in most anything, including long-term growth potential investments that you are wisely looking at. One of your greatest assets is your long-time horizon and the magical compounding that goes along with it.
You can have as many Roth accounts, with as many firms, as you wish but your yearly contribution limit applies to all the accounts as if they were one. So, if your limit is $5,500 and you have 10 Roth accounts and you want to contribute to all 10 equally, you could $550 to each account. Or you could do $2,750 to two.
Assuming you have your emergency fund set, little or no debt, and you do have a high-risk tolerance then look at global equities of all company sizes for inside your Roth. They are volatile but the tradeoff is the high-growth potential and ability to grow beyond inflation.
Inflation is arguably your greatest threat and ally over the next 40 years. Generally speaking, your job and equities are often the best investments to take advantage of inflation.
- The Roth can be used as an emergency fund (contributions can be accessed but should not invest in the volatile assets mentioned above)
- I-Bonds are a great secure inflation hedge, backed by the US gov and after one-year you have safety of principal
- Tips are inflation-adjusted bonds issued by the US gov, just be careful of how you buy them and taxes (they are not as simple as I-Bonds)
Lastly, if you have the cash flow and emergency fund you can look an HSA to save for retirement. The penalty for non-qualified withdrawals is steep, so make sure you plan things out with regards to paying for healthcare.
Here are two articles I wrote last year that might help:
Mark Struthers CFA, CFP®
For Sona’s Educational Series KnowThis! KnowThat! go to:
This is for informational purposes only. Your specific situation would need to be taken into account. All information is subject to change. Not to be considered investment, tax, or legal advice.
This might sound incredibly simple, but I'd just split any extra money that you have to invest evenly between the employer 401(k) plan and non-retirement investments.
As far as the 401(k), you should be making a reasonable retirement contribution, which you will be doing with the combination of the Roth IRA and the 401(k) contributions. In addition, the 401(k) contributions will give you a much-needed break on your taxes.
But at the same time, at age 26, you also need to focus on liquidity. By saving money in taxable investment accounts, you will not only be investing for the future, but you will also have the accounts available in case you need the money for other purposes. That could be the purchase of a house, or even an investment in a business. There'll be no tax consequences to you for withdrawing money from non-tax-sheltered investment accounts for such purposes. You're young enough that you do need to plan for these possibilities. I hope that helps!
You didn't say whether or not you are married. If so, you can contribute 5500 to a Roth for your spouse even if he/she isn't working. That will give you a total of 11K annually. Some employers offer a Roth 401(k) so look into that possibility. Otherwise, with a regular brokerage account you can minimize your taxes by purchasing shares which you hold for at least one year and one day, thus fitting into the 15% tax bracket for long-term capital gains and for qualified dividends. If you are married then some of your long-term gains will be in the 0% tax bracket and your qualified dividends will be also, unless they are large enough to push you into the 15% long-term bracket for some of them.
You can have as many Roth accounts as you want, but are only able to contribute a total of $5500/year, regardless of the number of open accounts. If you have a 3-6 month emergency fund, no consumer debt (student, credit or car debt) and no major upcoming expenses such as rent on a new place, security depoist, new furniture, moving costs, anything associated with new "digs" you should contribute to your 401k.
The short answer to your question is that, while you may certainly maintain Roth IRAs at multiple institutions, you may not contribute more than $5,500 per year in total. Similarly, in case you are also wondering, the $5,500 total limit applies to any combination of Roth and Traditional IRAs as well (i.e., you may not contribte $5,500 to a Roth IRA and another $5,500 to a traditional IRA in the same tax year).
If you are eligible to contribute to your new employer's 401(k) plan (many plans require 1 year of employment before eligibility), this would seem to be the logical next step, even in the absence of an employer match, as long as you are okay with the investment options in the plan and the plan expenses are not terribly onerous. In fact, if the plan has a Roth 401(k) option, you could technically contribute up to an additional $18,000 to your Roth 401(k) for the 2017 tax year in addition to the $5,500 you have already contributed to your Roth IRA.
Hope this is helpful. Good luck in the new job!