Roth Accounts

Roth accounts have been around since 1998 and they are probably my favorite type of investment. The cool thing about them is that even though they must be funded with after tax dollars now, withdrawals (only after reaching 59.5 years) will not affect your income tax. This is especially good for the wife and me because by the time we are old enough to begin emptying our Roths, we will already be earning incomes from our pensions and some non-taxable income will be beneficial. Some other noteworthy facts about the Roth include the contribution limits - $4K for 2006 (until April 17) and $4K for 2007, and then it jumps to $5K in 2008. If you are age 50 or older, you may contribute an additional $1K each year. After 2008, the Roth contribution limits will increase by $500 a year for as long as Congress allows this investment vehicle to roll. By the way, both working spouses can open up and contribute to a Roth, and there are several other options and guidelines for non-working spouses and children that might be worth investigating.

For a couple years when the limit was $3K, I contributed to my Roth in a lump sum (usually with my oversize tax refund). It was a little depressing those first few years (1999, 2000, 2001) to actually see less money in the account than what I put in. However, after missing a couple years (2002, 2003) due to tighter finances (house-wife thing), I've begun contributing again but in a different way. Both my wife and I contribute $300/month to our Roths, and when we get our refund now, $400 each goes towards maxing out our contributions for the year. It is becoming more difficult with the two kids going to a nanny 3 times a week (don't get me started on how much that costs!), but if there is any way I can manage continuing this investing, I am going to do it.

For our Roths, my wife and I have chosen Fidelity. She invests in FFNOX, Fidelity Four in One index, the Four being Spartan 500 Index, Extended Market Index, International Index, and US Bond Index. It's worked out well - no muss, no fuss. I have it a bit differently, with positions in the Spartan 500, but also in some small caps and a value fund. Fidelity has a pretty good amount of funds to choose from.

A couple final notes to be aware of regarding Fidelity and opening up a Roth account. There are a couple incentives out there if you are just beginning to look at this kind of thing. First, there is an offer from Fidelity, Fidelity $100 bonus, where you invest an initial $10,000 and you will receive $100 credit. Not bad to get you started. And you don't need to keep the $10K in there, just wait until you receive the credit and withdraw what you are not wanting to invest right away. There are other incentives like mileage programs American Airlines AAdvantage® members, but I prefer to stick to the cash. In fact, there is an entire thread at Fatwallet.com on the topic, FatWallet Forums - Fidelity - no longer any fees, 5.21% Money Market, $100 bonus.

Another great incentive to help you contribute is the Fidelity Investment Rewards credit card, Fidelity Investments. Basically, it's a cash back card which earns 1.5% on all purchases and deposits them quarterly to a linked Fidelity account. My wife earned an additional $400 contribution to her Roth last year as this has become our main credit card.