Roth IRA

In high school I was lucky enough to have a brilliant physics teacher. I was especially lucky because he had actually retired the year before. He then took one look at his finances and returned to work part time. The first day of class he didn't say a word about physics. Instead he talked about Roth IRAs and told us all to start one as soon as possible and max it our contribution as often as possible. I have no idea why a man so brilliant at math, and certainly smart enough to realize in his golden years how beneficial a Roth IRA would have been, didn't think about his financial future earlier. My 16 year old sat there smug in the knowledge that I already had a Roth IRA, started by my father. When I took over my finances, the contributions stopped.

Why are our past selves so stupid??

I recently rectified this situation. I was interested in applying for the Fidelity 2% Rewards Card. The rewards are deposited into a Fidelity account, something I didn't have. I knew we needed to start working on some Roth retirement savings, so my husband and I each opened a Roth IRA with Fidelity and I applied for the card and attached it to my Roth. I was pleased to see that Fidelity's trades are also $7.95 rather than the $8.95 I pay in my Schwab account. The Roth IRAs are fee free with a minimum opening deposit of $2500 OR minimum monthly contributions of $200. We set up monthly contributions of $500 each. The first contribution was set up for July, so we would each reach the $5000 maximum for 2010 by the required date of April 2011.

I thought the max contribution would go up to $6000 for 2011, so again we were set up perfectly to reach it by April 2012. Unfortunately, it remained at $5000 so we are actually set to reach the max by February 2012. Thanks in part to the rewards card, I'm hoping to speed that up a bit and make all of our 2011 contributions by December. By contributing as early as possible, we set ourselves up for the most compound interest possible, and this well help make up some ground lost by the max limit not going up.

I read an interesting article on Get Rich Slowly recently about building up an emergency fund even if you don't think you can afford it. I would add that you can also look at your Roth IRA as a part of your emergency fund since you can withdraw contributions penalty free - just not earnings. Although we certainly don't want to ever touch our retirement savings, in the case of an extreme financial emergency, we could withdraw from it. We don't have much additional cash in savings accounts - and I don't really want too much of our money sitting around earning a max of 1.3% - but by the end of 2011 we'll have $20,000 plus earnings sitting in our two Roth IRA accounts. That's enough money to make me feel fairly secure about being laid off, emergency medical bills, etc. and is also a great start to our retirement savings.

So here's to my old teacher. He was one of the very best I ever had. It may have taken me 10 years to really start listening, but I am now.