No Debt Plan

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Last week I told you how to make sure your money was safe from a bank failure. As I did my research on the topic, I discovered that IRA accounts are also covered at those banks. The FDIC insures your individual retirement accounts up to $250,000.

One of the questions I have received via e-mail in the past revolves around IRA accounts. Namely, if I have a Roth IRA with Bank A, can I open a new one with Bank B? Or are my options unlimited in regards to the number of different individual retirement accounts I can have?

The short answer is yes, you can have as many IRA accounts as you wish. You could open an IRA account up with 100 different banks if you felt the need. Of course you don’t really want to do that. Consolidating into one IRA account with the highest number of quality, low cost investment options would make your life a lot more simple. (Unless the institution it is held at fails.)

You can also have both a Roth IRA and a Traditional IRA. No matter how many IRAs you have you must remember you can only invest the maximum amount across all accounts. Currently that maximum is $5,000 for most people. If you have a Roth IRA and a Traditional IRA you could put $2,500 into each account for a total of $5,000 (rather than $5,000 into each and a $10,000 total).

As I was planning to write this article, Patrick at Cash Money Life put up a great article about the number of different retirement accounts you can have (401k, IRAs, all of them).

What if I have more than $250,000 in my IRA?

As I mentioned at the beginning if you have a Roth IRA with IndyMac Bank and it has $600,000 in it… the FDIC will guarantee the first $250,000. You may be able to get the remaining $350,000 from the bank eventually, but it would be quite disheartening to see more than half of your investment move out of your hands for a while. Disheartening is an understatement. If $350,000 of my money suddenly was inaccessible I would be freaking out.

I can understand in this situation some might consider opening up a second IRA with another institution to hedge your bets against failure.

But remember, bank failures don’t happen every day. And opening up a second IRA with a different institution does not ensure you will enjoy the same low cost investments as with your first IRA. I would recommend finding a quality institution (we use Vanguard) to keep your IRA safe. Plus, I wouldn’t recommend using a bank in the first place as they usually don’t offer the cheapest investments.

Chris commented on my post, One Simple Step to Retiring with $1,000,000, with a question about Roth IRA minimums.

You say the max is $5,000 is there a minimum? If I can’t afford to do the $416.67 per month, what is the lowest that I can go without any kind of penalty. Or can you go without putting anything in for a year or two, not that you would want to do that. Just curious, I’m not completely familiar with the way the Roth works. Thanks Kevin!

The best answer? It depends.

There could be a few different minimums: minimum to invest in a mutual fund, minimum amount required to open the account with the firm, or minimum amount you can add additional funds to your account with.

There are a multitude of places you can setup your IRA/Roth IRA. A bank, brokerage firm, or directly investing with a mutual fund/investment firm are a few options that come to mind. Each is going to have different requirements of you to open up an account.

For example, we use Vanguard for our Roth IRAs. To invest in Vanguard’s mutual funds — through Vanguard or a brokerage firm — you need $3,000 as a minimum to invest in that mutual fund. The only exception is the Vanguard STAR fund with a minimum of $1,000. Everything else you need $3,000 to get started. However, after that the smallest amount of money you can then add to that fund is $100 if I remember correctly. You don’t have to save up $3,000 at a time unless you want to use multiple funds. We are currently invested in a Target Retirement Fund to get started, so we have no need for another fund right now.

If you setup an account with a bank or brokerage firm you would have an array of options to invest in. Some would have higher minimums than others. Some of the firms may even require you to have a certain amount just to open the account regardless of how much you invest in each mutual fund or stock.

It really does all depend. We have been completely satisfied with Vanguard in the short time we’ve been with them. We didn’t have $3,000 saved up initially, but just set aside money each month until we reached the minimum.

My advice? Just get started today. Do whatever it takes. Set the money aside in an online saving account like ING until you have enough to start investing. Step by step you will get there. Just remember the first step is always the hardest.

That pretty much says it all. Last night I went to Vanguard’s website and signed up for our first Roth IRA (in my name). We had originally planned to open my account with Vanguard’s Total Stock Market Index (VTSMX), and the next contribution (whether to my account, or to open up one for my wife) would be Vanguard’s Total International Stock Market (VGTSX). We would continue to contribute to both funds for diversification.

However, it is going to be a while before we have another $3,000 saved up to invest in another Vanguard fund. That means it would be a while before we can better diversify.

So last night I made the choice to give us instant diversification with Vanguard Target Retirement 2050 (VFIFX). Target Retirement Funds are really “funds of funds”. This means the mutual fund doesn’t invest in individual stocks. Instead, it invests in other Vanguard mutual funds in this breakdown:

• 71.61% - Vanguard Total Stock Market Index
• 10.26% - Vanguard European Stock Index
• 9.89% - Vanguard Total Bond Market Index
• 4.66% - Vanguard Pacific Stock Index
• 3.34% - Vanguard Emerging Markets Index
• 0.23% - Vanguard Total Stock Market ETF

I think the bond allocation is way too high, in fact I would prefer it to be 0%. I looked at some of other Target funds and they all had very similar asset allocations. I’m willing to give up the 10% for bonds if I can get instant diversification. In the future, we may add more to the stock funds (buying them individually) to up our percentages.

Nonetheless, we’re started. And that’s worth something — first step counts!

This has been quite the busy week in our house. This past weekend I went on a road trip to Memphis with 4 of my best friends from college. Rendezvous ribs, Graceland, and a few nice pubs. And to top it off, I didn’t go into debt to do it. I had enough spending money set aside to pay for the whole gig. I also had a test in my MBA class last night, so the rest of the week was spent studying. Work has been hectic, and not allowed for a lot of writing.

So I have a question for anyone out there. I’ve posted it on the Get Rich Slowly forums, too.

The question:

We are planning on setting up our Roth IRA either this month or next. We should have the $3,000 required for investment with Vanguard. We are setting up the IRA for 2007, so we can maximize what we can contribute this year (2008).

Can I file my taxes, or should I fund the Roth IRA first before filing? That is, does filing my taxes officially close my ability to fund the Roth for 2007?

Any help would be greatly appreciated! Have a great Friday.