Author: Perfect Nest Egg

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IRA | Roth IRA

An IRA is an account set up at a financial institution (think Fidelity or Chase) that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. The 3 main types of IRAs each have different advantages:


Traditional IRA – You make contributions generally deductible on your tax return, and any earnings grow tax-deferred until you withdraw them in retirement. Best if you expect to be in a lower tax bracket when you retire.

Roth IRA – You make contributions with money you’ve already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.

Rollover IRA – You contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) into an IRA.

Why invest in an IRA?

As mentioned in my 401(k) section, IRAs are a great option if you don’t have access to a 401(k) or if your employer does not offer a match and you expect to contribute less than $6,000 per year.

Additionally, if you max your 401(k) and want to accumulate more savings, you can contribute to both a 401(k) and an IRA. However, if you max your 401(k) already, you are likely in a higher tax bracket that may preclude you from either getting the tax deduction of a traditional IRA or ability to contribute to a Roth. In these cases, do your homework. There are still ways to get around this with strategies such as a “backdoor IRA.” More to come on this topic…

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HSAs – The Trifecta Of Retirement Investing

HSAs let you save tax-free for medical needs. If you have a high-deductible health insurance plan (over $1,350 for individuals or $2,700 for families), you’re eligible. They are similar to FSAs, but FSAs generally have more restrictions such as “use it or lose it” rules and they don’t offer a way to invest your contributions. I would argue HSAs should be your first choice for investing for retirement, even more so than 401ks and IRAs. Here is why:

Triple tax break

  1. Contributions are tax deferred and you can invest the funds
  2. Earnings are not taxed
  3. Withdrawals used for qualified medical expenses are not taxed either.

With a Traditional 401k or IRA, you get the tax deferral benefit in #1 above, but pay tax later, so you don’t get the benefits of #2 and #3. With a Roth 401(k) or IRA, you get the benefits of #2 and #3, but not #1. With a HSA you get the benefits of all 3. A triple tax break!

2019 Contribution Limits

You can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage in 2019, which is slightly more than the 2018 limits. If you’re 55 or older anytime in 2019, you’ll continue to be able to contribute an extra $1,000

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2019 Will Be A Wild Ride!

Buckle up. This year will be a bumpy ride with ups and downs. When we hit the downturns, think about this poem from Rudyard Kipling, which was quoted by Warren Buffet in his 2017 Berkshire Hathaway shareholder letter:

If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.

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401k Plans

Keep it simple. If your employer offers a 401k Plan, even if there is not a company match, you should join the plan and contribute. Don’t worry about IRAs, stocks or mutual funds. Join your company 401k Plan now!

Contribution Limits

Start with 5% of your salary. If you can afford more, do it. If you can’t afford 5%, start with $50 or $100 per month. Whatever you can. This year the IRS has increased the maximum employee 401(k) contribution limit to $19,000 per year. The maximum contribution for 2018 was $18,500.Additional contributions can be made if you are age 50 or older. For 2019, that number remains at $6,000, which is also the same as the catch-up contributions in 2018 and 2017.

Traditional vs Roth

The biggest difference between a Roth and a traditional IRA is how and when you get a tax break: The tax advantage of a traditional IRA is that your contributions are tax-deductible in the year are made. The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed.

Tough call. If you are just starting your career, go with a Roth. Otherwise, select a Traditional or mix it up.

Fund Choices

There are several choices ranging from small cap to large cap, domestic vs international and low fee options.

Unless you are plan to monitor your investments daily, your best option is a target fund. I personally invest in the Vanguard target funds through my employer 401k Plan. What is a target fund? A target date fund is designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date approaches. As an example, if you pick a Target 2045 fund, the portfolio will be more heavily weighted towards stocks, gradually allocating to more conservative investments (e.g. bonds) are your target date approaches.

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Looking for a credit card

Before you start looking for a card, make sure you have a game plan. In my mind there are only 2 scenarios where a credit card makes sense.

  1. You plan to pay the bill in full each month and want the added benefit of cash back or travel rewards
  2. One-time use for large purchase / emergency using a 0% interest card to be paid within one year