I'm a newbie at Roth IRA's

[Guest Jackie V]

I recently opened a Roth IRA. I'm a college student working full time. Should I contribute as much as I can afford to the IRA ($2,000 to $3,000 per year - leaving very little leftover for me to save somewhere else), or should I contribute less (say $1,000 or so) and save some money in a different type of account for things like a car, a house, or any other unexpected expenses that come up?

Also, a bit unrelated to Roth IRA's, but I will be getting married within the next two years. Can anyone give me some tips on how to prioritize my money? For example, is it more important to contribute the max to my IRA than it is to save for a downpayment on a house? When should I start saving for my children's future? etc. Thanks for your help!!

Jackie

[John G]

Adult decision time! And, there are no easy answers.

From many perspectives, maxing out your Roth might be a very good idea. It gets you started early, and is a great tax shelter. Because contributions can be removed at any time, you can think of the Roth as part of your emergency funds.

But.... you have a lot of issues. How are you paying for college? Do you have any reserves if you get sick, layed off, or need to replace you car? How soon do you graduate from college and what is you major or employment prospects? (a computer science major with one year to go is a very different circumstance than sophmore philosophy major) Who is paying for the wedding? Is your finance also a student or currently working? And.... buying a house? Your children's future? (do you already have children? or is this after you get married?) Whooaa.

I love it when folks start to plan ahead, but you have a full menu of issues. You can't solve them all, so prioritize. I would suggest that getting your degree is #1. Second might be continuing to build up cash reserves - via Roth or other savings account. Don't rush into that wedding until you know you are on the right path.

House? Kids future? Stop thinking about these right now. Don't get distracted from your priority issues.

[Guest Jackie V]

Hey John G, thanks for your response. I was unaware that I could use a Roth as an emergency fund if needed. If I withdraw money, do I have to replace the money within a certain time frame?

As you can probably tell, I have a tendency to get ahead of myself. I just want to get everything started on the right foot! As for school, I will graduate in December '04 as an elementary ed major. My fiance will graduate in May '05 as a history education major. Both of us have tough roads ahead when it comes to finding a job...teaching jobs are far and few between in our region. That influenced our decision to wait until late 2006/early 2007 for the wedding that both sets of our parents will pay for. I would like to help them out with the wedding expenses, so I have started to set aside a bit of money from each paycheck.

I really appreciate your help! I'll follow your suggestions to finish up school and to start setting some reserve money aside. If you have any other suggestions, please let me know...I'm open to anything! Thanks again!

[John G]

Roth withdrawals: each year you can take out funds from any IRA for a 60 day period and redeposit them.... I don't recommend ever doing this as many things can go wrong during that 60 day period and the downside is ugly in terms of taxes and penalties. However, you can take CONTRIBUTIONS out of a Roth at any time without penalty. Again, I don't recommend this as it should be a last resort source of funds. Once withdrawn, you can replace them only in the 60 day period. This second option does allow some tax payers to treat their initial Roth contributions as part of their emergency reserves. If you can avoid taping into the emergency reserves for the first 5 years or so, you are likely to accumulate other resources and improve your access to sensible credit such that you can avoid dipping into the Roth.

School teacher marrying a school teacher does not commit you to a life of poverty. But unfortunately, school teachers rarely make the compensation they would receive in other fields. This is both due to basic supply/demand factors in labor force and the odd way our society values those who teach our children. I am married to a school teacher... she choose that field for reasons other than big buck compensation. New teachers rarely get the prime choices for assignments, often they are thrown into some of the toughest schools. But, you should find a reasonable number of openings in most parts of the country. If you really have problems in your area, consider taking a job in a different area for a couple of years.

You may want to look for ways to supplement your income via summer jobs, part-time work or running a business on the side. But perhaps my very best advice is to "live within your means", avoiding the lure of credit card debt, impulse purchases, superficial trinkets, and ego purchases (impressing your friends by your vacation/car/electronics). The most succesful people in our society figure out very early on that in money matters, playing good defense is just as important as having a bigger income.

My daughter is getting married this fall, and is "orchestrating" an outdoor wedding with 6 vendors. The headcount keeps rising, extras keep popping up.... I doubt that she will be able to stay in the 20k budget and I don't think she is making opulent choices... no limos, DJ instead of band, off peak schedule, minimal flowers, bridal dress made by mom, etc. Contrast this to how my wife and I were married - Justice of the Peace in our home with perhaps 24 friends and relatives. Don't press me to say which option is more sensible. Good luck with your plans.