So being the money-loving, golddigging jew that I am, I've decided it's time to stop fooling around and open up a retirement account. I don't really have much background in this area, though (I guess those genes skip a generation). I know about IRAs and Roth IRAs, but there's a billion other things you can do, and I don't really know enough about it to know where to start researching.

I was just wondering if any of you who have personal retirement accounts (not a 401k through a business) could talk a little bit about what you have, how it works, how you chose it, etc.

Set up a Roth IRA. I have a Roth set up through etrade.

A Roth IRA is a nondeductible retirement account. Unlike many RAs, a Roth IRA is not tax-deductible, meaning the money you put into your account each year is taxable. Other RAs are tax deferred, meaning your aren't taxed on the money until you pull it out in 40 years. Roth IRAs are taxed right now, then in 40 years, you get the whole sum tax free. This has advantages and disadvantages.

I will explain the tax system. We all understand inflation, right? For the sake of this illustration, let's say dud wants to pull the money out in 40 years. Right now, a dollar is worth $1, but with inflation, in 40 years, a dollar with be worth 50 cents (like how your old man is always saying "I used to get a gallon of gas for a quarter and an ice cream cone for a nickel!"). This means that in 40 years, you're going to need twice as much money as right now.

The taxes are a problem. If you get a tax deferred account (a traditional RA), when you pull out the $500K you have saved, it's actually only worth $250K, then it gets taxed down to $175K. You're out of luck. On the other hand, you can invest now, get taxed now, then when you pull out the $500K in 40 years, it's still only worth $250K, but you get the entire amount. However, when you get taxed now, your tax dollar is worth more, so you're actually paying relatively "more" in taxes by paying now. The reasoning behind this, though, is that you'd rather pay taxes now while you're healthy and working, than having to pay it all when you're old and unable to work.

The thing about Roth IRAs, though, is that they have yearly investment caps, so you can only put in certain amounts each year. The way your money increases is not primarily through personal income deposits, but through capital gains. You deposit money each year, and that moeny is used to purchase stock, bonds, mutual funds, whatever, and those funds are supposed to grow and be worth more to you in the future, so your money grows. The traditional line of thinkings is that when one retires, they should have saved about $1,000,000 (2007 dollars, not 2047 dollars, you may need more in the future due to inflation). With $1Million, you can put your cash into a 10% mutual fund (standard), then live off the 10% ($100,000) you gain each year until you die. $100,000 is plenty of money to live off of, but again, inflation and the ever weakening dollar might make $100,000 seem more like $50,000 in 40 years.

By continuing to make the maximum deposit each year, and prudently investing your IRA money into wise avenues, you are well on your way to happy retirement. The various online brokers (etrade, scottrade, etc) let you micro manage your investments. Many larger brokerages like Vanguard or Smith Barney recommend that you just pick a general "category", and let them handle the micro managing, though of course, its your money, you can invest however your like.

I am impressed that you, at a young age, are already becoming concerned about this. Good job! If you have any questions, just ask.

Likewise. When I first got my current job (over 5 years ago, I was 16) my boss advised me to start paying into an RRSP (Registered Retirement Savings Plan, Canadian thing). Being 16 I, of course, shrugged it off. It's good advice, though.

Dude, he's like 22.

I'm actually doing the RRSP thingy once i get a job.

This is a very wise direction you're heading in, happy_dud. happy_dad must be proud. :]

I wanted to get a Roth IRA before this semester, but then this semester came and I foolishly blew all my money. Hopefully working for an investment firm this summer will give me more perspective on how to prudently manage my money?

Yeah, I know. He's still young though, that's the point. Sure, it'd be great if everyone started at 16, but that's not very realistic.

I've been investing in my 401K and ESPP since I was 16. This is one of the smartest things you can begin to investigate. If you have the opportunity to get into a good, quickly vested 401K with your workplace, I would suggest looking into it as well. Best Buy matches 100% on the first 3% of your pay that you invest and 50% for every dollar past 3%. So the money grows really fast..:eng101:

Dud is so not 22, he's a youngin'.

After I come back from Spain and pay off whatever I owe my parents for it next May, I plan to open a retirement account myself.

I just keep getting the idea that planning for retirement is such an optimistic thing.

Haha... actually... happydud and happydad have been planning to start happydud's retirement fund for the past year and a half (I'm 19 now), we both just keep putting it off. I'm hoping to open one before the end of this year, so I can put in the max for this year now, and then the max for NEXT year at the begining of Jan.

Anyway. Steven, that was a great post. I never really understood how people could "live off the interest," and it makes sense now. Pretty simple, I just never really put 2 and 2 together.

More posts/suggestions/details/articles/whatever are welcome!

If your work will match money put into a 401K, do it at least to the limit they will match 1 for 1. Every cent less is just giving up free money.

Fail. :p

I have an IRA, kinda. They just keep rejecting all of my attempts to put money into it, saying that the account doesn't exist, though it appears as one of my accounts on their site.

Haha, I remember that story...

Yep. Going in on Saturday to discuss closing the account.