Funding an ira or roth ira
No, you don't have to have the money deducted from your paycheck. The IRS doesn't get a copy of your paycheck anyway. When you file your annual tax return (form 1040), there's a line there to write down the amount you contributed to the IRA. In fact, you can contribute to the IRA after the year ended, until the Tax Day of the next year, so that you can make sure your contribution will actually be deductible (not always they are). The IRA custodian (the brokerage firm/bank where you opened the IRA account) will provide you with a deposit confirmation and form 5498. A copy of form 5948 is also sent to the IRS. And on the last sentence, it doesn't matter when or where the money was earned (money is fungible, so there's generally not even any way to tell), but you do have to have sufficient earned income (that's basically money you earn from working, not from dividends and interest or selling stock and the like) in the contribution year to cover the IRA contribution.
I found that the Target Date funds for Vanguard have a lower minimum, only $1,000. They are spaced every 5 years from 2010 to 2060. They are available as: General Account, IRA, UGMA/UTMA and Education Saving Account. "You have several questions in your post so I'll deal with them individually: Is taking small sums from your IRA really that detrimental? I mean as far as tax is concerned? Percentage wise, you pay the tax on the amount plus a 10% penalty, plus the opportunity cost of the gains that the money would have gotten.  At 6% growth annually, in 5 years that's more than a 34% loss.  There are much cheaper ways to get funds than tapping your IRA. Isn't the 10% ""penalty"" really to cover SS and the medicare tax that you did not pay before putting money into your retirement? No - you still pay SS and medicare on your gross income - 401(k) contributions just reduce how much you pay in income tax.  The 10% penalty is to dissuade you from using retirement money before you retire. If I ... contributed that to my IRA before taxes (including SS and medicare tax) that money would gain 6% interest. Again, you would still pay SS and Medicare, and like you say there's no guarantee that you'll earn 6% on your money.  I don't think you can pay taxes up front when making an early withdrawal from an IRA can you?  This one you got right.  When you file your taxes, your IRA contributions for the year are totaled up and are deducted from your gross income for tax purposes. There's no tax effect when you make the contribution. Would it not be better to contribute that $5500 to my IRA and if I didn't need it, great, let it grow but if I did need it toward the end of the year, do an early withdrawal? So what do you plan your tax withholdings against?  Do you plan on keeping it there (reducing your withholdings) and pay a big tax bill (plus possibly penalties) if you ""need it""?  Or do you plan to take it out and have a big refund when you file your taxes? You might be better off saving that up in a savings account during the year, and if at the end of the year you didn't use it, then make an IRA contribution, which will lower the taxes you pay.  Don't use your IRA as a ""hopeful"" savings account. So if I needed to withdrawal $5500 and I am in the 25% tax bracket, I would owe the government $1925 in taxes+ 10% penalty. So if I withdrew $7425 to cover the tax and penalty, I would then be taxed $2600 (an additional $675). Sounds like a cat chasing it's tail trying to cover the tax. Yes if you take a withdrawal to pay the taxes. If you pay the tax with non-retirement money then the cycle stops. how can I make a withdrawal from an IRA without having to pay tax on tax. Pay cash for the tax and penalty rather then taking another withdrawal to pay the tax.  If you can't afford the tax and penalty in cash, then don't withdraw at all. based on this year's W-2 form, I had an accountant do my taxes and the $27K loan was added as earned income then in another block there was the $2700 amount for the penalty. So you paid 25% in income tax for the earned income and an additional 10% penalty.  So in your case it was a 35% overall ""tax"" instead of the 40% rule of thumb (since many people are in 28% and 35% tax brackets) The bottom line is it sounds like you are completely unorganized and have absolutely no margin to cover any unexpected expenses.  I would stop contributing to retirement today until you can get control of your spending, get on a budget, and stop trying to use your IRA as a piggy bank.  If you don't plan on using the money for retirement then don't put it in an IRA.  Stop borrowing from it and getting into further binds that force you to make bad financial decisions. You don't go into detail about any other aspects (mortgage? car loans? consumer debt?) to even begin to know where the real problem is.  So you need to write everything down that you own and you owe, write out your monthly expenses and income, and figure out what you can cut if needed in order to build up some cash savings. Until then, you're driving across country in a car with no tires, worrying about which highway will give you the best gas mileage." I'm concerned about your extreme focus on Roth. In today's dollars it would take nearly $2 million to produce enough of an annual withdrawal to fill the 15% bracket. If you are able to fund both 401(k)s and 2 IRAs (total $43K) you're clearly in the 25% bracket or higher. If you retire 100% with Roth savings, and little to no pretax money, you miss the opportunity to receive withdrawals at zero(1), 10, and 15% brackets. Missing this isn't much better than having too much pretax and being in a higher bracket at retirement.  One factor often overlooked is that few people manage a working life with no gaps. During times when income is lower for whatever reason, it's a great time to convert a bit to Roth.  (1)by zero bracket, I mean the combined standard deduction and exemptions. For two people this is currently (for 2017) $20,800 total. And it goes up a bit most years. I will split my answer in a few sections... Note: I will not address the legal aspect of the question. If you can or not use Federal money to invest. 1st - Investments with Student Loan 2nd - IRA as the Instrument I hope this helps! Your assumptions are flawed or miss crucial details. An employer sponsored 401k typically limits the choices of investments, whereas an IRA typically gives you self directed investment choices at a brokerage house or through a bank account. You are correct in noticing that you are limited in making your own pre-tax contributions to a traditional IRA in many circumstances when you also have an employer sponsored 401k, but you miss the massive benefit you have: You can rollover unlimited amounts from a traditional 401k to a traditional IRA. This is a benefit that far exceeds the capabilities of someone without a traditional 401k who is subject to the IRA contribution limits. Your rollover capabilities completely gets around any statutory contribution limit. You can contribution, at time of writing, $18,000 annually to a 401k from salary deferrals and an additional $35,000 from employer contributions for a maximum of $53,000 annually and roll that same $53,000 into an IRA if you so desired. That is a factor. This should be counterweighed with the borrowing capabilities of a 401k, which vastly exceeds an IRA again. The main rebuttal to your assumptions is that you are not necessarily paying taxes to fund an IRA. There's a lot going on here. I'd be making the maximum ($5500 for a single person under 50) contribution to the Roth IRA each year. Not too late to put in for 2014 before Wednesday, 4/15.  Not out of your income, but from the T Rowe Price account. As long as you have earned income, you can make an IRA deposit up to the limit, 5500, or up to that income. The money itself can come from other funds. Just explain to Dad, you're turning the money into a long term retirement account. I doubt that will trouble him.  Aside from that, too much will change when you are out of school. At 18, it's a matter of learning to budget, save what you can, don't get into debt for stupid things. (Stupid, not as I would judge, but as the 25 year old you will judge.) Simply put, that's not allowed.   Outside a retirement fund, they simply do not provide a mechanism to pay that expense ratio separately.  Ergo, any effort to pay that expense ratio would be classified as a new/additional purchase of the fund. You now must deal with  Inside a retirement fund, paying the expense ratio of the fund with cash would be treated as an additional contribution, which may then violate contribution rules (such as going over your contribution limit, or contributing past age 70-1/2). "Whoa. These things are on two dimensions.  It's like burger and fries, you can also have chicken sandwich and fries, or burger and onion rings.   You can invest in an taxable brokerage account and/or an IRA.  And then, within each of those...  You can buy index funds and/or anything else. All 4 combinations are possible.  If someone says otherwise, take your money and run.  They are a shady financial ""advisor"" who is ripping you off by steering you only into products where they get a commission. Those products are more expensive because the commission comes out of your end.  Not to mention any names.  E.J.    If you want financial advice that is honest, find a financial advisor who you pay for his advice, and who doesn't sell products at all.  Or, just ask here.  But I would start by listening to Suze Orman, Dave Ramsey, whomever you prefer.  And read John Bogle's book.   They can tell you all about the difference between money market, bonds, stocks, managed mutual funds (ripoff!) and index funds. IRA accounts, Roth IRA accounts and taxable accounts are all brokerage accounts.  Within them, you can buy any security you want, including index funds.  The difference is taxation.  Suppose you earn $1000 and choose to invest it however  Later you withdraw it and it has grown to $3000.  Investing in a taxable account, you pay normal income tax on the $1000. When you later withdraw the $3000, you pay a tax on $2000 of income.  If you invested more than a year, it is taxed at a much lower ""capital gains"" tax rate.  With a traditional IRA account, you pay zero taxes on the initial $1000.  Later, when you take the money out, you pay normal income tax on the full $3000.  If you withdrew it before age 59-1/2, you also pay a 10% penalty ($300).  With a Roth IRA account, you pay normal income tax on the $1000.  When you withdraw the $3000 later, you pay NOTHING in taxes.  Provided you followed the rules.   You can invest in almost anything inside these accounts: Money market funds. Terrible return.  You won't keep up with the market.  Bonds.  Low return but usually quite safe.  Individual stocks.  Good luck.   Managed mutual funds.  You're paying some genius stock picker to select high performing stocks. He has a huge staff of researchers and  good social connections.  He also charges you 1.5% per year overhead as an ""expense ratio"", which is a total loss to you.  The fact is, he can usually pick stocks better than a monkey throwing darts.  But he's not 1.5% better!  Index funds.  These just shrug and buy every stock on the market.  There's no huge staff or genius manager, just some intern making small adjustments every week.  As such, the expense ratio is extremely small, like 0.1%.    If any of these investments pay dividends, you must pay taxes on them when they're issued, if you're not in an IRA account.  This problem gets fixed in ETF's.  Index ETF's.  These are index funds packaged to behave like stocks.  Dividends increase your stock's value instead of being paid out to you, which simplifies your taxes.  If you buy index funds outside of an IRA, use these.  Too many other options to get into here." "Wow. It's clear I'm outnumbered.  When I'm approached with the question (and keep in mind, it's usually a couple data points and little else) ""I am getting started, with no other money do I fund a retirement or emergency account?"" I often suggest they put the funds into a Roth, in a money market fund, and treat it like an emergency account. If there's in fact an emergency, there's no penalty to withdraw the deposit and we're talking peanuts for interest today.  With no emergency, two things could happen: A) As the account grows beyond what's needed for emergencies, the excess can be invested long term. B) As the investor earns more money and saves up enough to have a true emergency account separate from the IRA, the Roth can be fully invested long term. The 'Bad idea' stems from the view that one is using their Roth as an emergency account, which of course is bad. The subtle difference is one has no retirement savings and puts their Emergency account into the otherwise unused Roth. As time passes, they've protected more funds to grow tax free.  In the end, the most important thing is whether the person is saving and not tapping for simple non-emergency things. I'd rather see a guy with $25K in his Roth and no other funds than to have $5000 in his bank account because every time it gets larger he feels compelled to spend it.  My answer to Matt is to treat it for now as you intended, low risk, CD or cash (money market)." No. Borrowing is not allowed, but if you take a withdrawal, you have 60 days to deposit into another IRA account. This effectively creates a 60 day loan. Not what you're really looking for.  If you take this withdrawal and re-deposit to new account within 60 days, no problem. If not, you owe tax on the untaxed amount as well as a 10% penalty. This comes from IRS' Publication 590, I have the document memorized by substance, not page number. First of all, there are some differences between the retirement accounts that you mentioned regarding taxes.  Traditional IRA and 401(k) accounts allow you to make pre-tax contributions, giving you an immediate tax deduction when you contribute.  Roth IRA, Roth 401(k) are funded with after tax money, and a non-retirement account is, of course, also funded with after tax money.  So if you are looking for the immediate tax deduction, this is a point in favor of the retirement accounts. Roth IRA & Roth 401(k) accounts allow the investment to grow tax-free, which means that the growth is not taxed, even when taking the investment out at retirement.  With Traditional IRA and 401(k) accounts, you need to pay tax on the gains realized in the account when you withdraw the money, just as you do with a non-retirement account.  This is a point in favor of the Roth retirement accounts. To answer your question about capital gains, yes, it is true that you do not have a capital gain until an investment is sold.  So, discounting the contribution tax deductions of the retirement accounts, if you only bought individual stocks that never paid a dividend, and never sold them until retirement, you are correct that it really wouldn't matter if you had it in a regular brokerage account or in a traditional IRA.  However, even people dedicated to buy-and-hold rarely actually buy only individual stocks and hold them for 30 years. There are several different circumstances that will generally happen in the time between now and when you want to withdraw the money in retirement that would be taxable events if you are not in a retirement account: If you sell an investment and buy a different one, the gains would be taxable. If you want to rebalance your holdings, this also involves selling a portion of your investments.  For example, if you want to maintain an 80% stock/20% bond ratio, and your stock values have gone up to 90%, you might want to sell some stock and buy bonds.  Or if you are getting closer to retirement, you might decide to go with a higher percentage of bonds.  This would trigger capital gains. Inside a mutual fund, anytime the management sells investments inside the fund and realizes capital gains, these gains are passed on to the investors, and are taxable.  (This happens more often with managed funds than index funds, but still happens occasionally with index funds.) Dividends earned by the investments are taxable.  Any of these events in a non-retirement account would trigger taxes that need to be paid immediately, even if you don't withdraw a cent from your account. Fund your retirement accounts first.  Even as an intern, it is still worthwhile to open a Roth IRA and start contributing to it. See my answer to a similar question: Best way to start investing, for a young person just starting their career? Look into the Coverdell Education Savings Account (ESA). This is like a Roth IRA for higher education expenses.   Withdrawals are tax free when used for qualified expenses. Contributions are capped at $2000/year per beneficiary (not per account) so it works well for young kids, and not so well for kids about to go to College. This program (like all tax law) are prone to changes due to action (or inaction) in the US Congress.  Currently, some of the benefits are set to sunset in 2010 though they are expected to be renewed in some form by Congress this year. I remember reading in an earlier version of Pub 590 (or possibly the Instructions for Form 8606) that timely contributions for Year X to an IRA are deemed to have been made on January 1 of Year X regardless of when they were actually made, but I don't seem to be able to find it now in current versions of Pubs 590a or 590b and so cannot include a citation of chapter and verse. Be that as it may, the calculations on on Form 8606 Part I effectively track basis on an annual basis rather than on a daily basis, and so the fact that the Traditional IRA has a zero balance (and basis 0 too) at some time during the year doesn't matter in the least.  In detail (though you didn't ask for it) Note that the whole $6500 that you put in remains non-deductible in its entirety, but you owe taxes on only $93,900 of that $100K that you rolled over into a Roth IRA and not on the whole $100K as you were assuming would have been the case. So, in effect, of that $6500 nondeductible contribution to your Traditional IRA, you did really get to deduct $6100 from your taxable income for 2016, and make only a $400 nondeductible contribution, exactly equal to your basis in your Traditional IRA as per the Form 8606 calculations.  I can only assume that the software package that you are using reproduces the above calculations exactly and does what the IRS says you must do on Form 8606 rather than what you get by tracking the basis on a daily basis. IRS regulations and instructions are not necessarily the same as what the tax law says; they are interpretations of the tax law based on what the IRS understands the tax law to say. People have challenged various specific IRS regulations and interpretations as being different from what the law says in Tax Court and been successful in some cases and failed in others. If you believe that tracking basis on a daily basis is what the law says (instead of just being reasonable and rational: reasonableness and rationality are not required either of Congress in the laws that they write or the IRS regulations that interpret the laws), you should take up the matter with the IRS or the Tax Court. "1) Indeed, if referring to a Roth as the question is, you are right on. But - You can deposit to an Traditional IRA (TIRA). You just can't deduct it. You are then permitted to convert that to a Roth any time. Now, this would appear to negate income issues, right? Not so fast. When you convert, all TIRA accounts must be considered. In other words, when it comes to the TIRA, you only have One TIRA, the ""A"" actually standing for Arrangement, not account. That TIRA may then be spread over as many accounts as you have time to set up. So, if there is any pretax money and/or untaxed gain, it will be prorated and taxed based on your conversion amount. If any of this is not 110% clear, please comment and I will update the answer.  No 401(k) at work?  Note: I edited as my original wording misunderstood the response, and in turn, appeared a bit unkind. Not my intention."