Answers to Common Questions (FAQ)

How do I open a Roth IRA

You can open a Roth IRA account with your online discount broker. Personally I use E-Trade and have my Roth IRA setup with them. Most discount brokers have an easy online application form for you to fill out and an 800 support number for you to call if you need assistance. It’s relatively easy to do and takes about 15 minutes. Check with your tax professional first to make sure you qualify. As of 2013 the IRS does not have an age requirement. However, most brokerage firms require you to be 18 or older to open an account with them.

How much money can I contribute to my Roth IRA

That depends on several factors. Mainly the year, your income and your age. To be sure you should check with your tax professional. Also, Congress frequently changes the law to different contribution limit amounts so be sure to check for yourself. Here are the maximum contribution limits for those that qualify as of January 2013:

For 2012, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:

  • $5,000 ($6,000 if you’re age 50 or older), or
  • your taxable compensation for the year.

For 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:

  • $5,500 ($6,500 if you’re age 50 or older), or
  • your taxable compensation for the year.

2013 Roth IRA Income Limits

From 2012 to 2013, the allowable income limits for making a Roth IRA contribution changed for each tax filing status.

Those Married and Filing Jointly can contribute a maximum of…

  • $6,500 if you’re over 50 and your combined earned income is $178,000 or less
  • $5,500 if you’re under 50 and your combined earned income is $178,000 or less
  • $0 regardless of age if your combined earned income is more than $188,000

If your earned income is somewhere between $178,000 and $188,000, your 2013 maximum contribution limit phases out.

Those who are filing as Single or Head of Household can contribute a maximum of…

  • $6,500 if you’re over 50 and your combined earned income is $112,000 or less
  • $5,500 if you’re under 50 and your combined earned income is $112,000 or less
  • $0 regardless of age if your combined earned income is more than $127,000

If your earned income is somewhere between $112,000 and $127,000, your 2013 maximum contribution limit phases out.

Reference: IRS website “Retirement Topics – IRA Contribution Limits”

When during the year should I contribute money to my Roth IRA

This is really a personal budgeting issue. The first choice if it’s within your financial means would be to fully fund your IRA at the beginning of the year. That way you will be in a position to purchase stock early in the year as potential opportunities present themselves. Doing so would also provide you with the most dividend income by putting your capital to work earlier rather than later.

The second best option would be to make your contribution deposits automatic each month or with each paycheck by setting up a direct deposit program with your bank, employer or brokerage firm. This is a great way to save money and it provides opportunities throughout most of the year to purchase stock when it meets our 20% discount to fair value strategy.

The third and least favorable option would be to manually deposit the IRA contribution funds at the end of the year. By the way, the deadlines to contribute are tied to the mid-April Federal Income Tax deadlines. In other words, you have until April 15, 2013 to contribute for 2012. Again always check with the IRS or your tax professional.

Should I invest in Mutual Funds or Individual Stocks

The short answer is individual stocks. As long as you purchase 20 stocks with an equal weighing across all industrial sectors for proper diversification. The problem with mutual funds is that they do not provide a high enough return due to their high expenses in the form of annual reoccurring fees, over-diversification (too many poor performers water down results of the high performers) and low dividend growth rates.

In fact, the performance of mutual funds is so poor that 80% of professionally managed mutual funds do not beat the S&P 500 index. At Dividend Geek we follow the investment strategies of Warren Buffett who believes that carefully building a concentrated portfolio is critical for investment success.

What if the stock market crashes

Funds in your Roth IRA should be dedicated to long-term investing of 20-30 years. If your focus is on a 20+ year long-term horizon than history is on your side, because stock market has had a positive return in every 20 year rolling period tracking back to 1900. The key to success is not to panic and sell at a loss. Our strategy is to focus on the income stream and not capital gains. At Dividend Geek we view market pullbacks as opportunities to buy quality dividend growth stocks at deep discounts and high initial dividend yields. In other cases we add more shares and lower our cost basis and improve our yield on cost.

The following chart shows that the longer you extend your time horizon, the less likely you’ll experience a loss over that holding period. Don’t let the negative opinions, dogma and rhetoric about the stock market keep you out. The numbers don’t lie – when investing long-term the stock market has consistently produced outstanding results that have out performed all other investment asset classes.

I’m over 40 will your system work for me

Time is by far the most critical and valuable component of the Dividend Geek investment system. Compounding for the full 30 years is preferable; however, you could reduce the compounding time by 5 years so that for example, if you are age 40 you could retire at age 65. To do so you will need modify the investment factors as follows:

30 Year ‘Traditional’ Plan
Annual investment amount = $5,500
Average Initial Dividend Yield = 3.5%
Average Dividend Growth Rate = 10%

25 Year ‘Modified’ Plan
Annual investment amount = $11,000
Average Initial Dividend Yield = 2.9%
Average Dividend Growth Rate = 12%

Notice that you will need to double the annual investment amount. With your Roth IRA contribution already maxed out you’ll need use another investment vehicle like a Traditional IRA (if you are married your wife can open one in her name) or possible a regular brokerage account which of course does not have any tax advantages. Also, you will need build your portfolio with more higher dividend growth rate stocks than you would on the traditional 30 year plan. Remember it is more difficult for a company to sustain the ability to raise its dividend at a 12% growth rate vs. a 10% growth rate over longer 10, 15 and 20 year periods so you will have to more closely follow these companies and make sure they are staying on track.

To run the numbers for yourself go to our ‘Downloads‘ page and download the free ’30 Year Income Calculator’ to see if you can come up with a combination that works better for you. It will also give you a greater appreciation for the value of time when it comes to compounding.

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