Roth IRA vs. Automatic Investing

by Calla Hummel

An investor can use both Roth IRAs and automatic investing as tools to grow wealth over time, particularly when saving for retirement. There is nothing adversarial about Roth IRAs and automatic investing. An IRA is a thing and automatic investing is a strategy but both involve regular contributions into a portfolio. They can be used in combination with each other or separately.

Roth IRAs

An individual retirement account -- IRA -- is an account that lets you save for retirement and receive favorable tax rates on that money. IRAs come in two types: traditional and Roth. Anything you put into a Roth IRA grows tax-free there: You pay income taxes on your income, deposit up to $5,000 a year of it into a Roth ($6,000 if you're 50 or older), then choose to buy stock, bonds, options or just let it sit. Any interest, dividends or appreciation is yours tax-free when you pull it out at age 59-1/2 or later.

Automatic Investing

Automatic investing is an investment strategy that makes investing easy, mindless and emotion-free for many investors. The investor sets up an account with a broker and specifies an amount of money to go from her checking account to her portfolio every month automatically. She also specifies what that money should buy. Her portfolio then goes on autopilot, adding a specified cash value to her investments every month.

Roth IRA vs Automatic Investing

You do not have to choose between a Roth and automatic investing, but you should be aware of their differences. A Roth IRA is an account with a bank or brokerage firm. You can put money into it at any time up to a yearly limit. If you take money out of it before you are 59-1/2 , however, you may have to pay a 10-percent penalty as well as pay income taxes on some of the money. Automatic investing is a strategy that can be used with any investment account, as long as it is a service that your broker or bank provides. It automatically takes money out of your checking account and buys investments. You can stop the service, change your strategy or take money out of nonretirement accounts at any time.

Automatic Investing with Roths

You can combine automatic investing and Roth IRAs. In fact, many working Americans ask their employers to take money directly out of their paychecks and put it into an IRA. Many employers offer this service and you can ask your brokerage firm or bank -- whichever manages your IRA -- to take an amount out of your checking account on a regular basis and deposit it into your Roth IRA.

About the Author

Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.

Photo Credits

  • Creatas Images/Creatas/Getty Images