If there was ever an account created to make you rich, this is the one.
I love the ROTH IRA account, but I will give you both sides of the argument for having a ROTH IRA vs having a traditional IRA.
Basically any type of ROTH account you should be investing into.
Why is the ROTH IRA amazing?
- Invest in whatever you want
- You can hold both cash and investments
- Pay taxes once and then never again
- You can withdraw for any reason without penalty
- You can contribute to a ROTH IRA your entire life, there is no age limit
- There are no RMDs like a 401k
- You can leave the account to a spouse tax free. If you leave the account to a non-spouse the money distributions will be taxed as income. Still not a bad deal.
Right now the max you can contribute to a ROTH per year is $6000. The government wants you to save for retirement. But they do not want you saving too much, because they want tax revenue off of you.
When you invest into a ROTH it grows tax free.
They only get to tax you once so they will not allow unlimited contributions. They want yout to stay in the workforce and contribute annually.
What is the difference between a traditional IRA and a ROTH IRA. In a ROTH IRA you pay taxes up front. A traditional IRA is tax deferred.
So why would I invest in a traditional IRA over a ROTH?
1. There are income limits with a ROTH IRA. There are none on a Traditional IRA.
2. Tax deffered. Rather than pay taxes today on the ROTH, what if you invested that amount today and let it grow to a bigger amount and took it out later?
Lets say your tax bill is $1200. What if instead of paying that $1200 you invested it in the market and let it compound annual for the next 20 years at 10%? And you invested thay same $1200 tax bill every year you were working?
After doing that for 10 years you could over $24000. that is if the market cooperated with you and you diligently invested that money you’re after year. now imagine if you did that for 30 years.
Lets get real. Are you really going to invest the money you would have paid in tax? Is it worth your time and effort? for the vast majority of people the answer is no. but if you are a high income earner the answer is Hell yes.
You would have a larger amount you would have to drawn down. And you could potentially strategically withdraw enough to pay less in taxes. A nice problem to have.
You are either going to pay tax on your money today or in the end. Pay it today and be done with it forever.
If you are a person in a high tax bracket you may not qualify for a ROTH IRA. So you have to open a traditional IRA and then rollover the money to the ROTH. It is called a backdoor IRA and it is a loophole in the law.
What should you invest your ROTH IRA money in?
I will never forget when someone asked for my advice on their investment account and they had simply added money to the account over the years, but never actually invest the money in any asset. The money just sat their in the account.
Lesson: You have to invest in something.
There is nothing wrong with leaving some of the funds in cash. You can treat this account like an Emergency Fund. So you can withdraw money from it at any time.
But keep in mind you paid tax on it, so its not exactly like a savings account.
You can invest your ROTH money into whatever asset or stock you want. You get to choose. That is the beauty over your employer 401k.
My favorite investment is index funds. You just choose a total market index and fund and be done with it. If the market wins, you win. If the market loses, you lose. Read my other artivcle to learn about how the market always goes up.
If you can out the max in at the beginning of the yea DO IT. Otherwise do like everyone else and put in a set ount each money. Have your dividend automatically reinvested.
I love index fees, because of law fees and maintenance. You dont have choose investments. You own the entire market. And if you go with Vanguard or Fidelity you fees are tiny.
You do not need a portfolio manager or advisor. They will charge you unnecessary fees to get the same results.
Please use a CPA or tax professional to plan your estate or get the most tax advantages possible when the time comes. And then make sure they charge an hourly rate, not a percentage. And also what out for insurance salesman. When they securities they get a high commission, which you pay for.
Are use M1 finance for my Roth IRA and my taxable stock account. I am not recommending this service, it is just the service I prefer to use. You may use any discount brokerage firm.
Let’s do the math so you can see what your money would do:
$6000 x 10 years = $60,000
8% interest compounded annually
These numbers are if you put in the maximum amount allowed.
You may not be able to afford $6000. But I always tell people when they start investing to start with small amounts and increase the amounts over time. The important thing is to get into the habit of investing on a regular basis and then let time do the rest.
As you get a raise or your income increases put that money toward your investments.
A ROTH will help you reach financial independence.
Imagine earning money tax free and then giving that money to charity tax free and getting to write off that gift from your gross income. That can be your reality with a ROTH.
Give big or go home.
If your an employee you should also ask them if they offer a ROTH 401k. They are less common than the traditional 401k, but it is the same premise as ROTH IRA. And it is worth your investment.
Dont wait! Time is of the essence when investing. You need those years the compounding to take effect.
Leave a comment or email me your thoughts: