Let’s Talk About Roth IRA’s

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As a teenager I started to get interested in the thought of investing. I had seen some retirement calculator saying that if I started just investing approx. $100 a week (only $5,200 per year) and continued to do this until I retire at the age of 62 I would have just over $1.25 million dollars! This really stuck out to me, that small contributions now can really pay off in the future, and I was all in. I remember just after turning 18 walking in and sitting down with a financial advisor who was shocked that such a young person was in his office interested in investing money and looking towards the future. While it was good I was making this move I was still making the mistake of having this advisor start to invest my money while I paid him almost 2% to do it. 

About a year later I was introduced to Vanguard. Vanguard is one of the leading names in investment options and the late founder Jack Bogle was known as the father of index funds. What I learned is that I could invest my money on my own and all it would take is about 15 minutes of filling in boxes online to do so. So for the past 7-8 years I have managed all of my own investments through Vanguard and it is literally as simple as managing any other account such as a cell phone plan or cable subscription. The greatest part about Vanguard is they strive to keep their fee’s as low as possible which gennerally ranges from .04 to .20% which is very hard to beat.

So where should you start? 

Now if you are young, like I was, and interested in investing or even in your 20’s, 30′, and even early 40’s, I suggest opening a Roth IRA account. Roth IRA’s are a little gift given to us by the government that allow us to put after tax money into an account and then withdraw it tax free. The limits on this type of account are $6,000 per year and you will be allowed to withdraw it at age 59.5. But wait it gets better. Let’s say some type of unexpected expense comes up or you may want to make a large purchase like buying a home.  The Roth IRA setup will allow you to withdraw contributions you have made after having the account for 5 years without any penalty. So if you have invested $30,000 into this account over a 5 year period and with interest it has now grown to $40,000, you would be able to withdraw the $30,000 without penalty. 

So you may be wondering what does “after tax money” being invested into this account mean? Well it simply means that you have earned a paycheck from your employer and that paycheck was taxed. Now you can take the money you earned from that paycheck and invest it into a Roth, and you will no longer have to worry about paying fees, taxes, or penalties on that money. So do your best to save the $500 per month and max this out. 

But how do I invest into a Roth IRA? 

I am a huge proponent of Vanguard due to their great track record and low fees. You can also set up an account through places such as Fidelity, Charles Schwab, Betterment, Mass mutual, etc. But I will only tell you what I have experience with and that is Vanguard. So If you go to their website you will go to the “Personal Investors” link, and  click on the “Open an account online” tab. This will bring you into a section where you create a user name and password and provide your personal information. 

Once you have done this you will begin to be asked what types of investments you would like to make. In my opinion you can’t go wrong with the Roth IRA, and will then be asked what you would like it invested in. 

I personally invest in what is called VTSAX also known as the Vanguard Total Stock Market Index. This fund invests into the largest 3,600 companies in the Unites States. One of the downsides with this account is that it requires a minimum investment of $3,000.  Now because you may not have $3,000 there is an alternative option known as a Target Date Retirement fund. These funds are great because they have a preset retirement date fund already setup that takes out the guessing work from the investor. Another plus is that you will only need a minimum investment of $1,000. For example if you are 20 years old and want to retire in 30 years you would pick the target retirement fund for the year of 2060. There are additional funds that are set up for every 5 years of expected retirement dates for example a 2025,2030, 2035,and 2040 retirement fund. Now the difference in each of these funds is that they automatically reduce risk for you as you get closer and closer to your retirement date. If you are young and again invest in the 2060 fund it will be highly invested in stocks initially. This will give you more potential to earn money but will also open you up to more risk and that’s okay because you have plenty of time left to have your money invested. Over time or every 5 years I believe this fund will then reduce its risk and become less invested in stocks and more invested into things like bonds. This then safeguards your average person’s money the closer they get to their retirement age. 

Now my overall recommendation is that if you are young and pursuing financial independence that you only use these target retirement funds as a starting point. Once you have them built up to the minimum investment of $3,000, you can easily transfer the money to something like the total stock market index fund where you will now let your money continue to grow. This is actually how Gabe has started his investment plan. When his account grows to $3,000 he will be transferring the funds into a larger fund.

One additional point to make about the target retirement funds is that you don’t have to invest in the fund that specifically meets your retirement date. Lets say you plan to retire in 5 years or 2025, but want to invest more aggressively. You can then choose a fund aimed towards a later retirement date like 2050 or 2060 to be exposed to the stock market even more. 

What can a Roth IRA earn me?

So just a little math to just begin to get you excited about this. If you begin now with no savings at all and start to invest $500 a month into a Roth IRA for 30 years you will end up with a total of $566,000 assuming a growth of 7%. In that time you will have invested $150,000 giving you a total profit of $410,000. Now while I would like you to invest much more than $6,000 per year this is a great starting point to begin with. Even if you can’t currently make $6,000 work, do whatever little amount you can. When I began this I was doing $100 per month, but through little changes, more discipline, and an increased salary, I am now investing over $5,000 per month. 

While I have just scratched the surface on what you can invest into I think the Roth IRA is a great place to start. It offers tax free withdrawals and also the option to withdraw contributions you have made without being penalized. So good luck on getting your new investment started and again if you have any questions please let me know and I will help in any way I can.  I’m aware these kind of topics can be a little boring but they are absolutely necessary. 

A little disclaimer: I am not a certified financial advisor nor do I intend on getting you to invest in any type of account or fund for my own personal benefit. I am not sponsored and do not earn any money from companies like Vanguard for getting you to sign up with them. My top priority is to get you started in investing to allow you to take control of your life and give you options later in life. 

Thanks 

-Matt-

2 comments on “Let’s Talk About Roth IRA’s”

  1. Great point about the ability to withdraw money you put in since it’s already taxed. Our former advisor wanted us to open a 529 for college savings. We only have one kid and it sounded like a huge hassle to deal with if he didn’t want to go to college and we were stuck with a 529. Enter the Roth IRA, problem solved!

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