The Easiest New Year's Resolution Ever...
2019 already seems to be flying by. Are you sticking to your resolution(s)? Or did the New Year come and go so fast that you never even thought about a resolution? Let’s be honest; sticking to a New Year’s resolution isn’t easy. By nature, that’s not the way resolutions work. Let’s take the gym as an example. In January it’s a zoo and by now, it’s back to the same crowd.
What if I were to suggest a 2019 New Year’s Resolution to you and it could be accomplished in a matter of minutes? Now would that be something you’d be interested in? For you Entourage fans, I felt like Bob Ryan when typing that. Check it out. Anyways, here it goes - Open a Roth IRA. Or, if you’ve already got one, increase your contributions! If you know me, you know how much I love Roth IRA’s. And you might be thinking, wow you really need to reassess your life if you love a retirement account that much. But hear me out...
Before I get into some details, answer a few questions.
Do you foresee your income going up as you get older?
Does paying less to Uncle Sam make you happy?
Do you want your money to work harder for you?
Is buying a home a goal of yours in the next 5 or so years?
If you answered yes to the questions above, you’re a prime candidate for a Roth IRA! Allow me to explain by each number.
I sure hope you see higher earning years in your future! With a Roth IRA, you contribute with after-tax dollars, meaning you’ve already paid taxes on the money. Because you’re making less now than you will be in the future, you’re getting hammered in taxes much less. Put into simplest terms, while you’re not making bank currently and thus not paying a fortune in taxes, sock money into a Roth IRA. And once you’re making a ton, it’ll be important to max out accounts like your 401k to (legally) shield as much income as you can from Uncle Sam.
After you turn 59 ½, you can pull out Roth IRA money completely tax free. Say what?! That’s right. Completely tax free. Remember, you already paid taxes on the money way back when, so the government won’t tax you again. But wait, there’s more. You aren’t taxed on earnings in the account either! So to use a simple example - if you contributed $40k to a Roth IRA and after 40 years, you’ve got more than $300k (which is entirely realistic), you won’t owe any taxes on the growth from 40k to 300k - what a steal!
This should’ve been an obvious yes, but how exactly does your money work “harder” for you? The answer is compound interest. For example, if you earn an 8% return (which is about average for the U.S. stock market), your money will double every 9 years! Yup, you heard that right. Instead of sitting in a bank account earning almost nothing, a properly invested Roth IRA can help you double your money about every 10 years. That’s the difference between staying at the Ritz over a Motel 6 in your retirement years.
While most retirement accounts are extremely rigid in their rules for allowing withdrawals, the Roth IRA is actually quite flexible. With a Roth IRA, you are allowed to use up to $10,000 to help fund a first time home purchase or for college expenses (if you’ve had the account for 5 years). In a perfect world, you won’t need to tap into a Roth IRA for a down payment, but if your dream home comes on the market and $10,000 is a real difference maker in helping you purchase the home, then by all means do it! Also, you always have access to your contributions without penalty. In a way, it can be viewed as a slightly more complicated savings account. However, I rarely even tell clients that because that’s not at all what a Roth IRA is meant for.
Okay enough of me rambling about the benefits of a Roth IRA. You’re probably bored. If you already have a Roth IRA, that’s amazing! My challenge to you is increase your contributions. Notch it up by $50 and see how that feels. You probably won’t even notice.
If you don’t have a Roth IRA and want to join the party, that’s great news! I advise all my clients to set up their accounts through either Betterment or Wealthfront because they invest the money for you in an intelligent, well-diversified way for very cheap and allow you to be hands-off. That was the 10,000 ft view of those two services so if you have questions, let’s talk about them.
My grand vision is to help hundreds or even thousands of young people open a Roth IRA. It’s such a powerful tool and I can promise you that you’ll thank yourself for opening it. If you already have one and you’ve been bugging a friend to open one, forward them this email! If opening a Roth IRA is what “all the cool kids are doing”, I know Step 1 Financial is doing something right.