Why You Need a Roth IRA and How to Get One

If you are already maxing out your Roth IRA, good work. You are lightyears ahead of a lot of your peers. If you aren’t maxing it out each year or don’t even have one, WHY THE HELL NOT? Even today, knowing full well the benefits of they offer, so many of our friends and coworkers still don’t have an IRA. And why not? Usually, it’s because they’re too hard to set up and most people still don’t understand them. I get it, acronyms are confusing. Why have to strain yourself with another one? I promise you that an IRA is worth your time. It doesn’t even stand for anything too complex. Individual Retirement Account. This is an account that you put money into the same way that some people just put money into a mutual fund. In less than 30 minutes with your bank or broker, you can create a Roth IRA and auto-schedule monthly deposits from a checking account!

Maybe you’re still confused or not convinced. Maybe you’re asking yourself, “why does he sometimes say IRA and sometimes say Roth IRA?” or, “what does he mean by maxing out?” and “who is Roth?” So I’ll answer some of these big questions in broad terms. See the link at the bottom of the page for an in-depth look at the limitations and tax benefits associated with each. First, a Roth IRA is an IRA with slightly different rules. It’s best to think of it this way: in a Roth IRA, you pay taxes on the money you put in, but not the money you take out (like accumulated dividends and capital gains – as in ALL THE MONEY YOU MAKE ON THESE FUNDS!) while in a normal IRA, you don’t pay taxes on the money you put in, but you do pay taxes on the gains when you take the money out. Now, it’s worth noting that the time you withdraw from an IRA is way down the road. Age 59 to be exact. So I ask myself these questions: 1. Do I think I will be in a higher tax bracket 30-40 years from now? Yes. 2. Do I think taxes are going to be lower in the future than they are today? Not a chance. 3. Do I make less than $129,000 each year (or $194,000 if filing jointly)? Much less. So I am both eligible for and very interested in maxing out my Roth IRA each year since I want to pay these taxes now instead of 30 years from now when I am going to have to hand over more money for the government to distribute as it sees fit. So why the $129,000 income limit? This is such a huge tax benefit that people could abuse it. It was created to serve YOU and not Richie Rich.

So, now we get down to numbers. What is maxing out your Roth IRA? Well, like I said before, the Roth IRA offers such great tax benefits that it can be abused. It was intended for lower income people like me and in an effort to further limit abuse, the maximum annual amount that you can contribute with the Roth IRA tax benefits is $5,500 each year. There are some fancy rules to that like letting people “catch up,” when they are older but I won’t go into those here since we are mostly geared towards millennials. The point is that you can maximize your benefits at $5,500 each year! That’s only a contribution of about $460 each month, which comes out to just about $229.16 per paycheck! (If you are paid every 2 weeks.) If you are being smart and contributing 20% of your income towards retirement each month, then you would be able to maximize this contribution with a monthly income of $2,300! So it’s alright to suggest that you could comfortably max out or come close to maxing out your Roth IRA contributions with an annual income of $28,000! So what are people making 2 or 3 times this not investing in a Roth? I DON’T KNOW. And it frustrates me. And to be clear, most American college graduates have incomes that are in excess of $28,000 annually. And we get it, money can be tight, but this is one investment that’s totally worthwhile.

Okay, so who is Roth? Senator William Roth Jr. is the man who sponsored the Taxpayer Relief Act of 1997 creating the Roth IRA. This bill created what has become the financial cornerstone of many American’s retirement funds. Fun fact: he was in the Army for the last half of World War II. If you’re so inclined, Senator Roth was talking about IRAs back in 1986 as well… here’s some sweet C-SPAN footage of him doing so, which discusses among other things one of the great things they provide for Americans allows Americans to take their retirement plans from job to job – remember – there was a time when workers stayed with their companies forever for the purposes of keeping their retirement vested. So if you like moving from job to job because you hate your boss or you realized that Des Moines wasn’t as fun as the company’s recruiting brochure said it was going to be (sorry Des Moines), then thank Senator Roth. (Sidebar, the best part of that interview may be the one caller who calls in to ask / complain about the programming, or lack thereof of C-SPAN 2, which was apparently fairly new at the time… everyone knows a guy like that caller).

Alright, hopefully that cleared up some questions. Now, you may be wondering how you can get your hands on such a delectable piece of financial pie. It’s stupid simple. Below are some steps to get you going. If these don’t work, get a new bank.

1.           Decide how much money annually you want to put into this sweet retirement account.
2.           Call your bank or broker. Alternatively, you can do it online. If you don’t have one, I recommend Vanguard to anyone new to online investing and savings, but any investing house will do: Schwab, Edward Jones, even some local banks have representatives that can point you in the right direction; plenty of credit unions have IRA certificates of deposit for those of you who are too afraid of the markets and just want a tax-free savings account.
3.           Tell them you’re interested in a Roth IRA and that you want to contribute each month to reach the annual amount you decided on in step 1.
4.           Figure out where you want your money to go. I recommend a lifecycle fund or retirement fund (often they will have a target date for retirement in the name or description). Remember, Money in an IRA can be treated mostly the same way as money in a brokerage account except that you can’t withdraw it for a while; so if you want to invest it all in your favorite mutual fund, you can.
5.          Bask in the glory that is financial security. You’re now ahead of more of your peers than you realize.

Full disclosure: Don wrote the bulk of this post and has invested in some of Vanguard’s funds. Dan has been investing with them since 2009. Neither have been paid for our recommendation of them, nor do we intend to ask for any payment. We recommend them because they typically have the lowest fees in the industry. If you don’t believe us, watch this segment from Last Week Tonight, which also recommends Vanguard.  We have no financial gain by anyone else using Vanguard as their investment portal of choice.