Thank you to my mom for getting me started with this tip back in 2012 since every year it’s a use or lose it investment option. 🙏

---

Taxes.

The one thing that we see taken out of our paychecks…

…and added to every bill when we buy something. 🤦

Wouldn’t it be nice if to not worry about taxes with our retirement investments?

I’m definitely not talking about tax evasion.

I’m talking about a Roth IRA.

This won’t eliminate all taxes in retirement,

but can reduce a portion of the taxes that you’ll have to worry about.

Retirement may seem like a long way from now…

but if you can do something that takes 15 minutes today to lessen the headache in the future – why wouldn’t you?

What is a Roth IRA?

Take the money that you receive in your bank…

…and invest it into a investment account that you don’t touch until your 59 ½ years old.

Why money in your bank?

This money has already been taxed (as you can see in your paycheck).

Here’s the more “formal” definition:

A Roth IRA is a special type of tax-advantaged individual retirement account to which you can contribute after-tax dollars. The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½ assuming the account has been open for at least five years. In other words, you pay taxes on money going into your Roth IRA, and then all future withdrawals are tax-free.

Investopedia

This is different than a traditional IRA or a 401(k) where you are investing pre-tax earnings.

Because you aren’t taxed today on that money being invested in a traditional IRA or a 401(k)…

…you’ll be taxed on the amount you invested plus any positive gains from those investments in the future.

Why do I max my Roth IRA contributions each year?

There are three main reasons why I consider maxing this out today.

Pay less taxes today than tomorrow.

Since I am paying taxes on that money today, I am also being taxed at the income rate that I am at today.

Not sure about you…

…but I plan on being in a higher tax bracket in the future. 😉

Contributing to my Roth IRA today will also allow me to avoid paying taxes in the future on any positive gains from the investment.

Use it or lose it investment opportunity.

There is a maximum amount that you can contribute each year to a Roth IRA.

For tax year 2023, the total contribution to all (Traditional and/or Roth) IRAs total cannot exceed more than $6,500 ($7,500 for those age 50 and over).

Even when I was in college and couldn’t afford the max amount…

…I would contribute even as little as $5 per week.

Contributing something is better than nothing when you have the next 40+ years for the investment to compound.

There’s an earned income limit.

After you exceed an modified adjusted gross income (MAGI) in 2023 of $153,000 (or $228,000 for married couples filing jointly)…

…you won’t be able to contribute to a Roth IRA.

MAGI is your taxable income after things like deductibles, etc.

Make more than the MAGI limit?

There are some legal workaround likes like backdoor Roth IRA for those that exceed the standard MAGI limits,

but those are a little less straightforward.

How did I get started?

Optimizing to keep my finances simplified and easy to track…

…I opened up an account with Vanguard (min: $3,000 to open) since I already had an account there and they have a solid track record with low cost index funds.

I also really like Fidelity (min: $0 to open) since they too have a solid platform and similar low cost index funds,

but there may be other Roth IRA brokerages that are a better fit for you.

One things to consider when selecting a brokerage are the associated fees for that investment.

A Vanguard or Fidelity-like account may have fees in the range of 0% – 0.35%.

A financial advisor could cost you upwards to 10x that!

Why pay a financial advisor a recurring, compounding fee to do the same thing I can do myself in 15 minutes?

I tried that once before thinking it was the smarter decision.

It wasn’t. 🙈

---

📚 Other Notable Resources

• Last Week’s Post: Celebrate AFTER you cross the finish line
• Open a Roth IRA: Nerdwallet – 16 Best Roth IRA Accounts of September 2023
• Make too much MAGI: Ramsey – What Is a Backdoor Roth IRA? And How Does It Work?