Save big money with a Roth IRA


There has been a lot of negative news to write about lately. So now, I’d like to remind everyone about one of the positives: The Roth IRA. Yes, the holy grail of retirement accounts. You don’t want to miss this opportunity.

What is the Roth IRA?

A Roth IRA is technically a Roth “Individual Retirement Account”, but is virtually always referred to as the Roth IRA. Unlike a normal IRA where your contributions are tax free (sometimes) and your withdrawals are taxable, a Roth IRA has taxable contributions and tax-free withdrawals. You heard that right, you pay tax on the money today so it can grow tax-free for years and then be withdrawn without tax. I don’t know about you, but this sounds like an awesome deal.

How much money can I invest?

For 2022, the Roth IRA contribution limit is $6,000 for individuals under age 50 with an extra $1,000 for those over. This limit is set by the IRS each year, and is expected to increase with inflation. For 2022, you have until April 15th, 2023 to make your contribution. You have plenty of time left.

Contribution income limits

Not everyone can use a Roth IRA in the normal sense. There are income limits which can hinder, if not eliminate, your ability to contribute. For 2022, the income limits can be found at the IRS website.

In the event that you are above the income limits, you can employ what is referred to as the “Backdoor Roth IRA”. As this may sound, it’s a backdoor to the current tax code. A legal one. The Bogleheads blog has the best write-up for how to execute the Backdoor Roth IRA, so rather than try to paraphrase their work, I’ll just link it.

How to get started

We’ve written a past article about Roth IRAs, so you should probably read it.

Once you’re up to speed, you can visit either of our three favorite brokers, Fidelity, Vanguard, or Schwab, to open an account. Don’t forget, you’ll want the “self-directed” option, which ensures you avoid the advisory fees and keep more of your money.

If you’re confused about which funds to invest in, you should take a look at index funds. These funds, in either Mutual Fund or Exchange-Traded Fund (ETF) format, track the major stock market indices (the Dow, S&P 500, etc.). By investing in these funds, you’re ensuring that you get your fair portion of the market gains (and losses) and nothing more or less. Essentially, you’re buying a representative sample of the total market rather than a non-representative sample, such as individual stocks. My personal favorite is the Vanguard Total Stock Market Index Fund ETF, which goes by the ticker symbol VTI.

Using the historical VTI growth of 9.8%, the chart above shows the projected growth for $6k per year from age 18 until 59.5 (eligible for withdrawals). That’s right… by investing a measly $500 per month from age 18 to 60, you can amass nearly $3.5M dollars. Easy when you put it like that, right?

Sit back and watch your money grow

Once you’ve opened a Roth IRA and budgeted the IRS limit for each year, you can sit back and watch your money grow tax free. Or, if you’re like me, you won’t check your account balance since it doesn’t matter anyhow. That’s right, I don’t check my account balance until Dec 31 each year when I do my end of year accounting. Sometimes, it’s best to sit back and watch the market do it’s thing.

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