The Roth IRA

The best savings vehicle you might not be using

A single $---- contribution into a Roth this year, instead of a taxable investment account, nets you an extra $---- at age 80. This is equivalent to saving an extra $---- this year.

What is
a Roth IRA

A Roth IRA is a tax-advantaged account for retirement or long-term savings.

A Roth IRA has the following properties:

  • You contribute post-tax money to it.
  • There are no investment taxes on assets in the account.
    • No taxes on dividends.
    • No capital gain taxes on sales.

You generally can't use the money until you're 59 ½ years old, though there are some exceptions if you do need it sooner.

In general, Roth IRA money is money you often want to use LAST when you're in retirement, because it has the best properties for bequest. Learn more about what order you should drawdown accounts in retirement

Learn more about tax-advantaged and tax-deferred accounts.

Why is
a Roth IRA valuable?

The primary value of a Roth IRA over a normal investment account is that you don't pay taxes on dividends each year in a Roth IRA (your computed tax rate is ----%), and you don't incur tax costs if you want to rebalance assets.

How valuable is
a Roth IRA to me?

We estimate you making a single Roth IRA contribution of $xxxx this year is worth $---- to you, just based on the dividend tax savings. You can read about our methodology here

Compare the value of your single Roth IRA contribution vs investing the same money in a normal investment account. Note that this is all in today's dollars!

This doesn't even include the savings from not paying capital gains when you sell your Roth IRA assets.

Can I
make a contribution?

You can contribute to a Roth IRA if you have earned income.

If you're married, your spouse can contribute to an IRA even if she doesn't work, using your income as hers for this purpose. This is sometimes called a spousal IRA.

How much
can I contribute?

  • For tax year 2018: Through April 15, 2019, you can contribute $----- .
  • For tax year 2019: Anytime now through April 15, 2020, you can contribute $-----.

Note that you can never contribute more than your total earned income for the year.

The Roth IRA vs an investment account
Cumulative Roth IRA savings

Looking at it another way, you can see how much you save cumulatively just from this one Roth IRA contribution in today's dollars

All of these numbers are inflation-adjusted, so the ending value and savings are in today's dollars.

What are
the downsides?

  1. You generally will pay a penalty if you access the money before you turn 59 ½, with some notable exceptions.
  2. If you make more than $193,000 (married) or $122,000 (single), the way you make a Roth IRA contribution is a little more complicated. But don't worry, we have the information to do it.
  3. In general, it's usually not as valuable as a 401k or other tax-deferred contribution, so you want to max those out first.

Enough talk, let's do this!

With your income, you should be able to simply make a direct Roth IRA contribution.

You can start the process at many major brokerage firms. A few common direct links:

All things being equal, we recommend Vanguard.

With your higher income, you can still contribute to a Roth IRA, but it's likely you'll need to make what is called a Backdoor Roth IRA contribution.

The key thing to know is you shouldn't have funds in regular IRAs. If you DO have money in regular IRAs, you should roll those funds into a 401k.

Once you've taken care of any money in regular IRAs, you make a standard IRA contribution, then do a "conversion" to Roth IRA.

This article from Physician on Fire does a good job explaining how you do this using Vanguard.

The net effect is the same as making a Roth IRA contribution directly, though it does create a little more hassle. For the savings, it should be well worth it!

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