First things first, I’ve put a TL;DR at the bottom if you don’t have the time to read everything and just need the major points.
So a lot of us have no idea how to manage our money. It’s pretty disheartening to be honest. I have way too many friends who are fairly clueless when it comes to saving for retirement or planning a budget, let alone knowing why having a 401k or Roth IRA is extremely beneficial to have set up and in place as soon as possible.
So why do you want a Roth IRA, let alone need one? It’s plain and simple. One day, you’re not going to be as healthy as you are right now and you’re not going to be able to support yourself working a full time job. This is a fact - come to terms with it now, that way you can start working towards making those later years as great as possible.
If you’re able to save money now and invest it properly, by the time you hit old age you won’t have to work a job because you have to, you’ll instead be working on whatever the hell you want. Because that’s what this is really about. Freedom from money. Freedom from worrying about how to support yourself. Freedom to do whatever the hell you want.
Now that I’ve (hopefully) got you hooked, let’s define some scary terms and go through some common questions so we can talk about this more succinctly.
I’m going to assume that you’re in your early 20’s, have your first “real world” job, and are making something in the range of $40k-60k a year. If you’re not in this phase of your life, then some of this might not apply to you. I am more than happy to discuss this privately over your preferred beverage if you have any questions or concerns =)
What exactly is a Roth IRA?
It’s an Individual Retirement Account used to make money without you actually having to do anything. That sounds nice doesn’t it? That’s because it is. It’s really fucking nice.
What’s the difference between an IRA and a Roth IRA?
There’s only 1 major difference between them. A regular IRA is tax-deferred, whereas a Roth IRA is tax-exempt. A tax-deferred account means that you don’t pay taxes on it right now, but you will have to pay taxes on it when you withdraw the money at a later time. A Roth IRA is tax-exempt because you’ve already paid the taxes on it now so you don’t have to pay them later.
So why do we want a Roth IRA over a regular IRA if we have to pay taxes right now? There a couple of reasons for this that you probably don’t want to read about (although if you really want to know, check out this site for a quick overview), so be content with knowing that you are effectively saving more money in the long term by using a Roth IRA instead of a regular IRA.
How much can I contribute?
Assuming you’re not married, you can contribute $5500 a year to your Roth IRA. If you’re married, you can contribute a lot more because America gives a ridiculous amount of tax breaks to married couples. Yes I am jealous and bitter about it.
Why a Roth IRA over some other investment account?
Well, for starters, if you have a 401k through your company (which is a whole nother future post ya’ll), you can’t deduct the contributions made to a regular IRA because you’re already deducting contributions made to your 401k. So if you have a 401k, a Roth IRA is a no brainer. If you don’t have a 401k, other investment accounts could tax the earnings you make.
Ok I’m ready to get a Roth IRA. How do I do that?
You’ll want to go to Vanguard and sign up for a free individual investor’s account. I believe if you choose a Target Retirement Account, it’s $1000 to open an account. I wanted more control over my investments so I instead opted for the $3000 account and bought all VTSMX shares. If you don’t want to really bother with learning all the ins and outs of investing, then I would highly recommend the first option.
Now what?
Make sure you’re maxing out the $5500 yearly contributions (you actually have until April of next year to make contributions for this year). You can either set up Vanguard to automatically pull from your account monthly or deposit it all at once, whatever you prefer. I set up mine to do it automatically so I never even see the money and would be tempted to skimp on my contributions.
There’s a lot I didn’t cover in this post and will eventually like to cover in future posts. If you have questions now though, then I encourage you to ask and I will happily help you figure this stuff out in more detail. It’s not easy, but it’s something you should know how to do. After all, if you can’t manage your money, it’s going to manage you.
TL;DR Fuck you read this because it’s important to your goddamn well-being. Take a break from Buzzfeed and get your life together.
Some further reading:
1. http://www.fool.com/money/allaboutiras/allaboutiras.htm
2. http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
