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Today is a good day.  Today we’re going to talk about what I believe is one of the greatest innovations in modern investment.

What if I told you there is an easy to use tool out there, available to every adult American worker, that can make you a millionaire?  Yet two thirds of Americans neglect to take advantage of this tool.  It’s a place to put your money where it will grow tax free for decades, and allow you to reap market growth, dividends, and compound interest (do you remember how much money Patti LuPone was making from interest back in Make Our Garden Grow?), all without paying an additional dollar in taxes besides what you’re already paying right now. 

Here she is boys…here she is girls…it’s the Roth IRA. (Gypsy fanfare!)

Omigod You Guys!

If you can’t tell already, I’m really excited about today’s post.

I wanted to lay some groundwork before we got here- but this is the #1 retirement savings vehicle I believe literally every person working and generating income in the USA should have.

And guess why?  Because pretty much everybody is able to utilize this tool in some capacity- you just need to be 18 years old, and have verifiable income reported on your tax return (Sound like you?  Good let’s keep going.  Under 18 years old?  Learn up and open one of these the minute you get there, kiddo.)

And I’m probably a little too far ahead of myself already, “a Roth Whositwhatsit? Oh Broadway Joe, the thinks you can think!”

An IRA is an “Individual Retirement Account”.  They come in a few different types- most commonly Traditional and Roth.  I want to make the distinction right here that these are accounts, and not investments (but they do hold investments).  Once you put your money into the account, you are then able to invest it.  Traditional IRAs came along first, so let’s start there.

Traditional IRAs were established in the USA in 1974 and went into effect in 1975. (Everybody Rejoice, The Wiz took home Best Musical that year).  The basic idea here is the government created this arrangement, so that folks could hold these accounts at banks or brokerages, and those banks or brokerages can then allow the person investing to invest their IRA monies into things such as stocks and mutual funds.

With a Traditional IRA, your contributions have tax deductibility.  What that means is, let’s say in 2019 you invest the full possible annual contribution to your Traditional IRA ($6,000).  That means you are able to deduct $6,000 from your tax liability, thereby owing the government less in taxes.  This means more money in your pocket- woohoo!  But wait!

Because you are deducting this contribution now – it means you will have to pay up later.

You can begin withdrawing money from your IRA at age 59 ½.  You can actually withdraw before then, but you’ll be subject to a 10% penalty (which I don’t recommend, don’t give away your hard-earned money if you don’t need to!). No matter what you must begin withdrawing by age 70 ½, and at the time you begin withdrawing, you start paying taxes on that money. (You got that tax benefit all those years ago after all, the government wants their money now!).

To Recap: Money goes in tax free, money grows, money comes out taxed.

Now let’s turn our attention to the star of the show, critics’ darling, the Roth IRA.

The LamborGHINI of Retirement Accounts

The Roth IRA shares many of the same rules as its sibling, the Traditional.  You can begin withdrawals at 59 ½, you must begin by 70 ½.  For both accounts you need to be 18 years old to open an account, and need to have some verifiable income by your own right.  

Roth IRAs were started in 1997 – (The same year Titanic cruised its way to Best Musical), named for Senator William V. Roth Jr. of Delaware, who sponsored the legislation that helped bring this wonderful account into the world.

The Roth and the Traditional may seem very similar on the surface, but have a fundamental difference between them- making the Roth an ideal account for a majority of American workers in my opinion.

With the Roth IRA- you pay your taxes now, and then never again.

That’s right.  With a Roth IRA, you are putting in “after tax” dollars (meaning you don’t get that sweet deductible the Traditional IRA can offer), but then your money grows tax free, and your future withdrawals are not taxed.

Woah, this is a gamechanger.  Let’s rewind to Compound Interest for a minute.  Remember how if you invest a sum of money, it’s just going to grow on its own, even if you don’t add another penny the rest of your life?  Well, all that growth is now tax free – and that is the major advantage of a Roth IRA.  

Example of Compound Interest in action.

(Just a fun example above- if you invested $6,000 into your Roth every year, and we assume an 8% rate of return- by year ten you’d have just north of $86k – an extra $26k+ above the $60k you put in that you’ll never pay tax on!)

But let’s talk for a minute about why it’s specifically a great account for folks working in the arts sector.

A career in the arts is a labor of love.  If you’re just starting your career, I hope and bet I’m not the first person to tell you that.  If you’re in the middle of your career, you know firsthand how hard it is to get going.  And if you’re nearing retirement age and still in the game, you’ve had a lifetime of ups and downs (and I bet your soul is full to the brim from the joy it brought you over the years).

It’s not inappropriate to say that artists will make less money in the first stage of their career than they will in the later stages.  I have tons of friends and colleagues whose careers are just now beginning to blossom in their late 20s and early 30s.  When I think about myself and the folks I work with- I feel confident we will be making more money in our 30s than we did in our 20s, and then more in our 40s than we did in our 30s, etc. so on and so forth.

That’s not an uncommon concept spanning many multitudes of different industries, but it’s especially true of the arts.

Therein lies the great power of the Roth IRA.  This is an account that rewards folks that make more money as they progress through their careers and lives.  And another wonderful aspect of either IRA is it’s not tied to your place of employment like a traditional 401k would be- meaning you don’t need to rely on your employer offering a plan to be able to save for retirement.

With a Traditional IRA, when you get to that age where you start paying taxes on those “income” withdrawals- you will pay in the higher tax bracket you have yet to achieve in life.  With the Roth IRA, you’re actually paying the tax now- but down the road when you have attained that higher plateau, you get to withdraw the income tax free.  It’s such a beautiful thing.

Tell Me More, Tell Me More!  Like Is There Any Catch?

There are a few more specificities worth mentioning related to these accounts, but also some workaround solutions.

Technically you cannot contribute to a Roth IRA if you make too much money (booked and blessed).  In 2020, the limit for singles is $139,000, and for married couples the limit is $209,000.  However, if you do earn more than those limits, there is still a way to utilize a “Backdoor Roth”, where you contribute to a Traditional IRA and then rollover your contribution to a Roth and pay taxes on your contributions at that time.  For the sake of simplicity, we won’t go too much further into that today- but know it’s an option, and if you fall into that high earning category please feel free to shoot me a message and we can chat a little more in depth.

If you are over the age of 50, you are also eligible to make a “Catch Up” contribution to your IRA of an additional $1,000 for a total of $7,000.  More money going in means more money coming out on the other side.

You might be thinking- how the heck do I get started? (Or maybe not, but then how did you even make it this far?!). Here are a few options you might research for wherever you are in your financial journey…

I’m Not That Smart (Don’t Be So Hard On Yourself!)

There are some amazing and insured custodian firms out there that you can start an IRA with and they will manage all the money and investments for you.  They are safe, they are secure, they are legitimate.  I’ll do a whole App review another time, but consider starting with a group like Betterment.

Betterment is a network of robo-advisors who allocate your money for you based on your risk tolerance.  I keep my own Roth IRA with Betterment at the moment.  It’s such a crazy time in the world- I have some peace of mind knowing those sweet little robots have their eyes on my money and are keeping tabs on things for me.

Betterment Homepage / Interface

The fees at Betterment are very reasonable, and way under what you would expect to pay by engaging a full-time financial advisor.  It’s a 0.25% annual fee to be exact.  Meaning if you keep $5,000 in your Roth IRA with Betterment, they’re going to charge you about $12.50 per year.

Keep in mind you are investing for your future and we expect an 8% average return on your investment, so the robots are going to earn you about $400 in theory (some years more, some years less, and those numbers will obviously adjust based on your contributions).

Think this might be the route for you?  I encourage you to look them up and do your own research- but if you like what you find, you can sign up for Betterment right here with a little referral link I’ll leave for you.

I Know Stocks Now, Many Wonderful Funds

Perhaps you’re a bit further along and you do have some knowledge of stocks, bonds, funds- or even the time, energy, and passion to commit to learning about making these investments.  I’d say you could think about going to a more traditional brokerage firm, like Vanguard, Fidelity, or TD Ameritrade.  These firms won’t charge you a management fee, but you’ve got to do all the heavy lifting yourself.

I like Vanguard a lot personally as I’ve had some good experiences with them in the past!  Whichever firm you decide to go with- you’ll want to be researching and investing in low cost market index funds they offer.

If you end up with Vanguard that might be a fund like VTSAX, with some bonds in there also such as VBLAX to balance and hedge against inflation.

If those last two sentences frightened you- it’s OK.  Rewind, go read about Betterment again, and know that this is a continuing journey and we’re going to cover all these topics eventually on the road to financial independence and freedom.  There’s a whole post about index fund investing in the pipeline.

Godspeed Investor

We covered a lot of ground today.  Take a breath, hold it in, let it go.

I hope I was able to convey a lot of the awesomeness that is the Roth IRA.  Once you start to dip your feet into saving and investing, it might feel really tempting to go in on the “flashier” investments (heard anything at all about a little company called Tesla recently?).  But I really do urge you to think about going steady with these tax-advantaged accounts first- as they will provide the most even path forward towards wealth and stability.

If I could give one piece of advice here at the end of the post- do your research, but set a goalpost for yourself.  The worst thing that could happen next is you become riddled with inaction.

Because we know how Compound Interest works, and we understand that time is our greatest ally in building wealth- it’s important to start investing when you are able to.  That means having a strong emergency fund, and no bad debts or liabilities dragging you down (credit card debt is different than student debt).

Start small.  To fully max out a Roth IRA each year, you need to contribute $6,000, which is $500 per month or about $115 per week.Maybe you start with $20 per week, and start bumping it up as you get more comfortable, eventually getting to that $115 benchmark.  But the most important step you can take here is actually starting.  And that absolutely might mean just thinking about it for a bit first.  Think, breath, and then get ready to act.  Starting right here, starting now.

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