Roth IRA: Who said money doesn’t grow on trees?

May 12, 2009 · 6 comments

We have all heard it before, “Money doesn’t grow on trees”. You know what I say to that? Heck yes it does! Young people of the world, I would like to introduce you to the Roth IRA.

What it is:

A way to get awesomely rich with minimal effort. The Roth IRA is most effective for younger people. Definition of young: 20 something, but don’t get me wrong, it’s NEVER too late. Compound interest is your best friend. If you don’t know what that means, don’t worry about it. It basically means your money grows at a crazy quick rate. If you got the discipline to save a little bit of that cash, you STRONGLY need to consider throwing it in to a Roth IRA. The Roth allows you to make contributions with your after tax money (the money you actually get in your paychecks). It then grows tax free for the next umpteen years (until you retire basically) and you get to pull out all the profits without having to pay anyone a dime.

Why is this so cool?

The Roth is epic, because of the tax benefits. If you are young, hopefully your income will only go up from here! If you take all your hard earned cash and put it in a Roth (maximum of $5,000 annually) you will have paid taxes on that amount equal to your current tax rate (probably between 15% to 25%). This is cool for one reason. Chances are you will be making more money when you near retirement and will be in a way higher tax bracket (30% and beyond). When you do retire you get to take all that money out…tax free. Meaning you just saved yourself from having to pay Uncle Sam a crapload of cash. Keeping YOUR money for yourself is what it’s all about.

How it works:

Sticking to the title of this post, the Roth IRA is the closest you will come to “money growing on trees.” You take your seeds (your current savings), bury it deep down in some soil (the bank or company of your choice), and water that sucker each and every year (annual contributions). When you plant a tree, you can’t expect a freaking redwood to be in your yard the next day. The Roth IRA is no different. You gotta be patient and keep feeding it the maxmimum contribution each year. After a good twenty to forty years of adding to your Roth that baby weed you had growing is going to be a full blown beast of a tree. But unlike the redwood, the Roth wont take 200 years to be cool.

I think it’s time for you to make a contribution to your Roth IRA garden. The choice to do it tomorrow could cost ya’ a good chunk of change. The earlier the better suckas. Do it! No seriously, go freakin’ do it!

1 myprettypennies

Roths are pretty important and can save you a bunch of heartache in the future by starting today. I guess, you think it’s more important to save for your retirement now than to pay off your debt? I have about $7k left in a student loan to pay and have been of the mindset to pay that off ASAP and then worry about retirement. You disagree?

2 BillyOceansEleven

Ah, but you make the reckless assumption that we can trust the government and that the rules won’t be the victim of “change”. Considering how big the national debt is and the entitlement programs that will have to be paid for in the not-to-distant future, the politicos in DC will be looking for any new source of tax dollars they can find. If they are really desperate do you really think they would hesitate to tax the vast sums of money in Roth IRA and 401k accounts?

If you doubt this is a real possibility, consider all the things we have seen in the last six months and whether we ever thought before that those things could ever happen (bank bailouts, “stimulus” bills, auto bailouts, etc).

I’m not saying you should never contribute to a Roth account (I have one as well), however I do think it is wise to hedge your bets some by saving in traditional tax-deferred vehicles as well. At least on my traditional 401k contributions I have realized an immediate tax savings, while with the Roth I only have a promise of tax savings in the future.

3 Punch Debt In The Face

@ My Pretty Pennies- I guess I personally believe it is important to start contributing to my Roth IRA even though I have student loan debt. I have three reasons for this.

1) It psychologically reinforces the discipline and importance of saving for retirement. I have put the Roth at the top of my “to-do” list each year and don’t want to leave that box unchecked.

2) The stock market has returned between a 10%-12% rate of return over its lifetime and that return is much higher than the 7% interest I pay on my school loan. Unfortunately with the Roth, you can’t make up for lost time and just contribute extra the following year. You get maxed out at $5K a year and I don’t want to miss the first two or three years of contributions while I pay off my loan…the earlier the contribution the richer you’ll be.

3) I’m paying down my school loan pretty aggressively. I plan to have it knocked out by the end of 2010. If I was keeping my debt around for the next 20 years I would definitely consider holding back on the Roth IRA

Hope that clarifies my personal reasons for contributing. I know it’s not for everyone, but it makes me happy and gives me a peace of mind :)

@ BillyOceansEleven - Really man? “Reckless assumption”? I never said I trust the government, but I can tell you I refuse to live in fear. You’re right the government may look for ways to get more money from us, and the Roth IRA might become one of those ways, but I absolutely refuse to not invest in a currently great deal out of fear that Uncle Sam “might” change it’s policy. I’m like you, I contribute to my Roth IRA and my 401K. Even if the fed sweeps in and takes more from our retirement accounts i’ll still be glad I saved it anyways. What else am I going to do? Put it under my mattress for the next 50 years. I guess we will see what happens :)

4 SJ

First, I enjoy your writing style; entertaining haha, even if you do over look a minor details but great message..

As for the “reckless assumption” there would be a large backlash if that happened; lotsa peeps would be slightly miffed. If roth IRA’s were taxed I’m sure it would be at a lower rate than income / trad/ 401k (in order to pacify votes =) )

The one case to worry about would be things as removing income tax (opps) but that seems unlikely.

Also, da Ninja is contributing to both, taxed no and later, so good hedge. I admit I’m not doing both irght now; only b/c my present marginal income tax rates are way too low =D

I will admit if I were in your case I would normally personally try to minimize the student debt first; larger guaranteed returns but everything is on sale now lol

5 Enemy of Debt

Great article again and good points about the benefit of starting now instead of later. 2 + 2 doesn’t equal four anymore once compound interest starts taking your money for walks.

I normally tell people to save a small emergency fund, then attack the debt with ALL of their money, but in this case I think you are on top of it all enough. Having your student loans paid off by 2010 is awesome. Keep it up!

6 BillyOceansEleven

@Ninja: Regarding the “reckless assumption”, I’m not saying anyone should live in fear, rather that you shouldn’t put all your eggs in one basket. It’s just like buying the flood insurance on my house: I don’t live in fear of my house flooding, but I would be stupid to not plan for the possibility it could happen.

From your comment it sounds like you are doing just what I’m suggesting. My argument wasn’t that you should completely shun the Roth accounts, just that you shouldn’t put all your retirement dollars there.

@SJ: Don’t count on there being a huge backlash. I would venture to say that there are more people in this country that don’t have Roth accounts (or if they do they don’t have any significant sum in them) than those of us who do. The backlash would be about as effective as the tea parties we saw last month. Yeah, some people will get pissed, but ultimately nothing will change because they are the minority.

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