- I've seen too many of you making some mistakes
when it comes to investing in your Roth IRA.
One of them could cost you $65,000 and the other one
could cost you almost $500,000.
You guys are seriously going to make my beard turn more gray
than it already is if you don't knock it off.
So let me show you what to watch out for,
that way, you don't lose more money
than you have to and I can save a few bucks
on hair dye for a couple more years.
A Roth IRA is a self-directed retirement account
where you can contribute after tax dollars to be invested.
Since the money going in is taxed,
the growth of your investments
are not taxed and the money withdrawal
from the account are never taxed either,
as long as you don't try to pull out some
of the money before the age of 59.5.
There is no such thing as a joint Roth IRA.
So if you and your spouse want to contribute to one,
then you'll have to do it individually,
hence the name Individual Retirement Account.
If you both have enough earned income separately,
then you can each invest up
to the $6500 limit for the year.
If one of you works and the other doesn't,
but you file a joint tax return,
then the person working can, of course,
contribute to a Roth IRA and your spouse can contribute
to a Spousal Roth IRA as well.
Remember, these accounts are owned by the individual person
and on paper, not co-owned by both people.
I want to try to encourage you to max out
your Roth IRA every single year,
if possible, because if you don't do it for that year,
then in the future you cannot go back and contribute
for a previous year
once that time limit has passed.
A Roth IRA is one of those accounts
where I would bend over backwards
to make sure that I can put in the full amount
allowed every single year.
In my order of operations for what to do with your money,
I have maxing out a Roth IRA right after investing up
to your employer match and HSA.
That is how important this type of account is.
The good news with this is that you actually
have a timeframe of 16 months to contribute
for each calendar year.
So if we are in 2023 right now, then you have
from January 1st, 2023, up until when taxes need to be filed
for that year to contribute, which in this case,
would be April 15th, 2024.
That's how it is every single year,
so ignore the actual dates in my example
and pay more attention to the timeframes
since the date taxes are due will change by a few days
from year to year.
Most brokerages will ask you which year you want
to contribute to.
For example, I personally invest using M1 Finance,
which you can check out down in the description below,
and also get a deposit bonus as well.
If I contributed to my Roth IRA through them right now,
then they would ask if I wanted the money
to go towards 2022 or 2023,
since at the time of recording this,
we haven't hit the date where taxes are due.
This is great because it gives you some extra time
beyond the current year to contribute Roth IRA money
for that year.
Before I tell you the next mistake
that I see way too many people making,
please help support my dog Molly
by hitting that thumbs up button and sharing this video
with anyone you think it would help.
Once you deposit money
into your Roth IRA,
there's one more extremely important step
you need to do that I see a ton
of people missing, and that is actually investing the money.
I can't tell you how many people I've talked
to over the years who just put money
into the account assuming it would automatically grow,
or knowing that they needed to invest the money,
but just forgetting to do it because life happens,
and things naturally slip out of our mind,
only to check their account balance years later,
realizing that it hasn't grown in value
because they didn't invest the money.
Stop the nonsense here and just set up auto investing
within your investment account,
and if you're waiting because you think
that you can time the market to buy in at a lower price,
you can't, because it's nearly impossible to do,
so just to get the money invested right now.
If you know how you want to invest the money, then great.
If you don't, then I personally like the two fund portfolio
for people who are in the accumulation phase
of investing and in the three fund portfolio
for when you're closer to retirement or in retirement.
I'll have a link to a playlist then I made just
for you where I teach you about both of those portfolios
down in the description below and above my head as well.
When you contribute to a Roth IRA,
all of your money is not locked up until 59.5.
You can withdraw the contributions that you've made
before that age without paying a penalty,
but you cannot withdraw any of the gains within the account.
For example, if you've contributed $6500
and the account has grown to $10,000,
then you can withdraw the $6500 contribution,
but you cannot touch the $3500 gain
without paying a penalty until 59.5.
I've gotta interject for a second
to give my personal opinion on this.
While withdrawing money penalty-free is an option,
I want to encourage you not to do this.
To be brutally honest,
I think that doing this is one of the dumbest,
most irresponsible, short-sighted things that you can do.
Withdrawing just $6500 worth of contributions
would cost you $65,000 in future investment growth.
So when any money is taken out of this account
before retirement, think about how it's actually going
to cost you 7,800 Chipotle burritos,
or 65 new Apple iPhones,
or anything else that you would buy
for that amount of money.
And yes, I am fully aware that you can do a penalty-free
early withdrawal up to $10,000 before the age
of 59.5 for a first time home purchase.
But this is just as stupid as withdrawing
your contributions early because that $10,000
is costing you over $100,000 in future investment growth
when you pull that money out.
Average annual home appreciation
over the past 12 years has been 6.11%,
and the US stock market has returned 12.27%.
Leave your money in the freaking Roth IRA
and go earn that $10,000 that you need to buy the home.
Responsible investing takes time,
like five or 10-plus years,
and this money needs time to grow.
The second you withdraw any of your contributions,
you are cutting down that tree
before it even has a chance to grow fruit.
Once you withdraw contributions from the past,
you cannot replace that money in the future.
I get that emergencies happen in life,
so that's why you need to have money set aside
in an emergency fund to pay for those things.
Do not, under 99.999% of circumstances,
use your Roth IRA money for anything
other than when you retire.
One thing I see way too many people doing
is investing in a taxable brokerage account
before they have their Roth IRA maxed out for the year.
This is a huge mistake
from a tax savings perspective for some of you
because of how each account is taxed.
With a Roth IRA,
you invest with money that's already been taxed,
so the money can grow tax-free and be withdrawn tax-free.
With a taxable brokerage account, you are paying taxes
for the ongoing dividend distributions every single year.
Then you have to pay capital gains tax
when you go to withdraw the money.
Since the money within a Roth IRA will grow
and can be withdrawn tax-free,
realistically, you want this account to get
as large as possible,
but not at the expense of your personal risk tolerance.
You should not take on additional levels of risk
by investing in more risky, unprofitable stocks
that random YouTubers have been pumping
over the past few years
or actively manage funds to try to achieve higher returns.
99% of people, including myself, cannot handle investing
in something with a high risk and potential,
potential, high return.
So don't even bother.
The money in this account is for retirement,
so is it really worth it to risk
that 60-year-old's financial wellbeing
because you decided to gamble
with their money right now?
I doubt it.
Some of you might be over the income limit to be able
to contribute to a Roth IRA,
or some of you will be at that point in the future
as your income grows.
You can still contribute to a Roth IRA
to take advantage of the tax-free growth
by doing a backdoor Roth.
To simply explain the process, all you do is contribute
to a traditional IRA.
Do not invest the money yet.
Then contact your brokerage to have them convert
the money to a Roth IRA.
Now, I have done it with M1 Finance before
and it was extremely easy.
It only took I think two or three days
for the money to get into my Roth IRA.
Only do this if it makes sense
based on your current tax rates and future financial plans.
There's two things that you can do.
if you are someone who thinks
that you might be over the income limit,
but you are not going to 100% know until the year is over.
Number one, you can either wait until January
of the following year, like we talked about in one
of the previous mistakes that I mentioned, or number two,
you can just contribute the money to a traditional IRA,
then do a backdoor Roth within the year to get the money
into the account so it can be invested.
That way, if you are over the income limit,
you've already done the backdoor Roth.
If you're under the income limit,
no big deal 'cause you had to pay taxes
on that money that was going into the Roth IRA anyways.
A question I get a lot is whether or not you can contribute
to a Roth IRA on different brokerages.
The simple answer is yes.
This is how it would play out.
You can contribute up
to the max for one year on, say, M1 Finance.
Then you can decide to contribute up
to the max on fidelity the next year.
Then you can contribute up
to the max on Vanguard the following year.
So by the end of that third year,
you would have three different Roth IRAs
with three different brokerages,
and there is no problem with that.
You can take it one step further.
If you decide, hey, out of these three,
I actually like M1 finance better than the other two,
you can convert the Roth IRAs with Fidelity
and Vanguard into your M1 Finance Roth IRA.
You can also split up your contribution
for the same year among different brokerages.
So if for this year you want to say contribute $4,000
to an M1 Finance Roth IRA
and the remaining $2,500 into a Fidelity Roth IRA,
then you can do that without any problems.
The only thing you cannot do is try to game
the system by saying contributing $6500
into an M1 Finance Roth IRA and $6500
into a Roth IRA with another brokerage.
You cannot exceed the maximum amount allowed per year
across all of your Roth IRAs
on all of your brokerage accounts.
Technically, you could do that since all
of the brokerages aren't talking to each other to keep track
of what you are contributing,
so you have to self-manage this.
I would highly,
highly recommend making sure that you do not do this,
whether it's on purpose or on accident.
I don't know what the penalty is for this,
but all I know is that you do not want to get caught trying
to defraud the government in any way, shape, or form.
Long-term investing is the name of the game with a Roth IRA.
This money is for when you are in retirement,
so make sure to take that into account
when investing this money.
No gambling it on stocks that random YouTubers
are promoting.
I think the two or three fund portfolio
is perfect for your Roth IRA,
which you can learn more about in these videos to your left.
There's a bunch of free stocks
and resources down in the description below
to help with all of your personal finance
and investing needs.
I'll see you in the next one, friends, go.