- What's up, money nerds?
I know that you're just like me
in that we both have zero interest in working
for the rest of our lives.
We're basically the same person.
Yes, you're correct, we just became best friends.
- What?
- Did we just become best friends?
- Yup.
- But please, I beg you,
do not show up at my house.
I personally wanna be able to dip outta the workforce
at a reasonable age,
grab my dog, hop in a van, do some hiking,
do some camping, maybe eat some mushroom sandwiches,
possibly a handful of dirt,
and I know that you have an image in your head
of what your life is going to look like
once you can actually quit that soul-sucking job of yours.
But for us to get to that point,
we have to get our money situation covered
so that we can afford that particular lifestyle.
I know, it sounds like a daunting task,
but it's really not as difficult as you think it is.
And the reason for that is because you have access
to one of the best kinds of money printers out there.
It's called, wait for it, a Roth IRA.
But who am I kidding, you already knew that
from the title of this video.
This is one of those things that you should be investing in
even if you already have another investment account
like a 401k, 403b, 457,
taxable investment account, or an HSA.
There are so many of 'em.
And in most cases, you should be investing in a Roth IRA
even before putting money into any of those.
If you aren't, then you're making a huge mistake
and I'll cover why that is later in the video.
What you really came here for is to find out how,
if starting today, you can easily build up
anywhere between an $800,000
and $1 million Roth IRA portfolio
with very little effort so that you're eventually able
to quit your job a lot faster than most
of the people around you.
I'll show you how to do that and touch on everything else
that you need to know about a Roth IRA.
If you have any questions throughout this video,
please leave them down in the comments below
and I will answer every single one of them for you.
The name Roth IRA sounds like a secret government agency
that operates in the shadows of society.
But all a Roth IRA is,
is a type of investment account.
It's specifically for retirement investing
that has some added benefits that can help make your money
grow a whole heck of a lot easier.
Now the IRA portion of the name stands
for individual retirement account.
The word Roth essentially tells you
that you won't ever have to pay taxes on the gains
that you see within the account
once money is deposited into it.
So if you put $2,000 into your Roth IRA this year
and invest the money within the account,
then in 35 years at a 7% average return,
the account will have grown to over $21,000
and you'll never have to pay taxes on that $19,000 gain
or $2,000 contribution when you go to withdraw it
for the rest of your life.
It's because the money that you put into the account
has already been taxed by the government
when your employer paid you.
It's what we call post-tax money
or sometimes referred to as net pay.
By doing this, you're essentially making a deal
with the government or the IRS.
You're saying, "Hey, you can tax this money
that I put into my Roth IRA right now,
but you have to promise to never make me pay taxes
on this money or on any of the money
in this account ever again."
An easy way to think about it is,
taxed going in, grows tax-free,
even the dividends, and not taxed when money is withdrawn
from the account after the age of 59 1/2.
Technically, you can withdraw some of the money
before 59 1/2, but we'll cover that in just a minute.
This is one of the ways that a Roth IRA is different
and way more powerful than something
like a taxable investment account.
With a taxable investment account,
the money that you put into it has already been taxed
by your employer.
Then, when you go to withdraw any money from the account,
if you had any gains,
then you'd be taxed on those gains.
For example, using the same numbers as the Roth IRA example
a minute ago, if you contributed $2,000
to a taxable investment account and after 30 years,
the account grew to $21,000,
then you'd have investment gains of $19,000.
Because $21,000 minus your $2,000 contribution equals,
wait for it, $19,000, #math.
In a taxable investment account,
you'd pay long-term capital gains tax
on that $19,000 profit, but with a Roth IRA,
you'd pay $0 in taxes on that same profit.
That's not to say that you should never invest money
into a taxable investment account,
but you'd wanna first max out something like your Roth IRA
before investing any money into a taxable investment account
because of the tax benefits.
When I say max out your Roth IRA,
there's a limit to how much you can contribute
to this type of investment account every year,
and it's going to be based on your income and age.
The government is going to let you skip out on paying taxes,
but they wanna limit how much of those taxes
that you're actually gonna skip out on.
Starting in 2021, you can contribute up to $6,000 per year
if you're 49 or younger
and $7,000 per year for people who are 50 and older.
If someone is below the age of 18,
then they're actually able to contribute
to a Roth IRA, as long as a parent helps them open
an account and they have some sort of taxable income.
They're usually referred to as a custodial account
or custodial IRA.
Now this is a great way to help younger people
get on the path to start investing as early as possible.
We'll talk about where to open a Roth IRA shortly,
so hang tight.
If you could do me a huge favor and Hulk smash
that thumbs up button, I would greatly appreciate it.
It helps support myself, Molly, and my future child
that actually doesn't exist at this point in time.
So thank you so much.
Your income does play a part in whether or not
you can contribute to a Roth IRA, though.
Single filers can contribute the full $6,000 per year
if your modified adjusted gross income for that year
is less than $125,000.
And for married filing jointly,
your income has to be less than $198,000
for that year that you contribute that $6,000.
Keep in mind that if you're married filing jointly,
then each of you can contribute $6,000 per year,
which comes out to a total of $12,000 per year.
If your income is above either of those numbers
for the year, then the amount that you can contribute
starts to phase out until you hit a certain income limit
to where they won't allow you to contribute money directly
to a Roth IRA.
For singles, it's an income of $140,000 or more
and for married filing jointly,
it's $208,000 or more.
But if you're above those income limits today
or as time goes on and you make more money,
you end up above those income limits,
then you can technically still contribute to a Roth IRA,
but just not directly.
It's a little Roth IRA loophole
called a backdoor Roth IRA.
I won't go into a ton of detail on how to do it here,
but at a high level, it's basically where you contribute
money to a traditional IRA,
then transfer that money to a Roth IRA
before you actually invest it in that traditional IRA.
And you have to do this before the end of the year as well.
Whichever investment platform that you use
can help you through this whole process
if you get to that point.
Keep in mind that there is a few rules
when it comes to a backdoor Roth IRA,
so make sure that you fully understand all of those rules
before attempting to do it,
or contact an accountant for their help.
Now if you want me to make a full video specifically
on how to do this,
then let me know down in the comments below.
Because you're going to be putting money into your Roth IRA,
it's important to know when you're actually able
to access that money without getting in trouble
by the government.
At the age of 59 1/2 is when you'll have access
to the total amount of money within the account.
If you try to take out all of the money before that,
then you'll pay penalties on that money.
This is really not smart.
Please avoid this at all costs.
But you're actually able to take some of the money out
of your account before the age of 59 1/2
without paying any penalties.
The IRS is going to allow you to withdraw the amount
that you contribute whenever you want,
as long as you don't touch any of the investment gains
within the account.
For example, if you're someone who has been maxing out
your Roth IRA with $6,000 per year for 10 years,
then your contributions would be equal to $60,000.
Now let's assume that over that time,
the balance of your account had increased to $100,000
due to the return on your investments.
So we're sitting here with $60,000 in contributions
and $40,000 in investment gains.
You can, at any time, withdraw any of that $60,000
without paying early withdrawal penalties,
but you cannot touch any of those $40,000 gains
before the age of 59 1/2.
Keep in mind, though, that once you take money out
of the account, you cannot put it back into the account.
So don't make this decision without really thinking
it through, but just know that it's an option.
My personal opinion is that I will never tap into the money
in my Roth IRA until I'm at a point
where I'm living off of my investments.
If I happen to get into a bind with my finances before then,
then I always have my emergency fund set aside,
as well as ways to earn income,
to help reduce the likelihood that I'll need to rely
and tap into my Roth IRA money before then.
I'd like to encourage you to do the same.
Because once you start pulling money out of the account,
you immediately interrupt the growth of your investments.
Think of a Roth IRA like a tree that you're trying to grow.
If you're trying to get that tree to grow
as big and tall as possible,
then you wouldn't start chopping off a portion
of the tree as it was trying to grow, would you?
Yes, it's still gonna grow,
but you're just slowing down the process.
And unfortunately, trees have forever to grow.
You don't live forever,
but I kind of wish that you did.
It's the same idea with a Roth IRA.
Every time you wanna withdraw your contributions,
you have to sell some of your investments
to get the cash out.
That'll, of course, interrupt the growth
of your overall account.
What looks like a simple $6,000 withdrawal
is actually a withdrawal of double or triple that
because of the amount that it could have grown to
if you would've just left it alone
and left it invested in the account.
A fairly common mistake that I see a lot
with anyone who has a Roth IRA
is that they don't invest the money within the account.
Now once you deposit money into your Roth IRA,
you have to take the next steps of actually investing it
so that it can grow over time.
Remember what the name stands for,
individual retirement account.
Therefore, the actual account isn't the investment.
It's just a place where you put the investments
to allow them to grow tax-free.
Think of a Roth IRA like a bucket.
Within that bucket, you can put all kinds of investments
that'll help your money grow.
Although you can just leave cash in that bucket,
you can also place things inside of it
like individual stocks, REITs, target-date funds,
index funds, bonds, and things like that
that'll grow over time.
I'll show you my Roth IRA in a minute
to give you an idea of the investments that I hold.
But keep in mind that the point of the Roth IRA
is to give you the opportunity to grow your money tax-free,
so you'll wanna try to get that money invested
as quickly as possible and also keep that money invested
for as long as possible.
Have you ever gone to the grocery store
and walked down the toilet paper aisle?
I promise this question is going somewhere.
The amount of different brands
and types of toilet paper options is absolutely insane.
It's kinda the same thing
with where to open a Roth IRA account.
There are so many different options
that it can get extremely overwhelming.
We have the old-school brokerage account companies
like Vanguard, Fidelity, Charles Schwab,
TD Ameritrade, and then we have a lot of the newer players
in the game who are very technology-driven
and really focused on improving the user interface
for us younger generations,
like M1 Finance, who is my go-to,
Wealthfront, Betterment, and a ton more.
I don't think that you can go wrong
with any of the old-school companies, to be honest with you,
but like I said, I personally prefer something
like an M1 Finance,
which is one of those newer platforms
that has really caught my attention,
since I'm more of a low-cost index fund long-term investor.
If you're already familiar with one over the other,
then stick with the one that you already know.
But if you're not sure, then to help make your decision
a whole lot easier,
I created a whole investing platform guide
where I break down everything that you need to know
about each one of these to help you decide
where to open up your Roth IRA.
Now it's completely free,
so I'll have a link down in the description of this video
to pick it up if you want a copy.
Here's a quick look at my Roth IRA
that I have through M1 Finance.
I'm mainly an index fund investor with 95% of my money
invested that way.
Now my investments are pretty lame, to be honest with you,
to the outside world,
but very effective because I just invest
in one index fund that basically invests my money
in over 3,600 different stocks.
One thing to note is that I have a very high risk tolerance.
So that's why all of my money is invested in stocks
and nothing in bonds at this point in time.
I'll have links in the description of this video
if you wanna learn more about M1 Finance
or if you wanna learn more
about index fund investing as well.
Please don't mistake what I'm investing in
as investment advice.
Your goals may be completely different than mine,
so just keep that in mind.
I have a ton of friends, family members, and acquaintances
in my life who don't contribute to their Roth IRA
every single year.
Trust me, I'm that annoying person
who's always asking,
"Hey, have you opened a Roth IRA yet?
Hey, have you opened a Roth IRA yet?"
But I only do it because I want everyone around me
to be very, very wealthy one day.
A lot of the reasoning is because they tell me
that they already put money into their 401k,
403b, 457, or taxable investment account.
So why bother contributing to a Roth IRA
on top of all that?
One of the main reasons that a Roth IRA
should be fully maxed out before maxing out any
of those other accounts is because you have the most control
over a Roth IRA.
And if I know you, which, you know that I know you,
you're all a bunch of control freaks.
So this (laughing) should get you all hot and bothered
just hearing that.
Because it's a self-directed account,
you make all of the decisions when it comes to the what,
where, and how.
First, you have full control over where you open a Roth IRA.
When it comes to something like a 401k,
your employer chooses who the retirement plan provider is.
Now if you're not a big fan of the features
that they offer or the fees that they charge,
then there's nothing that you can do about it.
You just have to suck it up and deal with it.
For example, my employer uses a company
called Empower Retirement, I think it is.
Now if for some reason I absolutely hated the company
and didn't wanna work with them,
then that would mean that I just have to stop contributing
to my 401k or constantly transfer money
out of the account.
With your Roth IRA, you get to choose
whether you wanna use one
of the more well-known investment companies like Vanguard,
Fidelity, Charles Schwab,
or you can choose to use one of the newer
and more modern investing platforms for your Roth IRA
like M1 Finance.
The second reason that you should be maxing out
your Roth IRA every year is because you have more options
when it comes to the types of things
that you can invest your money into.
As much as I don't mind the company
that services my 401k through work,
they sure do offer me some pretty trashy investment options.
But with a Roth IRA, you have access
to hundreds of more options with the brokerages
that I mentioned just a minute ago.
If you wanna build up an $800,000 Roth IRA,
then it's actually a little bit easier than you think it is.
It just comes down to two things,
simple math and time.
If you maxed out your Roth IRA,
which would be $500 per month,
and assumed an average return of 7% per year,
then your account would grow to $829,000
of tax-free money, keep that in mind, after 35 years.
And of that $829,000,
you would've only had to have contributed $210,000
for it to grow to that large of an amount.
I know 35 years sounds like a long time,
and I'd agree that it kind of is,
but that's the power of investing
with a longer-term view, as opposed to a shorter-term,
get rich quick view.
My numbers are also assuming that you invest
in something like an S&P 500 index fund
or a total stock market index fund
like the one that I showed my in my Roth IRA,
so keep that in mind.
Make sure to hit that thumbs up button
before you go, please,
and check out the description of this video
to get one free stock from Robinhood
worth up to $200 when you open an account
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Down there, you'll also find more resources
to help with all of your personal finance,
investing, and financial independence needs as well.
I'll see you in the next one, friends, done.