I am currently 37 and up until a few days ago did not have a retirement account to my name.
With that said, my husband and I do own a small portfolio of investment properties. We do not currently take any of the profits from the properties. Everything gets reinvested. In 15 years, we will own these free and clear and generate roughly $3000 of net income a month.
Back to the Roth IRA.
For those of you not familiar with a Roth IRA, they are different from a 401K or traditional IRA in that contribution are not tax-deductible.
Why would I not choose to defer the taxes?
Great questions.
Here are two reasons why a Roth IRA may make more sense than a traditional Roth or a 401k.
Two Reasons I Choose a Roth IRA
1. If you think your income tax bracket is lower now than it will be in the future.
Will you be making more later down the line when you want to withdraw the funds? If so, it may make sense to take the tax hit now.
My husband and I file jointly and manage to come in right under the married filing jointly income cap for 12% tax bracket. So the principle we are contributing to the Roth is taxed at this rate. It is possible in 22 years we would be closer to the 22% range.
For this reason, the Roth IRA makes more sense for our situation.
2. If you think you may want to occasional pull money out of your investment account.
Roth IRA’s are also unique in that you can pull out your principle from the account penalty-free. Any of the interest earned is still taxed and penalized for early withdrawal same as with a 401K or traditional IRA.
I have an emergency fund growing in a savings account. I have begun slowly transferring some of these funds into the Roth IRA. Some advisors are against having your emergency savings in anything but a traditional savings account.
We do have a few different places we could pull money from in an emergency. I would consider this account our last resort if we needed funds quick.
OPENING A ROTH IRA A STEP BY STEP GUIDE
Set-Up
I choose to open my account with Vanguard. It was free to do and overall pretty easy.
The first step is opening the account. It is similar to registering for online banking.
You will choose the type of account you are opening. At that point, you will need to fill in some personal information.
After this, it is time to fund your new account.
You can choose to link up your bank account so that you can instantly transfer funds into the account. I went with this option.
The set up of the account was relatively easy and straight forward.
Once the account is set up and funded, you will have a settlement fund (if you are going through Vanguard). The settlement fund is your bank account within Vanguard that you can make purchases from.
Allocating Your Funds
Now it is time to decide where you would like your money to go and what it should be doing for you.
If you are new to investing this part can be a bit intimidating.
I am currently reading and loving this book. Kristy Shen does a great job of walking you through a successful portfolio allocation.
I also came across this video and found it incredibly useful.
My advice when making investment decisions is to find your tribe and know who to trust. I generally trust seasoned investors who lean towards the FIRE movement. I know that my goals and values tend to line up with theirs.
I spent the most time researching where I should be putting the money. I decided to mirror Bruce Wannng’s portfolio.
I went with
Vanguards Total Market ETF
Vanguards S&P 500 Index ETF
Vanguards Total Bond Market ETF
There is a rule of thumb that says you should hold a percentage of bonds equal to your age. In my case, this would be 30% bonds and 70% equity.
This rule makes sense if you are younger and not on the track to early retirement. The idea being your portfolio will have a longer time horizon to withstand volatility.
My current allocation does follow this rule of thumb. Roughly 70% is in equity with 30% in bonds. As I continue to fund the account, I will be working to get my allocation closer to a 60/40 split.
Overall my experience opening and allocating a Roth IRA through Vanguard was easy and straight forward. I did have a few questions pop up that I could not find answers to online. I contact customer service at Vanguard and they were were very helpful.
If you have the option at work to contribute to a 401K with an employer match I would highly recommend doing this before considering a Roth IRA. A Roth IRA is a great option to get started investing and start you on your path towards financial independence.
I would love to hear from you! Do you contribute to a 401K through work? Do you currently have a Roth IRA? What is your favorite retirement vehicle?