For all the financially responsible steps I didn’t take over the past 10-15 years, there’s one thing I know I did right: I opened a Roth IRA.
To be clear, this certainly wasn’t my idea—it was my dad’s. He had me open one a long time ago, when I still lived at home, I think when I was about 19 or 20.
A Roth IRA, simply put, is a post-tax retirement fund. This is in contrast to a pre-tax retirement fund such as a 401K, the type that is often directly linked to your job. When you retire, you can access the money in your 401K, but it has to be taxed first. Your Roth IRA, on the other hand, contains money that has already been taxed, so when you eventually withdraw it you get the full amount. Either way, you have to pay taxes – there’s no escaping that. But with the Roth IRA you get the taxes out of the way early on.
So yes, it was a good choice, and I’m grateful to my dad for encouraging/requiring me to get a Roth. It’s not like I have a lot of money in it now—I believe I contributed a small lump sum of money to it about ten years ago (What money was this? I truly do not remember)—and it’s mostly just been sitting around since then accruing interest. However, last month I contributed $100 to it, and I’ve decided to commit to doing that regularly from now on.
Man, do I wish I’d been doing this all along. If I had contributed even a very small amount each month to it—let’s say $20—starting at age 20, then I’d have…[math]…$3,360 more in it than I do now, not including whatever additional interest would have accrued. Even during periods when I was making very little money, I think I could have spared $20 a month. Too bad.
But hey, better late than never. I’m going to start with $100/month and see if I can manage to increase that over time. I’ve set myself a calendar reminder to do this each month so I don’t forget. There’s lots of room to increase that, as the maximum amount you can contribute each year is $5,500 ($6,500 if you’re over 50), provided you’re making less than about $115,000 (which I definitely am).
One other interesting thing about Roth IRAs is that you can withdraw your contributions, though not your earnings, at any time—even long before retirement. This reminds me a little bit of the piggy bank I had as a kid, which had a hole in the bottom of it with a removable plug, which meant you could get money out of it any time you wanted. (This is in contrast to the traditional piggy bank concept, which required you to break them in order to get at the coins, thereby creating a disincentive to steal money from yourself, because who wants to smash a cute pig toy?) Because my piggy bank had a plug, it was functioned more like a pile of change on the dresser than an educational financial tool. Ah well. At least with the Roth you can only withdraw part of it early. And personally, I’m not planning to withdraw any of it for many, many years.
Anyway, thanks, Dad! I’m happy to have my Roth.
The official Roth IRA site is here.