Should you invest in a Roth IRA?

Back when I was 19, I read (skimmed) a book called 'The Slight Edge' by Jeff Olsen. This book talked about all of the little things you do in life that ultimately compound over years to make you a better (or worse) person. In this book there was also a chart showing the advantages of starting an IRA Roth earlier rather than later. A link to the chart can be found here.

This chart shows two people. One who started contributing $2,000 per year to their IRA Roth at age 24, and another who started contributing $2,000 at age 30. The one who started at age 24 stopped paying any money towards it at age 30 (6 years), while the other consistently contributed $2,000 from age 30 to age 62 (32 years). Now at the end when they are both 65, they have almost the same amount of money.


This chart is estimating an ambitious 11.2% year over year growth, which will not always happen. If you want to calculate your earnings on a lower % year-year growth, check out this calculator. I recommend playing around with it and visualizing your retirement. This is a much better strategy than paying a bunch of fees for your 401k.

The chart shown in 'The Slight Edge' amazed me when I was 19, but I didn't decide to act on it until I was 23. I had just gotten out of all my debt and had $3,100 in my bank account. I decided to put $3,000 of it in a Vanguard IRA Roth account, and continued to contribute to it as much as I could. Looking back, I am glad I decided to do this.

An IRA Roth is an Individual Retirement Account. The advantage of an IRA is that if you contribute under the correct conditions and do not touch the money until you are 59 1/2 years old, you will not be taxed on any gains. This means that all of your money can continue to grow every year without being taxed. Here is how it differs from a stock:

Let's say I buy $100,000 worth of a stock, and in one year I see a 10% gain. This means I made $10,000 in profit, which is great. Now let's say I decide to sell the stock and re-invest in another. Uncle Sam then decides that he wants 15% (Short term traders have to pay 40%) of what I have made. This means that I have to pay $1,500 or $4,000 on my taxes, giving me a net gain of $8,500 or $6,000. Now I can only invest $108,500 or $106,000. Imagine this being done every year and you can see how much money is being left on the table. An IRA allows you to choose a fund, and use all your money to make you even more money (please ask questions in the comments below if you need clarification on this paragraph).

The maximum amount you can put in an IRA is $5,500 per year. The good news is, if you have $11,000 to invest, you can put $5,500 in this month in 2017, and another $5,500 in next month in 2018. When I sold my house in  November 2014, I was able to contribute $11,000 to my Vanguard account in only 3 months.

If you have any more questions about an IRA Roth account and how to set one up, please ask in the comments section below.

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