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June 8, 2020

Roth IRA Investing | How to Save for Retirement Today – with Jedidiah Collins


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Are you ready to start investing? Many people who are nearing the end of their debt payoff journey start to wonder how to begin investing. Debt freedom is powerful, and investing your money is another way to level up your finances. One starting point that can benefit new investors is Roth IRA investing.

To get a better understanding of how Roth IRA investing works and how to open a Roth IRA, I sat down with Jedidiah Collins. Jedidiah is the founder of Rookie to Veteran and author of Your Money Vehicle. After spending seven seasons in the NFL while also getting his certification in financial planning in the off-season, he now spends his time helping young professionals step up their money game. 

In fact, Jedidiah’s focus is to eliminate the gap between the potential of your goals and the success you desire. Here’s how Roth IRA investing can help you do just that. 

What is a Roth IRA?

Before you can appreciate the power of a Roth IRA, it is important to understand what wealth means. Jedidiah is quick to distinguish between rich and wealthy. Someone who is rich has money today. Wealth, though, is all about future freedom.

If you want to know how wealthy you are, ask yourself how many days or years you can go without needing to earn more money. That is the ultimate goal of wealth: to buy you the freedom to live life on your terms and give you back your time.

Roth IRA investing can help you do that. Simply put, a Roth IRA is an investment vehicle. Think of it as a bucket that holds your investments. Because of the type of bucket it is, it has certain qualities that may benefit young investors. 

When you put your money into a Roth IRA, you are using post-tax money. That means that you have already paid taxes on the money and your earnings will grow tax-free thanks to the power of compounding. This is different than a traditional IRA or a 401k, where you put money into the account tax-free and pay taxes when you start spending your money in retirement. 

Roth IRA versus Traditional IRA

There is a lot of discussion in the personal finance world regarding Roth IRAs and traditional IRAs. It is important to understand how the different investment vehicles work so that you can make the best choice for you. 

Jedidiah likes to use an analogy of a family who is deciding which tree to plant in their backyard. They have several options.

The first option requires the tree to be pruned and cut before it is planted. After it is planted, it is pruned as it grows.

The second choice does not require any pruning up front but it does require extensive pruning before backyard parties or barbecues.

Finally, there is a third option. The third tree is trimmed and pruned before it is planted. Then, the tree is planted in Roth soil and never needs to be trimmed again. 

The second and third options highlight the main distinctions between traditional IRAs and Roth IRAs. A traditional IRA can be used to reduce your taxes now, but you have to pay taxes in retirement. Conversely, a Roth IRA is funded with money that you have already been taxed on. That means that you can withdraw that money tax free in retirement. 

Tree in field

Eliminating the Tax Question Mark with a Roth IRA

While people commonly argue in favor of a traditional IRA based on the assumption that someone will be in a lower tax bracket in retirement, Jedidiah says not so fast. He points to the recent CARES Act and previous tax law changes to showcase how quickly things can change. 

Regardless of which political party is in power, the tax code will continue to evolve. How it changes is unknown.

While we can’t know what tax brackets and capital gains taxes will look like in 40-50 years, we do know what they look like now. That is another reason why a Roth IRA might be advantageous to young investors.

If you take advantage of Roth IRA investing, you address the future question mark regarding taxes. Your taxes are paid upfront and your money continues to grow and work for you tax-free. 

Roth IRAs and Diversification

Roth IRA investing is an important part of your money plan. However, Jedidiah emphasizes that there are several components of investing.

Many financial planners talk about diversification, and that is why Roth IRAs can be so important. In addition to having a popular tax-deferred account like a 401k and perhaps a taxable account, opening a Roth IRA gives you another bucket to store your money.

In addition to diversifying the types of investment vehicles you own, Jedidah also says that diversifying what is inside a Roth IRA is important. A Roth IRA itself is not an investment. Instead, it holds whatever investments you want to purchase.

Here are some of the ways you can diversify within your Roth IRA:

  • Within an asset class – For instance, that might mean that you buy different types of equities, including large, mid, and small.
  • Among asset classes – You might invest in stocks or index funds in the US market. You might also invest in foreign and emerging markets. Some people also add fixed investments and real estate.

Related Article: How to Achieve Financial Independence Through Index Fund Investing

Roth IRA Rules

Before you rush out to open a Roth IRA, you need to know that there are some rules associated with them.

One of the most important rules has to do with who is eligible to have a Roth account. There is an income limit to be able to contribute to a Roth IRA. Married couples who file their taxes jointly need to have a modified adjusted gross income (MAGI) below $196,000 to qualify in 2020.

Single filers need to be below $124,000. If your income is higher than that, your eligibility is phased out. That is why it is important to review the tax rules surrounding Roth IRAs at least once a year. 

Additionally, you can contribute up to $6,000 per year based on the 2020 IRA rules. If you are over the age of 50, you can contribute up to $7,000 per year. 

Another Roth IRA rule that can be used to your advantage is to understand what can and can’t be withdrawn from the account. If you withdraw your earnings prior to the retirement age of 59½, you will pay a 10% penalty. Extenuating circumstances including education, buying a home for the first time, and disability do exist.

However, while the earnings on your Roth IRA can be penalized, the contributions are not. That means that you can take back your contributions guilt-free and still allow your earnings to continue to grow.

Advanced Roth IRA Strategies

If your income is above the MAGI cutoff, it may be possible for you to use what is known as a backdoor Roth IRA. Jedidiah offers a quick overview of the process to help you understand the basics.

Essentially, someone will contribute to a traditional IRA because there are no income limits. Then, that contribution is immediately pushed into a Roth account. Working with a financial planner or tax specialist can help you navigate this option.

Regardless of your tax bracket or MAGI, anyone who invests in a Roth IRA can take advantage of another strategy. This strategy is the creation of generational wealth. What is unique about a Roth IRA is that it allows someone to pass down their investments tax-free to their heirs. Since there are no required minimum distributions (RMDs) like there are with traditional IRAs, your money can grow throughout your lifetime. If you don’t use your money in retirement, you can use it to build future wealth for another person.  

Working with a financial planner can help you better understand these advanced Roth IRA strategies and other investing strategies.

Woman typing into computer

Where to Open a Roth IRA

To take advantage of the benefits of a Roth IRA, you need to know where to click. Thankfully, virtually all of the brokerages you use or are even just familiar with should allow you to open a Roth IRA. Jedidah says some of the most popular ones include:

Before you open a Roth IRA, you want to do a bit of research. Jedidah emphasizes that you focus on what is most important to you. For instance, if active investing is appealing, then you want to look for free trades

Questions to Ask Before You Invest

There are other fees to be mindful of as well. Here are some things that you should consider if you want to open a Roth IRA:

  • Is there a transaction free to open the account?
  • Is there a fee associated with purchases or trades?
  • What is the expense ratio? In other words, what is the manager being paid to manage the ETF or mutual fund?
  • Are there any load fees? 

When it comes to fees, 1% was used to be a standard expense ratio. However, Vanguard spearheaded industry change that really drove down the costs associated with investing. As a result, there are many brokerages offering low-fee and no-fee investment options. 

While Jedidiah is a fan of index funds, he also says that diversification is key. He stresses the importance of being globally diversified while also focusing on low expense ratio investments. 

Key Takeaways on Roth IRAs

If you are looking to get started with Roth IRA investing, the first step is to do your homework. Jedidiah dedicates an entire chapter in Your Money Vehicle to investing and also gives concrete action items.

In addition to exploring his book and other personal finance books, you can also turn to Google. Explore brokerages you may already be using or do some research based on the criteria that is most important to you. That might be fees or types of investments. Once you are ready to open a Roth IRA, know that you can begin driving your money vehicle down the path to financial freedom. 

Do you use a Roth IRA to invest for your future retirement?

Please let me know in the comments below.



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Andy Hill

Andy Hill, AFC® is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping families build wealth and happiness. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys being a Soccer Dad, singing karaoke with his wife and relaxing on his hammock.

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