Wednesday, March 13, 2013

My Annual Roth IRA Rant

It's tax time. Time for everyone to get a fresh reminder that Uncle Sam is a greedy old fart who takes away a lot of your money. Oh, and next year most of you will be paying even more. Are you ok with that? I should hope not, but don't fret there is a way to fight back. Invest your money in a Roth IRA.

Those of you who have followed me know I'm a huge proponent of Roth IRAs and dividend stocks. It gives me great pleasure to receive dividend payments in my Roth IRA account, reinvest those dividends to utilize the compounding affect, and not have to worry about paying a cent to the IRS.

If you are already taking advantage of a Roth IRA, nice job. Pat yourself on the back and drink a cold beer to celebrate sticking it to the "man". For those of you who are still on the fence or are dragging your feet, let's address why you're making a huge mistake.
  1. Taxes are probably going to go up. Even if you think your tax rate will go down when you retire, it surely isn't going to zero. And that's what your rate will be for any money withdrawn from your Roth IRA.
  2. Time = Money. Dividend growth investing is a way to "get rich slow". For those of you who have a hard time waiting, investing money into a Roth will force you to slow down since you cannot withdraw from it until your are 60. The younger you are, the more time you get to enjoy that compounding affect that will make you wealthier. But don't worry, if you absolutely need to withdraw money from your Roth you can...
  3. You can withdraw your original investment amount without penalty if necessary. Let's say I've invested $10,000 in my Roth so far.  It has grown to $15,000 but I have an emergency and need some cash quick.  I can withdraw up to my original contribution ($10,000) from my Roth without a tax penalty.
  4. Those poor souls who "make to much" to invest in a Roth.  Don't worry, the backdoor is still open for 2013.
  5. Roth IRAs have no required minimum distribution (RMD) during the owner’s lifetime. These are only required after the Roth IRA owner dies and only for non-spouse beneficiaries. You withdraw as much or little as you want.
Hopefully that is enough to convince you. If not, then allow me to brag a little as I have found that jealousy is a great motivator. I've been maxing out my Roth for several years now. The amount has grown to nearly $40,000. In 2012 I made about $1,500 in tax free dividend income. Because I reinvest my dividends and invest in companies that raise their dividend each year that amount is only going up. I have 25 years of dividend reinvesting and compounding until I retire. Assuming a very conservative annual dividend and stock growth rate of 6%, my Roth IRA will be worth around $418,000 and paying almost $14,000 in dividend income when I retire. A less conservative 8% rate of return will yield a portfolio worth around $680,000 and pay $22,000 in dividend income. A plausible 10% rate will make me a millionaire with $1,105,000 portfolio value and $35,600 in dividend income.  All of which will be tax free

So hopefully I got your attention. If this has convinced you, I recommend not wasting anymore time. Remember that you have until April 15 to contribute 2012 dollars. And there are income limits and contribution limits that you should be familiar with before contributing. These can be found here: 

For those of you just getting started in opening a Roth IRA account, I recommend

In this world nothing can be said to be certain, except death and taxes. At least there is something you can do about that latter.

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