Start Early

Roth IRA Challenge: Start Early

Everyone has a story to tell and today, TJ Pridonoff is here to share his! TJ has a self-titled blog that is awesome. He’s getting ready to take off on an epic road trip. During his preparations, he’s written about his spending, his investment portfolio, and other personal topics. His perspective is always fresh and you should definitely go check him out. Without further ado… Take it away TJ!

After I read Ms. Montana’s fantastic take on the Roth IRA challenge, I knew that I had a unique story to tell. Like probably all my blog posts, this is full of first world problems that several readers are just not going to relate to. If that’s not your jam, I promise that Maggie will post something a million times more awesome on Monday!

For those who aren’t familiar with my story, I’ve had a very fortunate upbringing and we are (I am?) counting down the days until I get to quit my job and travel America by automobile and AirBNB room rentals/campgrounds.  After that, I plan to “settle down” in a lower cost of living area so that I can understand what my future expenses look like and then work on how to generate the necessary income to supplement my investments in supporting that spend. If that means no full time job, then I get to call myself early retired. Wouldn’t that be fun?

Something that wasn’t at all a part of my upbringing was investing tips and strategies. It is indeed news to me that the Roth IRA was actually put into place back all the way back in 1997.

Because I’m one of those organized nerds who has a father who is an organized nerd, I have all of my personal income tax records going back to the very beginning. I’m talking about my pizza delivery days.

During my senior year of high school, my parents encouraged to me to get a part time job.  My deal-hunting was already subconsciously brewing because my job was delivering pizzas. I loved pizza. I had pizza almost every day for lunch at school (I had a really good metabolism), and since I was working at a pizzeria that sold slices during the day and did not sell them all, more often than not, I would score free pizza slice dinner after my shift was over. What 18 year old is going to turn down a free meal, right? I wish I could say I was frugal about Big Gulp size Sprite with cherry shots at 7-11. (I did however take advantage of the discounted refills for bringing back the same cup! Environmentally friendly by accident.)

In 2003, I had taxable wages of $823.12 from my pizza delivery of which I paid $51.03 in social security taxes, $11.94 in medicare taxes, and $7.41 California state disability insurance. I wonder if I will ever again see my taxes so low again? I also regret not declaring the TIPS because, you know, I could have thrown them in a ROTH.

In 2004, I had quite the increase. $3,309 of taxable wages. I split the year between two different pizza joints, but the second pizza joint was sold from one entrepreneur to the next one, so I ended up with *three* pizza W2’s for tax year 2004. The second pizza place didn’t give me any free pizza though. Boo to them.

I paid a whopping $69 in federal taxes and $3 in state taxes in addition to more of the FICA taxes that I paid the previous year. But I also had $3,309 in taxable wages! I could have maxed out my Roth IRA in 2004. It was “only” $3,000 back then. AND, I would have still had $240 left over to splurge on pizzas! I mean, it was 50% off the days I was working at the new pizza joint! Of course, I didn’t do any of that. My first actual IRA contribution was in calendar year 2010 for tax year 2009.

I didn’t file another tax return until the year 2008, since I was in college with negligible income throughout the mid 2000s.

I started working full time almost immediately after graduating college in Summer 2009 with my degree in the equivalent of underwater basket weaving, and I’ve maxed out my Roth IRA ever since. It’s fun to go back and see what my portfolio balance might look like if I started paying attention to this stuff a lot sooner.

For the sake of simplicity, let’s say I contributed $3,000 to my Roth IRA in 2004, and every year subsequent to that, I contributed $4,000 (which conveniently was the max from 2005-2007).

Year  Amount

2004 $3000
2005 $4000
2006 $4000
2007 $4000
2008 $4000
2009 $4000
2010 $4000
2011 $4000
2012 $4000
2013 $4000
2014 $4000
2015 $4000
2016 $4000

Total Contributions: $51,000.

portfolio increases

Source: PortfolioVisualizer

If I just threw it all in Vanguard 500 Index, I would have more than doubled my money vs. the contributions over that 13 year period. J

For the purposes of this post, I looked at my actual year-end IRA balances from the past 7 years. Since I maxed it out every year starting with 2009, I have $42,000 of contributions. Today, My Roth IRA is worth a little more than $60,000. 6% per year return is by no means horrible (it was invested in a bond index at least 1 of those years), but the 125%-ish return over the 13 year period of theoretical smaller contributions of setting and forgetting in a 500 Index is much closer to 10% per year.

What this means is that it’s absolutely plausible that if a reader does not max out their IRA, they could still end up with more money than the lucky folks who do max out for a shorter period of time. More time in the market and the magic of compounding.

The flip side to all of that unutilized Roth space from my youth is that I didn’t know a lick about investing until 2010-ish. All that $$$ I didn’t spend because I’ve never been overly materialistic was available to me in an ING Direct cash savings account. That savings account was the combination of sporadic high school and college wages, and birthday, Christmas, high school and college graduation checks from extended family and family friends. I had plenty of cash to go towards ½ of the 20% down payment of a condo shortly after graduation. A frustrating short sale that took 6 months to close almost makes me never want to deal with real estate transactions ever again….except that period of dabbling in real estate literally changed my life forever in the form of making me six figures richer.

The moral of this story would be that if you do have kids and you already have decided that you are going to help them out along the way, consider declaring any possible legitimate child income and utilizing those tax advantaged accounts.  The sooner you start, the more time for the compounded growth to work.

At the same time, stepping back and letting your kid figure out the investing side of personal finances for themselves isn’t necessarily a recipe for disaster either. It’s definitely a big part of my identity that I “figured out” investing all by myself because quite a bit of the life knowledge that I do have was passed down by my generous parents.

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19 Comments

  1. It’s always a balancing act. Kids need support and mentoring. However it’s a fine line between that and creating dependency. We do plan on pushing at least a portion of the childhood income into a Roth as support since it also has higher barriers to be tapped for something other then savings simply because you have to actively transfer the cash.

    • MaggieBanks

      I agree. Roths are a good way to help them along, but somewhat shield the money from utter stupidity. 🙂

  2. All yours tax statements from all your work in years?! Unbelievable. I wish I had that so I could see how much I really made (and spent) throughout the years.

    Plus I think you just convinced me to take on a delivery job as an extra side hustle…pizza. Yummmmm. 🙂

    • TJ

      You know it, Miss M! I Being a pizza delivery driver definitely has it’s perks. Especially if you eat a lot of pizza like teenage version of me.

    • MaggieBanks

      The organization is amazing! I’m not even sure I’ve SEEN a lot of my tax documents from those years (thanks dad for doing it all for me!)

  3. I was 18 in 1997…and I just opened a Roth IRA two weeks ago. What a shame! It’s hard to not continually kick myself for being so dumb, but I’m trying to channel that in preparing my boys to handle their money better than I did. And I guess starting at 38 is better than starting at 39.

    • TJ

      You’re so right, Ernie. It’s always better to start today than tomorrow. Just making the decision to start is certainly a big step in the right direction.

    • MaggieBanks

      I opened one a few years ago, but has failed maxing it out (or even contributing this year!)

  4. I believe I opened my Roth IRA in 2011 or thereabouts. My grandmother passed away and left me $5k in a very stable account, but I took it out and put it in my taxable account. I then used the rest of my bonus to max it out that year. It kinda sat around and didn’t do much until 2013, when I graduated and went to work. I’ve maxed it out since then and it now sits at roughly $20k. I wish I would’ve been able to put my high school job money in it, but I was so broke I needed every penny I brought in. We would only be talking a maybe 3 grand difference though.

    • TJ

      Awww Gwen. Nevertheless, you are still crushing it. Your income trajectory combined with your living in a relatively LCOL area should do wonders for your FIRE journey.

    • MaggieBanks

      We used my Roth IRA from my early working years to buy the house in which we live… I’ve thought about that a lot recently and whether that was the right choice… but overall, I don’t regret it (it was only about $12,000)

  5. TheRetirementManifesto

    There’s no doubt that starting young is the most powerful force in the universe (at least that’s whatcha Albert Einstein said about compound growth, and who am I to argue!?).

    Our daughter, Age 22, just started her first “real job” as a policewoman. We helped her set up a Vanguard Roth before her first paycheck, with automated ACH transfers every month. She doesn’t really “get it”, but some day she’ll look back in appreciation at how well we started her out.

    • TJ

      Fritz, it’s so cool that you are guiding your daughter to start early! And mad props to her for accepting your guidance! I mean, she’s already further along in her IRA than I was at her age! 😀

    • MaggieBanks

      Well done! And congrats to your daughter! Power to her!

  6. Great job, TJ. We started our Roths in our 40s. So there’s hope for everyone, even the slow learners like us. I’m amazed you were able to start so young especially since you were probably high on carbs and sugar for most of those early pizza years. Cherry shots on top of Big Gulps? Really?

    • TJ

      Mrs. G, my diet has definitely been horrific for most of my adult life. I have a pretty good metabolism. The year that I first contributed to an IRA. My dinner staples were basically bar food appetizers (chicken wings, pizza, sliders, etc), it was cheap in dollar terms, but certainly not in calories. And yes, sprite with cherry flavored syrup was typically my drink of choice. 🙂

      At some point I discovered the will power to mostly switch to water, but this is only in the last couple years, and the bonus is that water happens to be free in most restaurants! 🙂

      • MaggieBanks

        Ba ha ha ha. Sorry. This whole thing made me laugh. Way to make the switch to water!

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