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).
Total Contributions: $51,000.
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.