Millionaire Librarian

The acronym IRA sounds complex, but they are extremely powerful and relatively simple. IRA is short for individual retirement account. Instead of an employer providing this account; you can make your own. Opening one at Fidelity, Charles Schwab, or Vanguard will take you about 10 minutes at most. Currently in 2023, you can contribute up to $6500 a year to the account. Occasionally Washington increases the amount you can contribute. However, there is one catch. What you contribute must be earned income. That means that you must earn the money from an employer. You cannot have the money gifted to you and the money cannot be earnings from investments. For many of us in the middle class that isn’t much of an issue because once we start driving, then we start working.

If you read my last post, then you followed the hypothetical situation of Emma. In that hypothetical, Emma receives $2800 that is invested for her when she is born from a generous, loving, and compound interest understanding parent or grandparent. When Emma turns 67 then she will have a little over $2 million if it grows at an average of 10%. However. Emma will have an ugly problem when she trys to sell; taxes at the tune of up to $400,000. Things could be worse, but by utilizing the Roth IRA when she starts working in her late teens or early twenties she can save her almost all of the money that would be taxed in the prior scenario.

Continuing with our prior scenario at around 20 years old Emma’s little account will be worth around $16k. Emma gets a part time position where she earns income then she can sell her brokerage funds for the amount she makes that year from her job and use those funds to fund her Roth IRA. She does this for a few years until all the money is gone from the brokerage. From that point on then her funds in the Roth IRA will grow forever tax free until she needs them at 67 when they will be worth $2M.

There are some pitfalls for this scenario. First $16,000 at 20 years old is extremely tempting to blow on a better car or improving an existing car. As Dave Ramsey says “We want this money to be a blessing and not a curse.” Allowing a young adult the power to buy something that could hurt them like drugs, alcohol, or a muscle car would be a detriment to them. Another pitfall would be to spend it at 30 when they are buying their first house. At that point the money would be around $50k and would make an excellent down payment on a new house. Though there are far worse things than buying a house; your child or grandchild may buy more house than they could afford or maintain. Later we will talk about the importance of buying a house only as large as you will need.

If you can stress the purpose of this money, which is for retirement and if they follow the path you lay out before them, then not only will they have an amazing retirement, but they can also leave substantial generational wealth to their loved ones.