Roth IRA

I may have an unusual outlook on how to divide money into different “buckets.” I would like to dive into my explanation on why I feel comfortable putting my “the world is ending” emergency account into my Roth IRA instead of a savings account. Let me explain how I started my Roth IRA over 15 years ago.

My First Few Years of Investing circa 2005, I was 25 years old.
  • I had virtually no expenses as a 20-year-old. I needed enough money to fix my car or replace it ~$2,000.
  • I needed enough money to pay for my health insurance deductible, at that time it was $3,000.
  • I needed enough money to cover my rent if I was out of work for more than 3 months $750.
  • Total needed if I totaled my car and was disabled for 3 months would equal $5,750 plus the cost of food. I felt that the chance of this happening was very low and if that happened my mom would have stepped up and let me recover at her house because even at age 25 because I was her “baby.”

Having a “mom safety” net to help me with the unthinkable allowed me to be a little rogue and only save up enough to replace my junky jeep if needed. After I had $2,000 saved up in an account across town that didn’t have an ATM card, I focused all my energy into automatically depositing my extra money equally into my Roth IRA and to my emergency account.

At the beginning, I was sending $20 a paycheck to my Roth IRA and $20 to my emergency fund.

This seems like it’s not worth the hassle but I assure you it was this teeny tiny step that allowed me to eventually start maxing out my Roth IRA in my 20’s.

I was making $35,000 annually and I had virtually no expenses. Every year during our annual raises, I would increase my 403b by 1% and increase my Roth IRA by $20-$50.

Guess what happened to my emergency fund?

I never made it over $5,000! As soon as I would go over $5,000 I would suddenly need money for something. (Cough, vacations.) I was disciplined enough to keep $5,000 in it but not enough to build it any further. I have NEVER withdrawn from my Roth IRA but I know it’s there if I need it for a REAL emergency. This sense of security allowed me to push myself harder and harder to reach the maximum investment every year.

How to Slowly Get Started today when you don’t have the fund but are motivated to do something!
  • If your company matches your 401k or 403b contributions make sure you are getting that free money!
  • Open a Fidelity or Vanguard Roth IRA account. Deposit $20.
  • Auto deposit, $5 a month.
  • Ignore your Roth IRA.
  • Build up your emergency account according to what you feel is a reasonable buffer. Things to consider: your fixed recurring expenses, family safety nets, and how much is in your HSA to cover any medical expenses.
  • PAY OFF YOUR DEBT. Put all your energy into paying down all debt greater than 4-5%.
  • Once your debt is paid off then go back to the account, you already did all of the work by setting it up. Increase your automatic deposit until you are able to max it out. (2019: $6,000 or $500 a month.)
  • Continue to max out your Roth until your income exceeds the maximum allowance ($137,000 if single), then you can look into increasing your 401k or 403b to decrease your adjusted gross income.

Now for my favorite question: Do you max out your 401k/403b or your Roth IRA first?

I’m starting to change my tune on this answer. I used to say, “a little to each because you don’t know what tax bracket you’ll be in.” Then I started to say, “I know I will need less money in retirement because I won’t need a big house or a family to raise, so I prefer to max out my 401k/403b and get taxed later.” Now I’m saying, “Our taxes were SO low this year, there is no way our country will survive without hiking up the tax rate. So, put as much into the Roth IRA as possible!”

Here’s the Real Answer
Max out HSA (if eligible) AND 401k/403b AND Roth IRA

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