Messages from Mom - ROTH $$

This email was sent March 7, 2022 copied to all the kids and grandkids.

Hi Kids and Grandkids (grandkids are on, BCC),

I prepared this email for one of our grandkids and then thought it might be helpful to all our kids and older grandkids.  Save for future reference.

I've tried to get all of you set up with a ROTH and off to a good start while you are young.  But I won't be around forever, so you all need to learn more about them and their benefits.

I first ran the email by Scott, our resident family CPA, to see if he agreed or would make changes.  I asked his permission to include his reply back, in case his comments carried more weight than an "old grandma".  

Scott Westra wrote:

Looks great to me. I would stress that there is a limited amount ($6,000) and a limited window until income levels make the Roth unavailable. I believe you should NEVER take anything from your Roth until retirement. It is a precious opportunity and taking out principal just short changes that opportunity. You can never put it back.

It is very important to know the difference between the PRINCIPAL and the EARNINGS in your ROTH IRA.   Only PRINCIPAL (what you actually put in) can be taken out.  If EARNINGS are taken out before age 59 1/2, the EARNINGS will be taxed, plus a 10% penalty.  The government allows ROTHs as such a good deal because the government is trying to help people save for their retirement and not be left with no money in their old age.

Your EARNINGS varies daily with the market ups and downs and is tied to what investments you have on a given day and how those investments are doing.

ROTHs are such a great deal, but the money needs to be left in order to grow faster and faster the larger the amount in the ROTH and the longer it has to grow and multiply. 

EARNINGS must be left in until you are age 59 1/2.  They will grow tax free.

It would be wise to also save money in your bank account designated as an emergency fund, so you aren't forced to sell investments from your ROTH when the market is down.  An Emergency Fund is advised for everyone, no matter what your age, money that is liquid (easy to get) and not invested in the stock market.

Financial experts and all the finance articles I have read, suggest an Emergency Fund of at least 3 months of your living expenses---others recommend 6 months, 1 yr., or several years worth (at our age).  Depends somewhat on your age, health, stage of life, ability to make money, dependents, etc.  People should set a goal of a certain amount of Emergency Fund for their situation and work towards saving that much in the bank/credit union.

Play around with this chart to see how money can grow:  I put in the numbers of $6,000 at 10% interest and see how it grows over the years (that's only 1 year's max without even adding more).  And you wouldn't have to pay taxes on any of that growth.  Do the math and approximate how much you would save in taxes.  And you could put $6,000 in a ROTH every year!  And these last few years, your ROTH funds made much more than 10%!  Max out your ROTH each year, invest wisely in good diversified index funds/ETFs, and figure out how quickly you can be a millionaire and the many thousands of dollars you will save in taxes.  Especially you young adults and young marrieds can benefit greatly.  Don't let these opportunities pass you by.

I couldn't fit year 39 and 40, with my copying tool.

If just one year's maxing out of $6,000 can grow to $330,000 tax free by the time you retire in 40 years, just imagine what several years of maxing $6,000 will get you!!  Plug in the numbers and see!

Currently, once your salary reaches around $200,000 a year, the government will no longer let you add money to a ROTH, so max it out as many years as you can before you lose the chance to contribute. 

(There are conversion/backdoor roths that richer people can do, but the government is trying to do away with them.)

Go to this official government website and do the chart for different amounts and see how your money grows faster and faster.   official government website calculator.

Love, Grandma