The Do-It-All Roth IRA

Occasionally I counsel younger couples about finances. They share a problem with most of my older clients: They can’t do it all. There’s just not enough money in the budget (and perhaps on Earth) for everything they want to do. However, often with a younger couple it’s not so much that they can’t do it all—it’s more like they can’t do any of it fully.

Think of it…in addition to the normal expenses like food, clothing, and shelter, they need to look at health insurance, disability insurance, life insurance, retirement planning, emergency funds, savings for a house down payment, savings for a car, savings for other large purchases, savings for maintenance and repair of things they already own, property and casualty insurance, vacation savings, college funding (for themselves or for a kid), pay down of debts, tax planning, and quite a few other things.

Let’s just say that it usually doesn’t all get done. In fact, it all looks so daunting that often none of it gets done.

One of the things I’ll do is to get them in the habit of saving. But look back at all those things they need to save for. That’s a lot. So we begin simply and with a Roth IRA. If you’re thinking that a Roth is supposed to be for retirement, you are right. I hope to use every dollar we put in the Roth for their retirement investing. But initially it is more important that they put away some amount of money every month. This way we build both a habit and a cash reserve.

A Roth is a form of Individual Retirement Account. “Individual” means that there is no such thing as a joint IRA (if a couple is involved we’ll often open two). Each individual can contribute up to $5500 per year into the Roth…more than enough room for those just starting their lives after school. The money they contribute can be withdrawn at any time with no tax penalty. The interest the account makes, its growth, can be pulled out tax-fee if it’s left in the account until age 59-1/2.

Being able to withdraw their contributions is key. That way, we can use the Roth as a place to store money. Then when that emergency comes up or a car needs replacing or the washing machine breaks they can access the money that they put in. What about the interest they earned on that money? Well, that part stays in there until that 59-1/2 date.

Before all you 20-somethings run out and put your life savings into Roth IRAs we’ll want to look at this in a bit more depth. Isn’t a Roth riskier than a bank account? What happens when I run out of room in the account? How does my emergency and car savings end up turning into retirement savings?

We’ll dig deeper into these questions…next week. I’ve run out of room today.

This article was published under the title "Financial Mantra for Young: Save!"

in the Wichita Falls Times Record News on January 5, 2014.