The Only Reasons To Ever Contribute To A ROTH IRA

Government Pork SpendingIt’s been a while since I published, “Disadvantages Of A ROTH IRA: Not All Is What It Seems” and since that time, hundreds of thousands of folks have decided to think more carefully about their retirement savings strategy. One of the main things people have learned is that the government manipulates individuals into forking over more money than they otherwise should due to gross mismanagement of their own budget. Massive deficit? Let’s announce this huge “benefit” to allow people to convert their pre-tax retirement funds into a ROTH IRA! We’ll raise the spectre of higher tax rates to get more people to bite.

It’s sometimes daunting to go against the government because they employ some of the smartest people on Earth to keep themselves in power while keeping the rest of us dependent on their largess. But I’m here to help you fight back and live a better life.

If you contribute to a ROTH IRA or convert your pre-tax retirement accounts into a ROTH IRA, you aren’t going to be damned to hell. You’re just not maximizing your wealth over time. I’m a rational person who likes to see both sides of the story. So let me share with you the only legitimate reasons why one should ever contribute to a ROTH IRA.

For those of you who already have a ROTH IRA account, what you are about to read probably makes so much sense you might feel a little bad. But don’t worry. The number one solution when you are in a hole is to stop digging and slowly climb out.

Top Mistakes That Are Hurting Your 401(k) Returns

Retirement Life In MexicoHopefully everyone who has access to a 401(k) is contributing to a 401(k). To not do so is a mistake you don’t want to realize when you’re old and grey. The government isn’t going to save you because, with a large Social Security funding gap, the government is having a hard time saving itself. In fact, the government will probably hurt your ideal retirement life by either raising the retirement age limit for receiving Social Security and Medicare, raising taxes, or both.

I only have 13 years of experience contributing to my 401(k) because I rolled it over to an IRA two years ago. But 13 years is long enough to realize plenty of things I’ve done wrong. My 401(k) mistakes have cost me probably close to $150,000 since I started, which equates to around 35% of my 401(k) amount when I left Corporate America. In other words, instead of having $400,000 in 2012, I could have had $550,000 had I optimized better.

There’s a chance you’re making the same 401(k) mistakes that I’ve made. This post is a reflection of such mistakes as well as the mistakes I’ve witnessed personal finance consulting clients and readers make throughout the years. Hopefully this post will make you richer down the road as we analyze each mistake and solve them together!

The Average 401(k) Account Balance Breaks $100,000: Here’s How Much To Save By Age

Average 401k Balance Chart

Source: Manning & Napier

Investment management firm Vanguard reported the average account balances for 401(k) plan participants reached a record high of $101,650 at year-end 2013. Bust out the champagne! Who said there’s a retirement crisis on our hands?

Based on the Investment Company Institute (ICI), 51 million American workers were active 401(k) participants. 51 million is roughly half the US workforce out of a total population of 313 million. Hence, if the average 401(k) balance for half the US workforce is $101,650 then I dare say things aren’t as bad as they seem.

With MyRA or IRA making up for the other half of the working population with $5,500 a year contributions and Social Security, personal savings, personal investments, and pensions taking care of the other 200 million Americans, we’ve got America covered.  (See: How Much Should I Have In An IRA By Age)

OK, maybe it’s not so easy. We’ve got a lot more work to do to ensure a great retirement life, so let’s revisit my recommended 401(k) savings amounts by age or work experience to make sure. I also provide a savings guide by income chart as well. 

MyRA Won’t Help The Retirement Savings Crisis

Flip flops in the sand during retirementSo you listened to the State Of The Union and heard President Obama muff the pronunciation of MyRA. Was that “My IRA?” Or was that “Myra,” like a woman’s name? I’m going with the latter.

There’s an excellent 2,100 word piece entitled, “Will MyRA Solve The Retirement Crisis?” on Daily Capital you may want to check out. In the post you’ll find several shocking statistics about retirement:

  • 48%, or 44.5 million workers,  worked for employers who did not offer a retirement plan as of 2011 (NIRS).
  • Approximately 45% of households, or 38 million households, have no retirement account assets (401k or otherwise).
  • The median value of retirement account balances is $3,000 for all working-age households and slightly higher ($12,000) for those near retirement age.
  • Less than 1 out of 10 eligible working age individuals voluntarily contribute to an IRA.

Even if these statistics are half true, we’ve got a big retirement problem on our hands! Social Security is not going to be nearly enough, especially since it’s underfunded in its current state.  (See: How Much Savings Should I Have By Age)

The Ideal Split Between Passive Income And Active Income For A Better Life

A better life, three kids on boogie boardsActive income is much more enjoyable than passive income due to the positive feeling of purpose. We want to know our actions make a difference no matter how small the scale. So for those of you who fear retirement expediting your demise, don’t worry. Every able bodied retiree will naturally gravitate towards doing something useful to keep themselves healthy.

When my total income was dominated by active income I was thrilled but felt there was NO WAY OUT. The only way to flourish was to work hard and constantly stress about being the best to continue getting paid and promoted. I’m already quite disciplined, so to add high expectations from managers only compounded the one more year syndrome. It wasn’t until passive income hit about $3,000 a month in 2008 when I began to see the stars.

$3,000 a month wasn’t enough to live comfortably in my current house in San Francisco, but it felt good knowing I could survive on my own if absolutely necessary. Worst case scenario I’d sell my properties and rent a studio for $1,400 a month. With $700 a month left in disposable income after taxes, I’d wait it out until an opportunity came along.

Progress begets progress. Once I started thinking about the worst case scenario I became hooked on creating better worst case scenarios. I won’t be able to easily send more than one kid to private school in SF if need be, but my current worst case scenario is OK. Besides, I was told there is need-based scholarships for families who make less than $100,000 a year per child so that’s good! Fingers crossed for a studious and smart kid.

I’d like to quantify a framework of happiness between passive income and active income as a percent of total income. The goal is to provide motivational goals for those seeking financial independence. I’ll share with you some of my thoughts along the way so you get a sense of how the journey feels.