Facing My Financial Fears: Roth IRAs

This week, The Simple Dollar is doing a five part series on financial topics that scare me just a bit. Researching and then writing about them will (hopefully) alleviate some of that fear  Other fears include buying a car.

Even when I was at the worst of my overspending habits, I always contributed enough to my 403(b) and other retirement plans to earn the employer match. I could never argue against a 100% immediate return on the money I put into those plans.

I started putting 6% into a 403(b) at age 23, which was completely matched by my employer. After changing jobs three years later, I put in 5% into that plan, which was completely matched by my employer. Assuming an 8% return on my investment (a pretty low expectation, considering it’s all in index funds), I could start withdrawing my full salary from these plans indefinitely starting at age 60. I figured it was more important to pay off debts and other things than invest in another retirement plan.

As I grew older, started a family, had a child, found myself in the pit of financial despair, and began to dig myself out of it, I began to realize that I did need to invest more of my money for the future, but I still couldn’t see why anyone would want to invest even more for retirement.

There were two things blindsiding me. First, I was still stuck in the mentality that income tax was just another paycheck deduction. I didn’t consider that tax rates might go up over time or that my income might push me into a higher tax bracket. Until recently, income taxes were merely something that went away every paycheck to some magical, mystical place, and when I filled out forms early in the year, I might get a little bit of them back – but maybe not. Roth IRAs basically commit some of your money to staying at the interest rate you’re paying now – which I believe will just go up over time as I move up in income. If that proves to be true, Roth IRAs are actually a way for me to save on income tax when I get older.

The second factor was that I was content to keep my current income level in retirement. There was no thought of the possibility of a wealthy retirement, with a nice big house with grandchildren running around and a beautiful place to spend twenty years of retirement with my wife. Right now, since I’ve paid off my high-interest debts and I’ve not yet really considered a house purchase, I have the ability to put plenty into a Roth IRA, which will do nothing more than enable me to afford a beautiful house for me and my wife to grow old in together.

So I’ve made up my mind: starting in January, I’m going to open a Roth IRA and contribute $80 a week to it. I’m not going to start one this year because I have my budget to the end of the year completed (so I can manage holiday spending), but I am finally ready to take that leap and get a Roth IRA.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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