$5500 per year to tax-free Millionaire: Why you need a Roth IRA

What's up you guys? It's Graham here! So today I'm going to be making a video about what a Roth IRA is and why this is so important to sign up for one of these things as soon as you can and put money in it as soon as possible.

Now, this is one of these videos I recommend you do not click out of. I highly recommend you watch it all the way through because it's that important. I totally regret not doing this when I was a lot younger. Just like me not getting a credit card when I turned 18, me not signing up for a Roth IRA when I was like 16, 17, or 18 years old, in my opinion, was a huge mistake. If you guys could learn from my mistake, all the better.

So, that's why I highly recommend you watch this entire video. I'll be explaining exactly what it is and why it's so important. This is also the type of video that's going to make all the time you've spent on YouTube so far completely worthwhile. This means that all those cat videos you watched, all those stupid fidget spinner videos you watched, all those thousand-degree knife Challenge videos you watched, they're all worthwhile because this video is that important.

Like, you have the chance to make hundreds of thousands of dollars tax-free just by opening up a Roth IRA and contributing to it. Like, just to give you an example of the power of compound interest and investing as early as possible: if you're 18 years old and you invest $1,000 in a Roth IRA, by the time you're 60 years old, that $1,000 is going to be worth $17,100 adjusted for inflation.

Now, by that same example, if you invested that same $1,000 at 19 years old instead of at age 18, that $1,000 is only going to be worth $16,000 by the time you were 60 years old. That means that one-year difference will literally double your initial investment by the time you're 60 years old. So, that's why it's so important: investing as early as you can.

This is also exactly why you should be doing this now, especially if you're young while you're not earning a lot of money. So, this is what it is, and because it confused me so much when I was younger and I had no idea what it was, I'm going to try to explain it as easily and as simply as I can.

Okay, so what I'm talking about is called the Roth IRA, and what that stands for is individual retirement account. So, a Roth IRA is a type of retirement account where you can put in up to $5,500 per year with no immediate tax deductions. But when you're 59 and 1/2 years old, all that interest and all the earnings you've made over many, many years is all tax-free money that you can take out.

This means that you pay zero tax on years and years of compounded interest and earnings. Your tax-free profits in this account make you even more tax-free profits, which makes you even more tax-free profits, and that just snowballs from there and it grows to something huge.

So, let's say you have a job and you've saved up $1,000. Now you go and you open up a Roth IRA and you put that $1,000 in that Roth IRA account. That $1,000 that you saved up will have already been taxed by the government, so we call that post-tax money. You could then put that $1,000 in your Roth IRA account, and that's called your contribution.

So, now let's say that $1,000 you put in is worth $1,300 the next year. That extra $300 you made is your earnings. Now, this is all tax-free money that's going to make you even more tax-free money the next year because now you have $300 that's not going to be taxed that can then go and work for you and make even more money for you.

Now, the benefit here is that since you've already paid taxes on your first $1,000 that you've contributed to this account, you can take that out without any penalty or without paying any more taxes on that initial investment at any time. So, if you decide like 2 or 3 years from now you need extra $1,000, you don't have it, but you have it in the Roth IRA, you're able to take that money back out.

Now, of course, there are some restrictions. If you then want to put like that $1,000 back in, usually you're not able to do that. So, I'd almost consider this like a savings account where you can put your money in it and if you need it in the future, you can always take it back out if you absolutely need to.

So, all of your earnings in this account are going to be completely tax-free. Now, the catch is you have to leave it in the account. So, if you have $1,000 in this account and then it's worth $1,300 next year, that extra $300 that you made should be left in that account. Otherwise, you have to pay penalties and taxes on it. But that initial $1,000, like I said, you can take it out at any time if you need it.

The benefit here is that all the earnings you've made from your initial contribution are all going to be tax-free if you just leave it in there until you're 59. At that point, you can take out all your money completely tax-free with no penalty at any time, or you could just continue to let it grow and earn you more and more and more money, and then you just make bank.

Now, this is also best done when you're young for two reasons. The first is that you have the power of compound interest, which is exactly like my example that I gave you earlier: that $1,000 invested at 18 is worth $264,000 more in the future than if you invested that just at age 19. So, that's the first reason why.

The second reason why is because all of this money is paid into this account post-tax, which again means that taxes have already been taken out of that initial money. So, the way it works is that generally when you're young, you're not earning a ton of money, and you're not being taxed a lot. So, this is perfect for people between the ages of like 18 and sometimes 30 who aren't reaching their full income potential yet and aren't subject to the huge taxes that you're going to pay.

So, this works great if you're earning just a little bit of money but can still save some money. This means that you're not being taxed a lot, so all the money you're putting in this Roth IRA account is essentially giving you a huge leg up, then if you're doing the same thing at age 40 when you're making like $250,000 or $500,000 a year.

And by the way, what I mean by post-tax money is that let's say you have a job that pays you $20,000 a year. After you paid your taxes and all that sort of stuff, you might be left with $17,000. That $17,000 is what I refer to as post-tax money, because you've already paid taxes on that.

And chances are too, when you're young or just starting out, you're going to be paying a lot less in taxes because you're not going to be earning as much as in 20 years from now, where chances are you're going to be paying much higher taxes just because you're going to be earning a lot more money.

And by the way, when you're earning that much money, it's more about reducing your tax liability now than trying to get as much money as you can in the future by the time you retire. So, when you're already not earning a substantial amount of money, it's much better to take advantage of the Roth from the beginning, knowing that all this money you make isn't going to be taxed at a high rate, meaning that you're going to have more money by the time you retire than if you just had taken the initial upfront tax deduction.

Especially if you're like 18 to 30 years old and not earning a ton of money right now and expect to earn a lot more money in the future, a Roth account is perfect for you to do. And then when you start earning a lot more money, there could be other things that maybe work better for your situation.

So, here's what I would do: If you're under the age of 18 and you have some income coming in, you can go and you can ask your parents to co-sign with you and to help you open up a Roth IRA account. Now, because you're under the age of 18, you will need a parent's consent in opening up one of these accounts.

Now, keep in mind too, you can only contribute what it is that you earn. So, if you have a job that pays you $33,000, you can't really contribute $5,500 because you’ve only earned $3,000. So, my recommendation is just to put in exactly what you can, up to the amount of what you earn that year.

So, if you're over the age of 18, seriously, as soon as this video is done, go and sign up for a Roth IRA account. It's so easy! If you don't already have one, it's so easy, by the way, to like put it off—like, “next week” or “like tomorrow” or “say like I’ll do it next month; I'm busy right now.” Just do it! Seriously. If you're watching videos on YouTube, chances are you have the time.

Really quick, for like 20 minutes, go and sign up for a Roth IRA account and just put like something in that account now. I personally use Vanguard. You can also use Charles Schwab or Fidelity or any other account that you want. Just make sure they have low fees. Personally, I love Vanguard. I use Vanguard. Vanguard is amazing. I had nothing bad to say about them.

But this is my recommendation: please go ahead and do this as soon as you can and just put some money in it and just get in the habit of starting to put some money in the Roth IRA now. With this, you can put in up to $5,500 per year of earned income. Now, I recommend putting in as much money as you can or as much money as you could afford to put in this account.

The advantage here is that since there's compounded interest in this account, the sooner you start, generally, the more money you're going to be making by the time you're much older. Now, I totally understand that this might be a little bit of a boring investment strategy, but it's so effective and it's so important that you still do it.

Now, I don’t recommend this be your 100% retirement portfolio. It's just like Roth IRA, Roth IRA, Roth IRA. I totally recommend doing the Roth IRA on the side of doing other things, like investing in yourself and other investment routes that you might want to take. This should just be seen as future play money, that when you're a lot older, you can ball out really hard because you've saved all this money for such a long period of time.

Now, just to give you some numbers here: if you start investing at age 18, $1,000 per year, by the time you're 60 years old on average, that is going to be worth $264,000. Now, that's the power of compound interest, and that's also the power of investing in a tax-advantaged account because all that money that you made is completely tax-free. You’re going to owe nothing on that.

Now, over time, over all those years, you will have only invested from your own money $43,000, which means that $221,000 you've made tax-free from a $43,000 investment.

Now, let's say you invest $2,000 per year from the age of 18. By the time you're 60, you will have invested $86,000, but you will have made $444,000 completely tax-free.

Now, let's say you invest the maximum; you invest $5,500 per year from the age of 18. By the time you’re 60 years old, you will have invested $231,000 of your own money, but you will have made over $1.2 million of tax-free money by the time you're 60 years old.

Literally, if you just do $5,500 per year from the age of 18, you will retire a millionaire just by doing this. And by the way, this figure includes inflation already because generally, you can expect a 9% or so return annually, and I'm taking about 2% off for inflation. So, that means you will be a millionaire at age 60 in today's money.

This is why the Roth IRA account is so important, and this is why I also do this investment on the side. Now, I also have a few other investment accounts in addition to this, like a set 401(k) and then I also put a lot of money in real estate. So, I'll be explaining those in other videos, but at the same time, I still utilize the Roth IRA and I still see the benefits of putting money in a tax-advantaged account.

But the Roth IRA for probably 99% of you watching right now is perfectly applicable to what you should be doing to plan for your retirement and make a lot of money in the future. Now, because so many people always ask what I have: I have a Vanguard account, I have a set 401(k), and a Roth IRA, and in the Roth IRA, I just put all my money in an S&P 500 Index Fund.

You can also do what's called a target date retirement fund, which pretty much takes care of everything for you. You just pick the year you're going to retire, and you can just invest in that fund and that'll take care of everything. It's really easy to do.

And if you haven't done it already, seriously, go and sign up for one of these things. Just put some money in it. I promise, I promise this is such an important topic. Do not take this lightly. Please do it, especially if you're like 18 to 25 years old. Chances are this video is perfect for you. You need to do this! Please, please!

And by the way, I have no financial interest in you doing this or not. I'm not getting paid to do this. I'm not getting paid for any of these recommendations that I'm doing for you guys. It's just because I enjoy making these videos, and seriously, this is the sort of stuff I wish I had learned when I was like 15, 16, or 17 years old because I ended up learning this all on my own when I was in my early 20s.

I just see the advantage of learning this as early as possible, so that's why I want to just like cram this into you guys' heads because trust me, you will thank me years from now when you've made so much money and I see you driving a Ferrari down the street and you're like, “Thanks, Graham! Roth IRA money right here!”

And I will be so thankful. I will be so happy that I will have made a difference, and I will be so happy that I can see you guys succeed. So, that's my recommendation. So please do not take it lightly! Please, right now, go and sign up for a Roth IRA. Seriously, I don't care where you go. Just sign up for a place that doesn't have really high fees or anything like that.

Vanguard again is good, or Charles Schwab seems to be a really good one. Now, those are what I recommend, but you're free to go really wherever you want. Just again, just make sure there are no high fees.

As always, you guys, thank you so much for watching my videos. I really hope you enjoyed this one. If you haven't already, feel free to click subscribe. I'm going to be making a lot more videos coming up, so if you want to stay tuned with that and don't want to miss out on it, click subscribe!

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