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Former WSJ columnist gives advice to iwillteachyoutoberich readers

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While I was in New York a few weeks ago, I stopped by to meet Jonathan Clements, the former columnist for the Wall Street Journal — which I thought was the best personal-finance column in the country. (Here’s one of his columns: Twenty Tips for No-nonsense Investing.)

Jonathan Clements

Jonathan is now the director of financial guidance at MyFi. While I was there, we chatted for almost two hours (he’s hilarious) and I asked if he’d be willing to write up his thoughts on the most important step for iwillteachyoutoberich readers. Here’s what he had to say.

There’s no debate over the top priority. If you’re new to the work force, you ought to be funding your employer’s 401(k) plan, because it will give you a trio of benefits: an upfront tax deduction, tax-deferred growth and maybe a matching employer contribution.

But that brings us to the more interesting question. What should your no. 2 priority be? Forget building the six-month emergency reserve or saving for a house down payment. Instead, I would vote for funding a Roth IRA.

With a Roth, all your withdrawals once retired should be tax-free. True, unlike a regular IRA, a Roth won’t give you an initial tax deduction. But if you’ve just entered the work force and you are on a relatively low salary, that tax deduction probably isn’t worth all that much.

Meanwhile, here’s the sweetener: At any time, you can withdraw your original Roth contributions without triggering taxes and penalties. Let’s say you stash $5,000 in a Roth every year for four years. You could pull out your $20,000 in contributions and, provided you didn’t touch the account’s investment earnings, there shouldn’t be any taxes owed.

That means your Roth could double as your emergency reserve, your house down payment money, your car purchase fund or be used for any other purpose. (There is another provision that allows first-time homebuyers to make tax-free Roth withdrawals. To take advantage of this, the Roth has to be open five years and the amount is limited to $10,000.)

Ideally, you would leave your Roth to grow untouched until retirement. That way, you’ll get the most out of the tax-free growth. But if you
need it, the Roth offers wonderful financial flexibility. To learn more, head to

I’ve written about Roth IRAs and 401(k)s in The World’s Easiest Guide to Retirement Accounts.

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  1. What’s step #3? Have the emergency reserve?

    I know exactly what I spend (track it monthly), spend less than I make, , have no debt, save ~40-50% of my paycheck, max out my Roth and 401k, have 2 years of Emergency cash assuming my spending is the same, etc.

    I guess I should start optimizing my ROI? That’s where I’m stuck. What next? I feel like I’m in a financial standstill. I’m doing the right things, it seems, but how can I do more?

  2. I am kind of surprised that he didn’t suggest creating an emergency fund as your second option. With a Roth IRA you can’t take the money out without big deductions until you reach retirement. A lot of younger people with new jobs usually have big expenses to start (i.e. ring, house or rent payments, car payments, etc.). It’s kind of hard to argue, especially with his background.

  3. Tom, you can actually withdraw the principal (the amount you contributed) at any time — even before retirement — tax-free and penalty-free.

  4. If you withdraw money from your Roth IRA as an emergency fund can you put the same amount back in at a later time? My understanding is that you can only put in 5k per any year. Say you withdraw 15k for an emergency but can only put back in 5k a year, aren’t you effectively sabotaging this retirement fund?

  5. I miss Johnathan Clements

  6. Really. I have had a Roth since I was 16 (now 26). My wife and I are facing some big expenses (like Tom said, rings, wedding, and down payment). Ramit, you might have to say it again. You withdraw the principal at anytime — tax-free and penalty-free?

    I heard of $10,000 for a home but, never heard of anything else.

  7. Hey Daniel, have you searched online for something like “Roth IRA withdrawal”? I say this because everyone should be getting multiple sources of information (not just iwillteachyoutoberich), and not knowing isn’t a good enough reason to not do something with your money — it’s just one search away!

  8. Any thoughts on the new MyFi program? I’m skeptical, but with Clements there, I’d be willing to give it a look.

  9. Using a Roth as a replacement seems for an emergency fund seems like a great long-term idea, but I’m not so sure if it would work as well in a short-term window. For example, my investment of $20K over 4 years may be significantly lower if the market happens to suffer during that time period. Of course, having a longer period of time to ride out the ups and downs would be best, but it’d be a tough pill to swallow if my house deposit savings were less than what I initially put in the Roth. Just my two cents though.

  10. Honestly….i dont know if im messing up my future…but i say screw 401K. im doing it the traditional way of saving after tax money. im 32 and so far my net worth is a little more than $500K. 2 cars both paid off. house paid off.

    401K : zero