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Guest post: Read this before you file your income taxes!

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[Update: Roth IRA amounts corrected below.]

[From Ramit: Since tax season is here, I wanted to write something about the tax issues we face. But since I’m not an expert, I’ve typically turned to guest posters to help. Last year, David Bergstein answered your tax questions.

This year, I’ve invited Todd Doerr to guest-post for the next three days. Over the next 3 days, he’ll write about taxes for three situations: people in their twenties, college students (I know you’re lazy so you can just point your parents to the article to do all the work), and recently married couples. And on Friday, after the three posts, I’ll announce something pretty cool.

I like this post below because Todd points out that if you’re already saving, why not take a small extra step to dramatically increase your returns?]

* * *
Guest post by Todd Doerr

Stop. Turn off your ipod. Turn off your phone.

This one post will help you win with money – guaranteed – if you take ACTION. If you are in your 20’s or 30’s, this is going to rock your world.

I coach many individuals and families in my financial coaching practice – they pay me to help them quickly get out of debt and build wealth. Hopefully you are already saving some each month towards retirement. Why not spend an hour to setup a simple, automatic wealth building plan that will double your return?

I’m amazed that only 31% of Generation Y workers (born 1978 or later) are saving for retirement in their 401k, according to Hewitt Associates. You can be light years ahead of your friends if you follow the coaching advice that follows. It will only take an hour of your time – your friends will be amazed!

Let’s dive in – stay with me!

Let me go ahead and spell out the entire purpose of this post:

The Roth IRA is one of your most important wealth building tools. Maybe even the most important. If you consistently invest in your Roth IRA during your working years, you will build substantial wealth.

OK. Maybe it was a little heavy, but I want to get your focused attention for a few minutes. Let’s cover the basics first.

The Nuts and Bolts of the Roth IRA

Here are some of the common questions that I get about the Roth IRA:

Q: Why should I care about a Roth IRA?

A: The short answer: You don’t want to work the rest of your life. Using a Roth IRA consistently, in addition to your 401k, will make you very rich and will change your life. I would argue that if you save aggressively in a Roth IRA, you will open up new options and freedoms in life that you cannot fathom today.

Q: What is a Roth IRA?

A: A Roth IRA is simply a retirement savings account offering amazing “back-end” tax breaks when you take money out at retirement age (59½ years and older). The Roth is a “bucket” – you fill that bucket with good conservative mutual funds (I don’t recommend individual stocks).

Q: How hard is it to setup?

A: 1 Hour – I’m dead serious. I’ll cover the specifics later in this article.

Q: What are some specific benefits?

A: You can withdraw funds without taxes or penalties once you’ve reached age 59½ and held the funds in the Roth for five tax years after the year you make your first contribution. Here’s an example. Let’s say that you worked your buns off for 30 years and had $1 Million dollars in your Roth. When you retire at age 59½ years (or older), you can take out the $1 Million TAX-FREE. It also grows TAX-FREE each year during your career. Don’t think you can save $1 Million? Keep reading on.

Q: What are the limits on a Roth IRA?

A: You can contribute $5000 annually to a Roth ($10,000 for married couples), whether you participate in an employer plan (like 401k) or not, if your AGI (line 37 on Form 1040) is less than $116,000 (joint filers, $169,000).

Q: Anything else I should know about it?

A: You can withdraw your contributions penalty-free should you need them for an emergency. You can contribute at any age as long as you have earned income. There are some

A Sweet Retirement

OK. Onto the cool stuff. Go ahead – take a peek. Wow.

The tables below show what you could have in your Roth IRA if you invested monthly or annually during your career. These numbers assume you invested in a diversified, conservative set of mutual funds that could average 11% annually (stock market has averaged over 11% for over many decades).

You must really like that $400 car payment! Or, maybe the gym membership isn’t looking so fiscally fit anymore. And for sure, the minimum payment to Visa could be put to better use! Maybe the $200 per month for eating out is not so appetizing.

Here are some specific and exciting ways to boost your savings plan.

  • $100 – $200 – $300 – $400 per month of savings: Go through your budget and find the “luxury” items – you will be amazed when you cut a little here and there. These things add up. My favorites include: driving a used car and dropping the fat car payment, drop the premium cable channels, cut back on the cell phone plan or drop your land line at home, selling the cat (just kidding!), bring your lunch to work except 1 day per week, drop the gym membership, take basic vitamins instead of $100 per month, only buy clothes that are mega-bargains, cancel subscriptions that you don’t really have time to read – the list goes on. You won’t miss these and will truly enjoy knowing you have a plan to win with your money. Get yourself motivated and start making changes now!
  • $200+ per month of savings: Work a part-time job to speed up your progress. Ask your employer for overtime opportunities. Provide a tutoring service. Deliver pizzas (you can make $750/mo doing that). Mow yards or provide handyman services. Start a pet sitting business. Get creative. Get your real estate license. Write software on the side. Don’t analyze this too much – just go for it. If you don’t like your first part-time job – just find another one. This is not a FOREVER job.

Anyone in America with a decent income can win! The key is to start TODAY and not hesitate. Set your goal and don’t stop until you reach it – $100 – $200 – $300 – $400!

Annual amount – Assuming 11% return

Yearly Contribution

30 years of saving

40 years of saving
















Monthly Investing Results – Assuming 11% return

Monthly Contribution

30 years of saving

40 years of saving














Simple Way

To Get Started in less than 1 hour

STEP ONE: Don’t file your taxes yet. The good news: You can still make a “2007” contribution if you open a Roth IRA before you file your income tax return.

STEP TWO: Open an account TODAY. The sooner you start, the sooner you start the magic of compound interest.

  • Find $5000 $4000 (the new 2008 limit is $5000) for your “2007” contribution. If you don’t have $5000$4000 right now, just put in whatever you free money that you have. $500 – $1000 – it doesn’t matter. You must get started!
  • Autopilot for 2008. Setup an auto-draft from your checking account each month and have the money invested automatically. It’s too easy to get distracted during the year to write a check each month – set it up once and let it run. Your target amount should be $416 per month ($5000 divided by 12 months). If you have to start small, that’s OK. As you can see, even $100/mo is HUGE at retirement. And don’t forget the next time you get a raise, bump up your monthly investment by even more.
  • Open an account at a low-expense, customer friendly mutual fund company. Simply tell them “I would like to open up a new Roth IRA and make a contribution for 2007. I would also like to setup an automatic investment plan each month for 2008 and beyond.” I highly recommend T. Rowe Price and Vanguard as a great place to open a Roth IRA.
    • T Rowe Price. You can start with as little as $50 per month on most mutual funds. Contact them at or 1-800-638-5660.
    • Vanguard – They have higher minimums amounts to start, but offers lower annual expenses than most companies. Contact them at or 1-877-662-7447.
  • Choose a conservative “growth and income” mutual fund or balanced fund to get started. These should be funds you plan to hold for a lifetime. You can diversify later into different flavors and styles of mutual funds. For right now, these will work fine.
  • Leave it alone! If you look at the long history of the stock market, 97% of any 5 year timeframe had a positive return. Don’t try to get fancy, time the market, buy individual stocks – stick with the basics. You want your foundation to be strong – don’t tinker with it. Invest and leave it alone.

Retirement Savings Goals

In case you are wondering how much you should save each year for retirement, your overall savings goal should be about 15% of your gross income (most of my clients are in the 10% – 20%), in the following order:

  • Fund your employer 401k plan up to your maximum employer’s match.
  • Max out your Roth next up to $5000 (or start with a Roth if no company match).
  • Finish out the 15% by investing more in your 401k.

Friends, Laziness, and Boosting Returns

OK. You now have a vision for building significant wealth.

But what about your friends? Many of your friends probably don’t get it. Why? Because they haven’t seen that significant wealth is possible for the “average” person with an “average salary”. Share this article with them. I’ve found that it helps to have like-minded friends shooting for a hopeful future.

If you are feeling lazy – you better wake up! I have made it abundantly clear that 1 hour of your time will rock your world. You don’t have to do heavy analysis each month – set up this plan on autopilot and let it run. If you are so lazy that you can’t spend 1 hour on this, then, whew, life is not going to be easy in your later years.

If you are already saving some, you can turbo charge your results by using low-cost mutual funds that I recommend in this article. Using mutual funds that cost 1% less per year than the average mutual fund could boost your total nest egg by nearly 25% over a 30 year time span. Instead of $1,000,000, you could end up with another $250,000 for a total of $1,250,000.

Final Thoughts – Keep it Simple and Automatic

It’s amazing, but you can actually thrive and build wealth with a simple, “boring” diversified portfolio in your retirement accounts. The Roth IRA should be a serious part of most wealth building plans. Open your account today.

Be sure to join us tomorrow. I will be sharing some specific ways to find $1000 Dollars for college expenses.



Todd Doerr is personal finance coach. He helps his clients to rapidly get out of debt and to build serious wealth. He tells his clients, “It’s not always easy or pretty, but it always works.” You may reach him at or at

1. See the two other articles Todd wrote:

2. Then check out his eBook, The 2008 Tax Makeover Guide


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  1. Speaking of taxes, and the retirement contribution, take a look at the Saver’s Tax Credit:

  2. I have a question for Todd. How can one open a Roth IRA account *TODAY* if we don’t have a ton of cash laying around?

    I read the post and it sounded as if I could get started with roughly $50 at T. Rowe Price. However in going through the motions to get it setup on their site it sounds as if I need at least $1,000 to even open a Roth IRA with them.

    Am I missing something? How can one “open an account today” for less..? This has been a major hold up in me getting a Roth open–I know I want one. Hell I’ve wanted to open one for years once I learned the benefits but I never was able to amass the $3,000, or even $1,000 needed to get started.

    I guess that’s part of the problem, a lack of ability to save, but if there was an option to “open the door” for $50 and keep pinging at it with $100 a week that’d be a much kinder solution to getting me on the track of Roth IRA goodness…

  3. I thought I read somewhere that the max for Roth IRA investing in 2007 was $4,000. Was that incorrect?

  4. That’s what I get for not reading the fine print. I do believe I’ve found the $50 option.

    From T. Rowe’s site:
    The Automatic Asset Builder (AAB) service enables you to systematically invest money from your bank account on the same day each month. For example, you may invest a minimum of $50 into a fund account each month from your bank account.

    The minimum initial investment requirement to open an account is WAIVED if you choose to fund the account by Electronic Funds Transfer (EFT) with Automatic Asset Builder (AAB) service.

  5. Great advice, but why go overboard with the promises? “Assuming an 11% return” is pretty absurd. Why not pick a more reasonable number that has a higher chance of being correct? Also, did I read it correctly that this article is suggesting NOT paying off your credit cards??? “And for sure, the minimum payment to Visa could be put to better use! “

  6. What sensationalism. Yes, the 2007 limit is $4000. Always pay down your credit cards first. 11% is ridiculous over 30 or 40 years. Try something closer for 7% for honesty. Yes, I’ve maxed my ROTH for 2007 and you have until April 15th to do so. The 2008 limit is $5000. … I would have expected better ‘facts’ from an ‘expert’.

  7. “Q: Anything else I should know about it?

    A: You can withdraw your contributions penalty-free should you need them for an emergency. You can contribute at any age as long as you have earned income. There are some ”

    There are some—-what? He stopped midsentence here.

    Does he mean there are some limitations? if so, what?

    Proof read!!

  8. @Jared: I agree… 11% is overly optimistic. 9% is *more* realistic but even then, that’s “keeping fingers crossed” type stuff. The figures in that table are very misleading, in regards to telling people what they should expect.

    In reality, if I save for 30 years (I’m 31 now) @ $4k a year with a 9% return, I’m only looking at ~$600k. Even at 11%, it only climbs to ~$895k.

    Don’t get me wrong… the IRA is a wonderful savings tool and EVERYONE should invest in one, but let’s be realistic with our numbers when giving advise please.

    As always, do your homework and research before choosing your savings tools.

  9. Ok Guys – Sorry about the typo:

    2007 Roth contribution limit is $4000.
    2008 Roth contribution limit is $5000.

    Let me clear up the bad info on T Rowe Price:

    I just called T Rowe Price to triple check – $50 is the minimum to get started in a Roth.

  10. Actually, the retirement option to consider when doing your taxes is NOT the Roth since it has no bearing (when you are on the younger, still contributing side) on your taxes. Run your numbers for your taxes, then figure out how much you can contribute to a traditional IRA for the previous tax year, this is an “above the line deduction” and will decrease the amount you owe or even give you a refund…which you then should contribute to your Roth IRA with. The IRS actually gives you a break for saving for your retirement with this deduction, not the Roth.