The Roth IRA — great for W-2 freelancers, 401k and i401k holders.
The ‘don’t blame me’ blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it’s educational information to get you going. Please consult your trusty professional and do your due diligence. Carry-on!
With simple set-and-forget investing, it’s easy to have around $1 million in retirement.
Investing in a Roth IRA - who is it good for?
It’s great for freelancers who get paid as W-2 employees through a payroll company—this is common in industries like film production — W-2 income can’t be used for our beloved i401k, which has a yearly limit of $77,500.
For staffers with a 401k or freelancers with an i401k, you can have a Roth IRA with it’s own separate contribution limit. Yes! You can have both! SEP-IRA holders, it’s a bit messy for you to have both; chat with your accountant.
For W-2 only people you should consider also opening a HSA. It has a $4,300 for singles and $8,550 limit for contribution limit for families. People over age 55 get an additional $1,000. Go, Gen X and the Boomers! Read the post about the HSA here. It was designed for health spending, but you can use it as an investment account.
What’s the goal here? Work less later in your career as you have a growing pot of money and enjoy chill-tirement.
The Roth IRA - Have almost $1 million by age 60.
Contribute $7,000/year ( Ages 25 - 49 ), then $8,000/year ( Ages 50 - 60 ) — growing at 7%
How did the account get to almost $1 million?
Investing $583 per month, age 25 to 49. ($7,000 per year contribution limit up to age 49.)
Investing $666 per month, age 50 to 60. ($8,000 per year contribution limit age 50+.)
The account grows at an average 7% per year using a Vanguard Mutual Fund or three ETFs. More on that below.
Why didn’t you know about this? It’s not your fault. No one educates us on investing. Not our schools, universities, unions, and often not our parents.
Why did the account jump from $442,000 to $981,000 in the last 10 years?
That’s the magic of compound interest. Not only does the amount grow because of your contributions, but the 7% annual growth from the investments is applied to the account again and again. It becomes like a snowball rolling downhill, getting bigger and bigger over your working life.
Example time:
7% growth of $7,000 is $490. Yes, boring. But,
7% growth of $700,000 is $49,000. See how that 7% later on becomes a monster earner?
Try the compound interest calculator at the bottom of the page; play around with it. It’s kind of shocking how compound interest works. Our brains work in a very linear way; we don’t get it until we see compound interest in action.
Compound interest, watch that sucker grow!
What exactly is a Roth IRA (Individual Retirement Arrangement)?
A Roth IRA is a tax-advantaged retirement savings account that allows you to invest and grow your money until you retire.
Contributions are made with after-tax dollars (they are not tax deductions).
Your investments grow tax-free.
Withdrawals during retirement are tax-free, unlike a traditional pre-tax 401k or i401k, where you pay income tax on the withdrawals.
How much can you contribute in 2025? (The IRS raises the limits some years.)
Up to age 49: $7,000
Age 50+: $8,000
Who qualifies for a Roth IRA?
Single filers earning less than $150,000
Married, filing jointly, surviving spouses less than $236,000
Married filing separately (if you lived with your spouse at any point during the year) less than $10,000
What if you earn too much? The Backdoor Roth IRA
If you earn more than the limits above, the Backdoor Roth IRA is the way. I know it sounds dodgy, but it is legal. How?
Open an IRA and a Roth IRA with Vanguard (Schwab, Fidelity, E*Trade all have IRA’s, but Vanguard’s funds are awesome and simple.)
Deposit $7,000/$8,000 into the IRA from your personal bank account as the money used is after-tax, not your biz account. Wait a few days for the money to clear into the account.
Call Vanguard (or do it online) and have them transfer the full amount into the Roth IRA. (I do this every year.)
The Back Door Roth instructions are on the Vanguard site here.
You must file for IRS Form 8606 so the IRS knows the money was not deductible. Turbotax or your account will do this. Just make sure to tell them about the Backdoor Roth IRA.
WARNING: You cannot have an existing IRA with funds in it. If you do, the conversion from Traditional IRA to Roth IRA becomes a mess, and you’ll get taxed because of the ‘pro-rata rule.’ This is very much a ‘chat with the accountant’ moment.
Can you have an active 401k (staffers) or an i401k (Solo 401k) and a Roth IRA?
YES! You can have both, and they have separate contribution limits. How sweet is that?
What investments go inside a Roth IRA?
One of the simplest ways is a Vanguard Target Date Fund. You pick the approximate year you want to retire and buy that fund, then keep buying it until you retire. Want to retire in 2060? Pick the Target Retirement 2060. Vanguard then invests the money in low-fee index mutual funds that invest in U.S. and international index funds, plus bonds. They change the mix for you as you age.
Vanguard is amazing, one of the few big firms looking out for small investors. What are the fee’s? They charge 0.08%, that’s it. Example: $100,000 invested would cost $80 in fees per year.
Want to get more involved? You could use a Three-Fund Portfolio of ETFs. Read about it here in The Knowledge Post.
Inside a Roth IRA, you can buy stocks like Apple, Ford, etc, but I don’t recommend it. Read about why here.
That’s it; just keep putting in the maximum allowed contribution every year and watch it grow.
The stock market will drop sometimes, and so will your Roth IRA balance.
Yes, it will be uncomfortable sometimes to watch your balance drop, but it’s ok. The U.S. stock market goes up 2/3 of the time and down 1/3. Keep investing, even in the middle of a stock market crash when everyone is panicking. Why? The funds are on sale; the price has dropped. They will recover.
DO NOT sell when others are freaking out. The arrows in the graph below are the big crashes in 2008-09 and 2020. See how small they are looking at them over a twenty-four-year period? At the time, a crash is totally pukey. Long-term, no biggie.
Read The Knowledge article here about what the stock market really is. Don’t listen to the daily noise on CNBC or the colleague at the water cooler.
Market crashes 2000-2024. Keep Calm and invest.
When can you begin to withdraw from the Roth IRA?
At age 59 1/2, you can withdraw from the IRA and switch from saving to spending mode in retirement, or chill-tirement, as I like to think of it. Work less, play more.
There are penalties if you withdraw early. It should be your last resort, chat with your accountant.
How much do you need in retirement? Here is a quick post on the ‘4% Rule’. I recommend talking to a Certified Financial Planner if you are three to five years away from retirement. They charge a one-off fee for a plan. Personally, I am going to avoid advisors that charge a yearly percentage of your investments.
NEXT STEPS — Don’t delay, it’s TIME invested that matters the most.
Chat with your accountant if you have one. Do your due diligence and read up on this; it won’t take long.
Visit the Vanguard Roth IRA page here and get going. Call them and chat. The staff is very helpful. However, they cannot give tax advice. Schwab, E*Trade, Fidelity, etc, also have IRAs.
Setting up the IRA is super easy. Don’t stop contributing, no matter what the stock market does.
Remember to read about the HSA. If you qualify, you can contribute another $4,150 per year to that account, receive a tax deduction, and use the same investment strategy.
I do not make anything when you open these accounts. Shoot me an email if you open an account so I know this article is working! We will get rich slow.
Ye olde wise saying:
“The best time to plant a tree was twenty years ago. The next best time is today.”
Play around with the compound interest calculator. What happens when you change the amounts or the term (the amount of time the money is invested for.) TIME is what matters.