I will be the first to admit that I was never a fan of Roth IRAs or traditional IRAs, for that matter. I never understood why you would spend all these years building something up, only to dismantle it during retirement. I do have a Roth IRA, but I have been investing into it sparingly.
But everything changed while I was reading the book “Smart Couples Finish Rich.” With a couple of sentences, my whole investing outlook towards Roth IRAs changed. But before I get into that, let’s do a quick review of what Roth IRAs are.
A Roth IRA is an after-tax savings account. This statement means you will get paid from an earned income job, pay taxes, and fund your Roth IRA after that. There are some limitations on Roth IRAs that you will need to be aware of.
Is Saving Money Bad?
Information on Roth IRAs. First, there is an annual cap to how much you can invest per year—each year is different. For 2021, the cap is $6,000/ year if you are under 50 years old. $7,000 if you are older than 50 years old.
Second, you can only invest if you have earned income for the year. And you have to make more earned income than you invest. For example, if I work a job that pays me $3,000 for the year, I have a $3,000 limit for the Roth IRA. This is important for people like me who plan to retire on dividends.
Lastly, your money needs to stay in your account until age 59.5 before you begin withdrawing. The money you invested can be withdrawn at any time; however, your earnings face severe taxes and penalties if drawn before 59.5 and under five years of owning the account. So if I invested $1,000 and earned $500 over a timespan, the $1,000 is a free game. I need to wait until age 59.5 to withdraw the $500 in earnings and face a 10% penalty, plus capital gains taxes. Read more about Roth IRAs here. Please get to understand the rules before you jump in.
Where does the magic come in? “Josh, this sounds boring and not magical at all! I want to see the magic!” Okay, okay, here comes the magic. With traditional IRAs (pre-tax investment vehicles), there is something called required minimum distributions or RMDs.
RMDs basically tell you that you have to start withdrawing money at some point, roughly age 72. So after years of building up your pre-tax traditional IRA or 401K, you will have to sell off your investments and pay taxes on the whole piece of the pie. Each year in retirement, my RMDs would become larger and larger until I would be withdrawing vast sums of money until my death. Whatever is remaining is left to my children, who also have to continue to dismantle the account.
Dividends vs. Royalties Part I
This rule never made sense because I will have a sizeable military pension that my wife and I will use to fund our retirement. Why would I build up a $1 million account, only to watch it get withdrawn, taxed, and the balance forced to zero?
For the last couple of years, I believed that the Roth IRA also had RMDs. I was under the impression that you also had to dismantle your Roth IRA starting at roughly age 72. However, Roth IRAs have no RMDs! I repeat, Roth IRAs have no RMDS!
How is this magical? That means that you can build up a considerable post-tax Roth IRA and retrieve all of your dividends tax-free after age 59.5. Let’s take a quick dive into my new Roth IRA strategy.
Cash Flow 102: Creating Passive Income for Retirement
My new Roth IRA strategy. My goal is to build an extensive portfolio of growth stocks in a Roth IRA by maxing out each year’s contributions. I will mainly use the Total Stock Market ETF (VTI) for my growth vehicles, which is my favorite “growth” stock. Then I will add in some S&P 500 (SPY), Dow Jones Industrial Index (DIA), and Nasdaq (QQQ).
There is no reason to invest in dividend-paying stocks at this point. Remember, I will need to have earned income. I plan to never work for a full-time job after my military service, so what’s my plan? I have a part-time job as a military science instructor. It is an online teaching gig. I can just keep this job for another 30 years, investing all my earnings into my Roth IRA.
So, running the numbers through my compound interest calculator, I will have roughly $700,000 by age 70 in my Roth IRA. This is if I start investing $6,000/year for this year and the next 30 years at an 8% return.
The magic of dividends. So I have $700,000 invested in VTI (Total Stock Market) at age 70. I can sell all of these off without any tax penalties at all. I now have $700,000 cash in my Roth IRA. I can then buy the highest-yielding investment products that I want. I can aim for a 10% return on my investments.
For example, I can put the entire $700,000 into a high-yield closed-end fund such as Pimco Dynamic Income Fund (PCI), which yields about 10%. This would net me $70,000/year or almost $6,000/month—all tax-free.
I won’t need the money, so I can literally just give it to my kids. My sons will be 45 and 41 at this point, and they will be able to access this tax-free money through me. I can keep investing in my Roth IRA as long as I have earned income from a job or my business.
$30,000/month Cash Flow Retirement
Upon my death, the Roth IRA can be left to my sons. They will have to dismantle the Roth IRA in ten years, but they still have all the money coming out tax-free. So they can live off the dividends for nine years and buy some property in year 10.
The most important part is teaching my sons how to leverage this tax-free money. Rolling everything into real estate may be able to keep everything tax-free for their lifetimes.
Happy Cash Flow Retirement
The magical conclusion. Using the Roth IRA is one of the only ways to get tax-free dividends! You all know I am about my dividends. I wouldn’t need the dividends now; I would want to invest in safe stock market index funds to grow the portfolio “worry-free.”
Once I get to a certain age, say 70, I would sell off all my safe index funds and invest in high yield dividends to get as much current income as possible. I can then use these dividends to support my family tax-free. How freakin’ amazing is that.
Now, I need to decide how I want to fund my Roth IRA. It may be best to invest $500/month. I’ll figure it out and write another article on my progress. Here is a picture of my little Roth IRA today. As I said, I never made it a priority. Now that I have an investment plan, I can start to fund it. I will also need to fund Kristina’s as well, while she is in the workforce.
What do you think of Roth IRAs? Have you been diligently investing in them, not being stubborn like me? I look forward to growing our Roth accounts over the years. Luckily, VTI pays a tiny dividend; at least, it is something to look forward to every quarter. I love my dividends! Good Luck!
The Biggest Book on Passive Income. 310 Chapters, 1,250 Pages. Everything you need to start your Passive Income Journey. Read more and download the 20-page Table of Contents. View on Amazon.
Download Passive Income Printables for Your Financial Journey (here)
Read My Books for Free: Free Kindle Books Schedule also on Kindle Unlimited Join me on the best app for Crypto- Voyager
Follow us on our Facebook Page (here). Join our Facebook group (here)
20 Books that Will Make You Rich (here) part 2 (here)
Want to Build Passive Income from Books and Affiliate Marketing? (Learn here)
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Leave a Reply