IRAs – EVERYONE should have one

So what exactly is an IRA? Contrary to popular opinion it doesn’t stand for Individual Retirement Account but Individual Retirement Arrangement as defined by the IRS.

I don’t particularly care why they call it an arrangement and not an account. What’s important is they (IRA) allow us to save for retirement – and THAT IS IMPORTANT. I don’t want to be scrimping by in my retirement years if I can help it – and I can.

If you have income then you can have an IRA. And with it being 2019, you can save $6,000 in it, traditional or Roth. Now what does that mean?

Let’s get into basics for a moment. There are two different types of IRAs: Traditional and Roth.

Traditional IRA

A traditional IRA allows a person to save $6,000 a year for retirement without paying taxes now. Essentially, you put your money into the IRA pre tax and you pay taxes later (at ordinary income tax rate, not capital gains which is lower). If you made $60,000 this year and put in the max ($6,000) in the traditional IRA the IRS treats you as if you made only $54,000. You pay less taxes AND you are saving for retirement. Excellent win.

Another defining feature of the traditional IRA is that there are no income limits to have and contribute to one although there is a limit when considering tax deductible contributions (which I won’t go into here).

Roth IRA

A Roth IRA allows a person to save $6,000 a year for retirement but you pay taxes on that money upfront. If you make $60,000 a year and contribute $6,000 to a Roth IRA you are treated by the IRS as if you earned $60,000. The benefit then is when you withdraw that money it is TAX FREE since you have already paid taxes on it.

While there are income limits determining whether you can have and contribute to a Roth IRA ($137,000 single and $203,000 married filing jointly – 2019) there are no Regular Minimum Distributions (RMD) at 70 1/2 like with a traditional IRA. (RMD is when you are required to take some of your money out of the account, I.e. “distribution,” whether you need it or not. Uncle Sam wants his cut, after all; sometimes that pocket robbery really hurts.)

Which one should you choose?

Ah, the real question posed; scores of advisors have wrestled with this one. Traditional wisdom says it depends on your tax rate now vs. when you retire. If your taxes are going to be higher now then use a Traditional IRA to defer taxes until you retire when your taxes are lower (because you are making less than in retirement), thereby lowering the amount of taxes you pay overall. Conversely, if you expect to have a higher income in retirement than during your working years then utilizing a Roth IRA will allow you to pay taxes up front when taxes are estimated to be lower.

In the above scenarios, it is all about taxes. Uncle Sam wants his pound of flesh and your job is to pay as little taxes as possible and save as much as you can. Thankfully, the IRS has some rules in place which allow you to make choices and save for retirement. Hallelujah!

When’s selecting which IRA to choose, however, I do not believe taxes should be the only reason you factor in. Simplicity, too, should weigh heavily in the process. Comfort level should also play a role here also. Allow me to explain:

If you have a steady job, 40 +, then it is much easier to select a traditional IRA, set it on auto pilot if you will, and keep marching on. Simply put, it’s much easier to set it and forget it when your job is steady and predictable. But what if you work in an industry that happens to be volatile? One where you basically work yourself out of a job from the first day you’re on it? (Because the job is done, it has been built, and it’s time to move on). One where inclimate weather makes you miss time (read: money)? Perhaps you travel for work and there are periods of instability and work is scarcer than normal?

This is the reality for millions of skilled trade workers. Their workweek can and often fluctuates (lack of hours and overtime), rain days cause them to miss work/pay, and they essentially work themselves right out of a job. If you are not one then you have NO idea what it’s like nor can you fully grasp the differences which exist. Conventional retirement wisdom/planning as often touted doesn’t work and must be shaped accordingly.

I recommend a Roth IRA for anyone who resonates with the above. It’s far simpler and easier to manage. You work some overtime? Toss money into your Roth IRA. Working in a higher wage rate area? Throw some coin to your Roth IRA.

Sure, you should cut expenses, live below – and not within – your means, and know where your money goes and what you spend but c’mon; I know how it is. The website isn’t called the wealthy ironworker for nothing. That’s precisely why I recommend the Roth IRA. (tax discussion not included)

Everyone should have an IRA

IRAs are, in my opinion, the most basic of retirement vehicles. Anyone with an income can have one and SHOULD. Why?

Simple. Because you can. If you have a generous employer who has an amazing 401k (because of their match, investment options, and fees), an IRA is yet another vehicle for you to save for retirement. Maybe you happen to have a pension (those in the building trades who are union have) but an IRA is yet another vehicle for you to save for retirement. Have a 403b from a non profit? You should have an IRA because you can and it’s another vehicle for retirement. Perhaps you work for a crappy employer, have no conventional options for retirement, and don’t know what to do. Open an IRA! In your case, it is your only vehicle for retirement but it is certainly better than nothing. If you are a member of the building trades, a skilled tradesmen, who has a multi employer pension and an annuity fund but is conscientious about retirement savings: you should open an IRA also. Can you have enough retirement savings? I think not my friend.

Having a IRA is the most basic building block of retirement. There are other vehicles but the IRA is the one by far most common – and because it is so easy to qualify for an IRA (do you have income? Then yes, you qualify) it should be the most abundant. And maybe it is but it isn’t as prevalent as it could/should be nor are the funds reflective of that.

I believe it isn’t taught. We are losing a lot of skills and personal finance is one of them. People are growing up with no sense of money/finance and are paying the price in retirement. Don’t believe me? Roughly 45% of American households have NO RETIREMENT SAVINGS AT ALL. 

I for one do not want to be one of the 45% who have NOTHING saved up; I know plenty already. Unfortunately they live limited lives in their retirement years. I have seen it firsthand; it isn’t glamourous nor anything to write home about. It’s penny pinching and going without for the bare necessities, scraping by on nothing but meager social security which keeps them from being absolutely destitute.

What I have

I personally chose a Roth IRA (one for me and one for my wife) to contribute to after much deliberation. Even now I waver periodically as to why I decided on a Roth and wonder if I shouldn’t change. I realize many argue the various points of traditional vs. Roth but for me the decision was initially a simplistic one: what could I contribute to via after tax dollars? You see, I had some money coming available and when I contribute after tax money it was still available to me – right up to the point of saving. Although I waver periodically between traditional and Roth I believe just about everyone in the trades should open a Roth IRA for one simple reason: it’s easier to invest in. Work any overtime this week? put some in your Roth IRA.

I use a robo investment called betterment. It was setup in the office of a financial advisor but can be done in the leisure of your own home and is simple to use.

In the end, tax treatment matters but overall having something saved for retirement is absolutely paramount. Go against the grain, live differently, be diligent about saving and investing, educate yourself, and plan for retirement – don’t just let it happen to you. If you have an IRA then good, max it out on a yearly basis. If not, don’t be one of the 45% who have NOTHING saved for retirement; go now and open one and begin to feverishly save. It is NEVER too late so long as you are alive.

Here’s to a comfortable retirement.

-The wealthy ironworker

*I have more to write about this subject but for now this will suffice. I plan on delving into more details and different angles as those times become available*