The Benefits of a Roth IRA

Roth IRAs are so good that they’re probably not going to last. I think that one of these days the federal government is going to say, “Wait a second, that’s just too good of a deal,” and they’re going to yank it, so you want to get one now and grandfather that thing in.

What is a Roth IRA?

A Roth IRA is an individual retirement account similar to a 401k or a traditional IRA. They offer a valuable future tax break. Since they are taxed when you put money into them, the income is tax-free on retirement.

Why Roth IRA Over a 401k or IRA?

Roth IRAs are fantastic because you put money into it after you have paid taxes on it. That’s what makes the Roth IRA different from a regular IRA or a 401k.

“A Roth IRA is a great, tax-efficient way to save for retirement.”

In a regular IRA or a 401k the money is going in pre-tax which is the big advantage, because you don’t have to pay taxes on that money when you put it in. When you start to take it out, you pay your taxes on it way down the road.

There are some advantages to an IRA or 401k, but the Roth IRA has advantages as well.

Advantages of a Roth IRA

Once you put your money into a Roth IRA, it never gets taxed again. This includes all of the money that grows in the Roth IRA. We like to encourage our students who are just getting going as investors and are just scrambling to make a living much less prepare for retirement to use a Roth IRA.

We’re really excited about introducing them to Roth IRAs. I want you guys to really be thinking about this. If you are young, if you are just getting going on your job and you’re not in a high tax bracket, you should use a Roth IRA.

“If you are young, if you are just getting going on your job and you’re not in a high tax bracket, you should use a Roth.”

 How much Can You Put Into a Roth IRA?

As of 2014, you can put up to 5,500 dollars a year into a Roth IRA.

Let’s say that you can only manage to put in $2,000 a year. You keep your belt tight and every month you put in $250 into your Roth IRA after taxes.

Once it’s in the Roth IRA you can start investing as a Rule #1 Investor. As that grows, there are no taxes that are going to be paid on it.

If you put in $2,000 a year, for 10 years, you have $20,000 invested in your Roth. Let’s say you’re earning 15% to 25% a year, pick a number in that area. Let’s say that you’re a good Rule #1 Investor and you can get 25% a year. What you will see is that on that $20,000 that comes in over 10 years, will turn into well over a million dollars.

Conclusion

There are some other things we can teach you to build your wealth at an even faster rate of return using some great things in the options trading world, but for right now, just understand that a Roth IRA can help you produce a wonderful retirement.

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Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.
  • beau

    AGNC has me interested. I was just introduced to this company last week. I immediately saw their high dividend and reference to their BV. However, I do not know anything about how to do a rule one analysis on this company. They clearly look to utilize their dividend as a source of income for stockholders as stated right on their home page:
    http://www.agnc.com/
    Their options don’t make too much sense to use as a basis reducing strategy.But from looking at their dividend…why would you try?
    Looking at the chart, it seems to be in a solid range.
    Would it make sense as an investor to simply purchase shares and receive hefty dividend even though I don’t have an understanding of how this industry operates.
    I will continue to look into it and see what I learn.
    Additional article,
    http://seekingalpha.com/article/2919546-american-capital-agency-unloved-but-still-outperforming

  • Mike Mac

    Will the Saudi transition go smoothly? Will neighboring countries stir some trouble and create an EVENT?

    • Jon

      Hi guys. I am a new investor that has been trying rule one methods and using the indicators with minimal gains . Mr. Market is finnicky. I have been following the blog for a while. Thank you for all the advise. I am leaning towards stockpiling (buy and hold) and selling only when the stock is reaching new highs with near top indicators. Still learning and working through it all. My best gains have been on Polaris(great company) and facebook (risky biz portfolio). I looked at Gildan also and have a Mos of about 20 making it expensive. I have Polaris at Mos of 142 making it a buy now. What do you guys think? I also have under Armour at about 50. Was very tempted when it hit 60 but decided to wait. Also have been watching Disney and ExxonMobil but they will never hit mos. How do you value these kinds of companies? Thank you.

  • Martin

    Here is a nice article on Walter Schloss that reinforces a lot of Rule 1 principles:

    http://seekingalpha.com/article/2830596-16-investing-lessons-from-a-superinvestor-the-world-forgot

    • Mike Mac

      Some great principles in that article. Thanks for sharing.

      • Erick

        yes thanks.. great article 🙂

  • Garrett

    Mike Mac,
    My Rule #1 Buddies brought to my attention that GIL was a top pick and Meryl Witmer was backing it.

    Just based on a 15% GR, I see GIL as being fairly valued. So unless I dug into it deeper, I’d have to know what’s the EVENT that is suddenly putting GIL on sale and why Mr. Market hasn’t recognized that value???

    I don’t see any FEAR on GIL. We Rulers buy in FEAR and SELL in GREED.

    We were buying GIL back when it tanked below $20.00 a share. Our mistake was not buying enough and selling way, way to early.

    GIL has phenomenal Big 5 Numbers. If you can figure out why it should be selling for a higher price, share that on the blog – I’d start my research with Seekingalpha.com

    To Your Wealth!
    Garrett

    • Ross Hodgson

      Rulers,

      Buying in fear and selling in greed is a great way to make a lot of money but not the only way to make a lot of money. GIL is currently overpriced and Mr. Market will recognize that eventually. As Mr. Buffett says it’s better to buy a wonderful company at a reasonable price than a mediocre company at a fantastic price. The reason he says this is that wonderul companies grow intrinsic value each year. They don’t have to be trading at a huge discount to make you amazing returns. The stock price, in the long run,. increases in value along with the increased value of the company – its intrinsic value. You don’t have to obsess over their discount/MOS to intrinsic value to make great returns from absolutely wonderful companies. These companies often offer above average returns at lower risk. I would suggest you look at ROST, CNI, and DLTR as wonderful companies at reasonable prices that have made shareholders excellent returns over the years through both economic downturns and economic expansions. These companies don’t go on sale by huge margins but they will continue to make you stable and handsome returns for years to come. The snowball of compouding your returns with these companies will make you very rich one day with less volatility than Mr. Market, or having to wait to make the cash register sing by waiting for a major event. Focus less on discount and more on what companies are growing their instrinsic value each year.

  • Garrett

    David Haring,

    Welcome to Phil’s Blog!

    You may want to try a 30 day free trial to Phil’s Toolbox. It’s a great place to start for newbie Rulers and very simple to digest the “Big 5” numbers.

    My primary sources for digging into a company are Phil’s Toolbox at http://www.ruleoneinvesting.com, Gurufocus.com and SeekingAlpha.com. Of course I follow all that up with the company’s website and read the 10k/quarterly earnings – also found on Seeking Alpha. Zap an email over to Michelle at support@ruleoneinvesting.com and in the subject, write “Garrett said to contact you!” and see what Michelle can do to introduce you to Phil’s toolbox.

    Please, please – before you invest in a company, take a few minutes to let the other Rulers on Phil’s blog know what company you’re considering. I’d be glad to take a look at a company with you and share my thoughts/valuation.

    On my watch list, most of the companies I like are fully valued. So there aren’t a lot of bargains out there right now. However, there is always something.

    What companies have MEANING to you that you’re digging “an inch wide and a mile deep?”

    To Your Wealth!
    Garrett

  • David Haring

    Would like to thank you for your books I probably would not have ever tried to invest had it not been for your book. I am having a hard time finding information on msn or yahoo things do not look the same as they do in the book. Is their a up dated book out that I could get? Thanks Dave.

  • Mike Mac

    I was bullish on $GIL in 2012. http://www.ruleoneinvesting.com/blog/mike-thinks-gilmead-gil-deserves-a-rule-one-eval/
    $GIL is Meryl Witmer’s pick in #Barrons Roundtable. It might be time for me to Time to do a new evaluation on $GIL. However, on its face it appear too pricey and not offering enough of a MOS.

  • Angela W

    Love to read all the comments! You guys pull your hearts out to educate and inspire us.

    After reading Guy Spier’s Education of a Value Investor, I am reading The Warren Buffett Stock Portfolio. Interesting Chapter 8 Aanlysis on Bank of NY Mellon. EPS growth rate 2.86% vs. BVPS growth rate 12%. The authors used the lower 2.86% to figure out future earnings. Sort of like what Pabrai says, be more concerned about the downside and the upside will take care of itself. So if growth turns out to be between 2.86% and 12%, that’s all upside.

  • Bradlewski

    Hey RULERS
    Roth IRA or tax-deferred IRA, which produces greater wealth?

    This is not a question of which saves more on taxes. The key to financial independence is wealth creation not tax avoidance. So, as RULERS, go with Wealth Creation and when you get to age 70 1/2, remember to say thank you for no RMDs (Required Minimum Distribution or as we say, required mass destruction)

    Cheers!!

  • Mike Mac

    Is anyone else enjoying being long oil stocks? Ouch! I still like $HP and might add to $BP at $35.

  • Garrett

    Rulers,
    “The wind blows where it wishes and you hear its sound, but you do not know where it comes from or where it goes.”

    I’ve been pondering that thought today. I think it might mean that life is full of twists and turns – I like to say that life changes in an instant – like with a phone call, a conversation, a chance meeting – sometimes good/sometimes bad.

    Life hands us a script and for many of us, it’s not the script we’d have written for ourselves. It wasn’t how we planned it out – a tragedy, a divorce, an illness, a financial loss etc…

    Regarding my own unwanted life scripts – financial loss is probably the easiest to deal with – because money is replaceable. But still – it hurts and sometimes you think about how life could be different if you just didn’t make that investment and instead done something else with that money.

    I think for a lot of us reading Phil’s books, reading this blog and trying to take responsibility for our own financial decisions life brought us here under somewhat similar circumstances.

    If you’re one of those like me who lost a bunch of money in the past or is searching, I just want to say, “Don’t give up!”

    Mr. Market is funny that way. You can sit in cash for a long time while it goes up thinking that you’ve lost the opportunity.

    Not True.

    Mr. Market will always offer other opportunities.

    Suppose you had a $100,000 and invested $25,000 in four great companies that I’d definitely consider Rule #1 companies. These are on my watch list and I’ve owned or traded them at one time or another last year. Suppose just for an example, you bought them at their 52 week low. Now, I haven’t even looked these up yet, so let’s just see what would have happened – my guess is that we’ll see that stockpiling great companies as they get cheaper is the way to maximum returns – Just like Phil said in Payback Time.

    Coke 52 week low: $36.89…. today $42.63 =’s 15.5% today
    Walmart: 52 week low: $72.27… today at $89.31=’s 23% today
    Well Fargo: 52 week low: $44.17…today $51.25 =’s 16%
    Whole Foods: 52 week low: $36.08….today $51.72 =’s 43%
    Bed Bath and Beyond: 52 week low: $54.96…today $74.48 =’s 35.5%

    Wow…that’s pretty remarkable – and I’m not even including the dividend yield or share buybacks which would add another 2 or 3 percent easily. If we owned an equal amount of shares then the average is 26.6%.

    Now I know you can’t always buy at the 52 week low, but you can certainly get close by stockpiling your way to wealth! And who wouldn’t be happy with anything close to 15% or more?

    So don’t get discouraged. Just stick with solid companies that you know will be around in 100 years. Don’t make this stuff rocket science.

    Oh…and my biggest lost opportunity ….in hindsight…. NOT making a few hundred thousand because I sold out way, way to soon on Southwest Airlines stock. I doubled my money and got out…had I just stayed with them and not looked at the price…well, I would have been able to buy a house.

    There will be other opportunities. There always are. “The wind blows where it wishes and you hear its sound, but you do not know where it comes from or where it goes.”

    To Your Wealth!
    Garrett

  • Garrett

    Markus,
    Hello there! And Welcome to Phil’s blog.

    Phil has an excellent strategy for doing low risk “gambles” using an index and vertical spreads. It’s well known among his students, but it’s too complicated to introduce on the blog. I’ve learned similar strategies too.

    Occasionally I’ll do some cash flow strategies. But for me, I really just like writing on Phil’s blog and patiently wait for a great opportunity to come along. I’ve traded, I’ve speculated, I’ve invested – I like investing. There’s very little stress in it. Boring is where wealth is made for me and my goals. My soon-to-be 75 year old dad is a great role model of this. He’s loaded up on Kimberly Clark and loving it every time his friends go to the bathroom – Kimberly Clark makes a lot of toilet paper.

    Here on the blog, we keep it to Meaning, Moat, Management and MOS…and occasionally I share some thoughts on other things that help me clear my head of all the non-sense Mr. Market is saying.

    I was just emailing back and forth with Jeff Town today. I’d suggest you get in his Rule #1, 6 month course and there you’ll learn solid Rule #1 Fundamentals to Investing and some excellent cash flow strategies. “Moncho” here on the blog is a graduate and he’s a friend of mine.

    My life lesson is do what Buffett, Pabrai, Watsa are doing – just be boring and buy a great company on sale.

    My Rule #1 Wealth Buddies share info with each other every day several times a day. When one emails the other we just keep it all in one group email. Today, one of my friends commented to our group that he should just learn the lesson to stop looking at the PRICE of his stock. He’d learned that over the years he’d have done better if he just bought it and forgot about it. Same with me…same lesson Guy Pierce in his book The Education of a Value Investor learned and the same lesson Monish Pabrai has learned.

    Now, that doesn’t mean we don’t do our homework and stay up on the biz. But it means we should forget about the price and just focus on the VALUE. We can do that by listening to our earnings reports and keeping up with our basis, share buybacks, cash flow, PE Multiples, Book Value per Share, etc…

    As long as the FUNDAMENTAL story doesn’t change, we just keep on owning our company. And the longer you’re in it, the longer you’ll have less Market Risk.

    For instance, Dad bought Exxon at $50 per share and inherited other shares from my Grandmother. Dad doesn’t give a rat’s butt what the price does because he’s lowered the cost basis through dividends over the years that he’s supplementing his and mom’s retirement with XOM dividend checks.

    That’s pretty cool. Mom and Dad have been retired now for about 10 years and guess what? They have NEVER touched their principal. They have actually had their wealth substantially INCREASE during their retirement. Dad says he won’t outlive his money anymore at 75. And Mom won’t either because all she wants to do is golf and play “pickle ball” – kind of like a cross between tennis and ping-pong on a mini-court.

    I’m really impressed with what Mom and Dad have done as retirees. If only we could all be so disciplined!

    To Your Wealth!
    Garrett

  • Garrett

    Martin,
    Howdy there. I have more to say than what I’m saying, but I’m in a hotel and their internet service is about a -1 out of 10. I keep losing the connection.

    “Early Retiree” is one of the very few investors I follow on Seeking Alpha. I’ve never met him but I enjoy reading his stuff. He can get pretty advanced, but he teaches as he goes and shows where he’s getting the information. I’ve taken some of his old analysis and then applied it on companies I was researching. He’s a Warren Buffett fan for sure.

    I remember reading that exchange between them regarding IBM’s comments. I’ve been following IBM since Buffett bought it and I’ve traded it. I haven’t bought any since the big drop. As I’ve shared with Phil, IBM isn’t really in my wheelhouse of knowledge so I won’t load up on it. But I would be comfortable doing a covered call strategy on a first tranche rather than having $16,000 in cash not doing anything.

    To Your Wealth!
    Garrett

  • Moncho

    One additional item about ROTH IRA’s is the ability for an individual to withdraw any contributions made without penalty. Just make sure any gains stay within the account. While no one would recommend withdrawing any monies until retirement, we all understand that life events happen.

    I use my ROTH IRA as an additional savings account (I already have two others for short term immediate needs) that will create tax free gains in the future. I like knowing my “savings account” is getting a much higher APR than a .5% APR regular savings account.

    Moncho

  • Markus Hell

    Hi Phil
    I enjoy to receive your emails where I can learn to invest very well.
    But could you tell me more about option. I know all about rule 1 but about option I haven’t got much knowledge. 

    I need some help about bull put spread and bear call spread (vertical spread?) And covered call/put.

    Can you give me some example?

    Do I have to sell ITM or OTM?
    Do I have to buy OTM or ITM?

    I don’t have much money and would like to make 33% every month. But first I need to understand the basis

  • Garrett

    Rulers,

    This was an interesting article from a Seeking Alpha contributor regarding his analysis of the overall market valuation:
    http://seekingalpha.com/article/2810025-the-jobs-report-was-great-but-the-market-is-down-lets-analyze-the-dow?ifp=0

    To Your Wealth!
    Garrett

    • Martin

      That was a good article. I was also reading through the article he wrote about IBM last January. I looked through some of his other articles and he has one for IBM from about a year ago. It is interesting to see the exchange between him and the other contributor Early Retiree in the comments sections. IBM is not in my circle but I think it will be a good article for me to understand in order to get better at valuations.

    • Erick Lindley

      luved the article G.. Thanks for sharing 🙂

      • Garrett

        Thanks Eric. I thought it offered at least some pretty rational explanations. I’d like to either create or get his template and maybe use it as another tool in our MOS analysis.
        To Your Wealth!
        Garrett

  • Mike Mac
  • Mike Mac

    Allan Mecham? Never heard of him. Guess I should have. I love some of his quotes.
    5.“Activity is the enemy of returns.”

    http://www.philly.com/philly/business/personal_finance/Is_this_guy_the_next_Warren_Buffett.html

  • Mike Mac

    One point of clarification. IRA’s are referred to as individual retirement “accounts” largely because the financial services industry wants everyone to think that to have an IRA you must have an “account” with them. Not true. IRAs per the IRS code really are individual retirement “arrangement.” Having an account with a Vanguard or Fidelity is one way to use the arrangement. Other arrangements are to invest IRA savings into hard assets like real estate, mineral rights, gold, etc. I’m not recommending doing this because there are complicated rules and big penalties if done wrong, but I thought I’d explain the versatility of these arrangements.
    -Mike Mac
    http://www.irs.gov/uac/Publication-590,-Individual-Retirement-Arrangements-(IRAs)

    • Keith

      Awesome, Mike Mac!