Zaphod for President

I’ve written myself a master plan, and the time has come to execute it. My debts are being repaid on schedule, my emergency fund is growing, and I’m even finding some extra time and cash to work on my dump of a house.

The time has come to create a Roth IRA, and begin investing for the long-term.

Before we continue, please allow me to remind you that I am not a professional, and no part of this post should be considered specific advice from me to you. I am simply sharing my own journey so that you might avoid some of the mistakes I am about to make.

Before we discuss why I like the Roth IRA, let me explain a bit about my income situation. I am a freelance PHP programmer. I bill clients via an LLC which I was able to register for about $50. I expect to earn about $35,000 this year. By choosing to work for myself, I am forfeiting a comparable salary of about $45,000 for a “real job” doing the same thing. Am I insane?

At a W-2 job earning $45,000 per year, I would expect to pay $4,220 plus $3,587.50 to Uncle Sam, and net $37,192.50 for myself. As an LLC I can take $35,000 of taxable income, reduce it with company expenses, including a portion of the mortgage, electric and water bills (home office), car expenses, and so on, and pay far less in taxes, all while obeying the letter of the law and allocating funds to bills that I have to pay anyway.

Will I keep all $35,000? No way. However, once you factor in the cost of a second car, plus insurance, plus maitenance, plus gas (commutes suck), there is no real economic advantage to getting a real job. Finances aside, I don’t want a real job anyway; I want to sit here by the pool and blog at 3-in-the-morning.

I begrudgingly pay every cent in taxes that I am legally required to (under threat of fines and prison) but I will be damned if I am going to give this Government a penny more than I must. In my opinion, the Federal Government is out of control, and by giving it more money to squander I am serving as an enabler; contributing to an ever-greater problem.

This brings us back to the Roth IRA. What is a Roth IRA? It is a specific form of retirement account, like a 401k. The difference? When you contribute to a 401k, you are investing pre-tax dollars. This means that when you are old and feeble, and need to start using your money, Uncle Sam will still be pestering you for his cut. With a Roth IRA you are investing post-tax dollars. In other words, you pay Uncle Sam now, and then enjoy tax-free gains for the rest of your life.

Let’s pretend something terrible were to happen a few years from now. Let’s pretend my emergency fund was wiped out. Here we see another advantage of the Roth IRA: I am allowed to withdrawl all of my cash contributions (i.e. any cash I put in, not gains) without penalty.

Let’s pretend I didn’t own a home yet. Would it still make sense to start a Roth IRA? Yes. Another advantage: I am allowed to withdrawl up to $10,000 (including gains) to buy a primary residence.

More advantages: with other retirement vehicles, at a certain age, I am legally required to start spending my money. With a Roth IRA, I am allowed to leave it alone, to let it continue growing for the rest of my life. If I wanted to, I could leave it to my children, and never spend a cent of it.

Is the Roth IRA right for you? This IRA calculator can help you find out.

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