The Personal Finance Podcast - Should You Save for A House or Contribute to an IRA?!

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Starting point is 00:01:12 And today on the personal finance podcast, we are doing the first episode of Money Q and A. If you want to send over your questions to me, the answer on Money Q&A, hit me up on Instagram at Master Money Co or Spotify at Master Money Co. And today, we have three awesome questions. The first question we're going to be answering is about what you should do if your company doesn't offer a 401k match. The next question is about the five-year rule and when you can withdraw your contributions from a Roth IRA. And the third one is, what should you do if you're trying to save for a house and you also want to be saving in an IRA? Which one should you prioritize?

Starting point is 00:01:58 So stay tuned because we have an awesome. episode for you guys today. So without further ado, let's get into it. All right, so here is the first question. What if my employer does not do a 401k match, should I still invest? So if you've never heard our episode, The Stairway to Wealth, one of the biggest things we talk about in the Stairway to Wealth is the order to put your money. And we're also going to be coming out with an investing checklist with our new course Index Fund Pro that is going to have the order to put your money for investments as well. Now, the stairway to wealth is a free printable. I'll link it up below so you can check that out. But the stairway to wealth tells you the exact order to put your money. So the order we

Starting point is 00:02:36 recommend once you start to get to the investing levels is the 401k match, then the Roth IRA or HSA, then back to the 401K. Now, that's the first three levels of investing that we talk about there. Now, the 401k match is because the 401k match is free money. But within this question, she does not have a 401k match. So what do you do? Well, anytime you're looking at the stairway to wealth and you don't have an option available to you. What you do is you just jump to the next step. So jumping in the next step means that she would jump to the Roth IRA or if she has a Roth 401K, that's even better.

Starting point is 00:03:09 Or the HSA, which you need a high deductible health plan to qualify for an HSA. Now, we like these before the 401K for a number of reasons. First of which is with a Roth IRA, money goes in and it's taxed. Then the money grows tax free and you can pull the money out tax free. Now the beautiful thing about this is the gross. of your money within a Roth IRA is the majority. So if you invest $500 a month into a Roth and get an 8% rate of return over the course of 35 years, at the end of that 35 years, you'd have a million bucks.

Starting point is 00:03:42 But within that million dollars, $875,000 is going to be tax-free money because that's the growth of your money. And the remainder of their money, $200,000 in change, I don't do public math, is the amount of money that you actually contributed. So this is something that understanding that the growth of your money is going to be the majority, especially if you have a long time horizon, is why I love the Roth IRA so much. Now, the other option that we talk about is the HSA, which is short for health savings account. You're going to be saying to yourself, well, how is a health savings account something that's great for retirement? The HSA is a way for you to actually get money by contributing money tax-free.

Starting point is 00:04:23 The money grows tax-free, and you can pull the money out tax-free. So the amazing thing about the HSA is it's actually a super retirement account because it has the triple tax benefits. Money goes in tax free. It grows tax free and you can pull the money out tax free. So you can invest these dollars into a health savings account. Now when you pull the money out, you have to have a qualified medical expense. Now there's a long list of these that the IRS has. It's things from even if you have mouth sore mouthwash, you can get an HSA right off on that. And the cool thing about the HSA is there's no time limit to when your transaction was made for a qualified medical expense. So you can have a medical receipt for something that was 30 years ago

Starting point is 00:05:01 and utilize that to pull money out of your HSA. So what a lot of people do is they use this as a retirement account. They get money into their HSA, let it grow, and save their receipts over time. So when it's time to retire, they can start pulling money out of the HSA completely tax-free. Now, this is a really cool strategy and a lot more people should be doing this. So this is why we have it at the same level as the Roth level. Now, the cool thing about the Roth level is that you have either or options. Now, some people don't qualify for either or options. With an HSA, like I said, you have to have a high deductible health plan. And with the Roth IRA, you have to be able to qualify with your income.

Starting point is 00:05:37 So if you make too much money, then you don't qualify. And it goes up every single year. If you're a married couple, it's at $214,000. And there's a bunch of things in between that you have to understand. And at the single level, last I checked, it was somewhere around $140,000. And it changes every single year. I'll leave a link down below so you can check out the latest income limits. but just understand that that is exactly how it works with those income limits.

Starting point is 00:05:57 Then we jump to the 401K once we max out both of those. So that is the stairway to wealth. That is the order that we believe putting your money in, especially if you don't have that 401K match, then just jump to the Roth level. And if your company offers a Roth 401K, that's even better than the Roth IRA because you get more money into the Roth 401k. So now if you prefer the 401k over a Roth or an HSA,

Starting point is 00:06:19 then more power to you because investing those dollars in tax deferred account is still extremely powerful. We just like the Roth IRA and HSA at Master Money a little bit more. So here's the next question. Are Roth contributions deductible without penalty if under 59.5 and in the account for less than five years?

Starting point is 00:06:39 So the key thing that we're talking about here is the five-year rule within a Roth IRA. And the five-year rule works a number of ways. But to answer the question short and quick, you can withdraw contributions from a Roth IRA anytime tax-free, penalty-free. Contributions, money that you put in to the Roth IRA. However, you may have to pay taxes and penalties on earnings in your Roth IRA if you pull it out early.

Starting point is 00:07:02 Now, you know that we talk about this all the time. Never interrupt compound interest unnecessarily. So if you can avoid doing this at any and all cost, absolutely try to avoid pulling out money out of a retirement account early because you can't get that money back in there later on. You lose that year when you pull the money out. If you absolutely have to, maybe you're trying to get out of really bad credit card debt or you're trying to get out of a really bad situation, then maybe you're going to have to do that. And if you have to do that, you can withdraw the money that you contributed penalty and tax free.

Starting point is 00:07:32 But the Roth IRA has something called a five-year rule, which says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to the Roth IRA account. So this rule applies to everyone who contributes to a Roth IRA, whether they're 59.5 or 105 years old. It doesn't matter how old you are. This rule literally applies to everyone within that range. Now, if you withdraw money earlier than that five-year rule, it can trigger the 10% penalty plus taxes. So you want to make sure that you're not doing that if you can avoid it whatsoever.

Starting point is 00:08:04 Now, there are some exceptions to that, and I'll get into some of the exceptions in a second because there are exceptions, and it's usually when you're in a bad situation where those exceptions actually apply. So the key thing to understand here is, you can withdraw contributions, you cannot withdraw earnings.

Starting point is 00:08:19 earnings are the big key here. So if your money made money, then you can't pull that money out. At the time I'm recording this, you can max out a Roth IRA for $6,000 a year. So every time you put $6,000 into the Roth IRA, you can withdraw that $6,000 out. But if your $6,000 grows to $7,000 next year, you cannot pull $7,000 out. You will be penalized on that $1,000 by 10% in addition to taxes. So understanding that is incredibly important. Now, if you're younger than $59.5, how can you withdraw earnings. Well, if you've owned a Roth IRA for less than five years, you'll generally owe a 10% penalty if you withdraw any earnings. But there is ways to avoid the penalty, but not the income taxes. So you're always getting it taxed on the money, but there are ways to avoid

Starting point is 00:09:02 the penalty if you meet one of the following exceptions, one of which is if you're withdrawing up to $10,000 to buy your first home. Now, this is actually a really cool thing because if you withdraw $10,000 to buy your first home, first being the key word, then you may be able to buy. You may be able to avoid the 10% penalty. If you're withdrawing up to $5,000 in the year after the birth or adoption of your child, you can also potentially avoid the penalty, the 10% penalty, you'll still pay taxes on the money. Or if the withdrawal is also for a qualified education expense. So these are things that people don't talk about with the Roth IRA that you can do. Sometimes you can utilize the Roth IRA for qualified education expenses. And with all of these, you want to make sure you're

Starting point is 00:09:44 talking to your accountant. If any of these qualify for you, don't just go out and do it. it, make sure you're actually talking to an accountant to ensure that you can do it within your specific situation. You can also withdraw for unreimbursed medical expenses in excess of 7.5% of your adjusted gross income for the year. So if you have massive medical expenses, you can also withdraw for that reason in excess of 7.5%. Or if the withdrawal is for a disability. You can withdraw if it's for health insurance premiums while you're unemployed. You can avoid the penalty if the withdrawal is made to a beneficiary of your estate after your death. So there's a bunch of different ways that you can withdraw earnings without that penalty. But I will leave a link down below so you

Starting point is 00:10:27 can check that out if you're under the age of 59.5. Now, if you're over 59.5 and you've owned the account for five years and you don't have to worry about that whatsoever. But if you're younger than 59.5, there are a number of ways to get the money out. We've talked about ways to get money out of a Roth IRA if you retired early. So if you're interested in that, we have an episode on that. I'll leave a link down to that in the show notes as well. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in

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Starting point is 00:14:04 and this is a classic struggle that is juggling multiple savings goals. And the thing about juggling multiple savings goals is you only have so much money coming in. So maybe you have a bunch of different savings goals. You want to save for your emergency fund. You want to start investing your money. You want to buy a house. You want to save for a wedding.

Starting point is 00:14:21 You want to save your kids' college. You have all these goals in place right in front of you. And you're trying to figure out, well, which one do I go for? But what you want to do is make sure you prioritize and put these savings goals in an order. Because the most important thing needs to be at the top and you need to devote the most money towards the most important thing. So something like this scenario where you're trying to figure out, should I be invest? my extra dollars or should I save the money for a down payment, I will always opt to invest for my future instead of trying to save for a house because a house is actually a luxury. A house is

Starting point is 00:14:55 not a necessity to build wealth. There's a lot of really wealthy people who rent houses, but it is something where you have to save for your future. So to save for your future, the thing that I would at least do is if you're trying to decide between these two scenarios is I would at least hit the MIG or your minimum investment goals. So for example, if the baseline, the minimum amount you need to retire is a million bucks, then at least be stocking away enough money to retire with a million dollars. And then if you really want to have actually more in retirement, at least hit that minimum number so that you can take care of the present as well. But making sure you have that financial baseline taken care of so that you can have money going towards

Starting point is 00:15:33 your financial future, then going out and buying the house would be the order that I would look at doing that. Now, I know it's a lot. it's tough to do in practice, this is much easier to say than to do because everyone wants to buy a house. A lot of people want to have home ownership, the American dream, all of those things. But just understanding that if you can take care of yourself first, then go out and make sure that you have the things that you want. If you can do that, you can build a lot of wealth in this life. And understanding that psychological mindset shift is going to be a major factor for you. Because changing your mindset to thinking about your future instead of the present is the way to build

Starting point is 00:16:07 wealth. It's one of the best ways to do this. But it is really hard to do. Let's get real. Your boys getting real here. This is really hard to do. So thinking through this, making sure that your future is in place first and then going and saving for the down payment is the order that I would do this. So prioritizing is number one. Make sure you prioritize everything you wanted your savings goals. And then right after that, then you can go out and figure out, hey, do I have enough money save for retirement? Yes, now I can start saving for my down payment. You know, you can also look at down payment options for lower down payments if you're interested in that too if it's their first home you can do an f a h a loan or you can do a traditional loan with a low down payment so that you can get

Starting point is 00:16:44 to the house at a much lower down payment as long as you can afford it now affordability how much can you afford well we recommend 30% or less of your gross income should be towards housing now preferably i'd like you to have much less 30% is the max if you live in a really expensive city or something like that, but preferably we'd like you to have much less going towards housing because if you can get to say 20% range, then you're really pursuing financial independence. You're going to put yourself in a much better situation by doing that. So that's my answer. I would go after your retirement account first, then pursue the down payment on the house. So that's a wrap for this money Q&A. If you want to ask me a question, hit me up on Instagram at Master Money CEO or on TikTok at Master MoneyCO. And you

Starting point is 00:17:31 have a chance to submit your question in for money Q&A. And we're going to be doing this more frequently as a bonus episode. So make sure if you have a question that you want to send in, you send it in to me. And right now, like I said, we're doing it on Instagram and TikTok. Thank you guys so much for listening. And we will see you on the next episode.

The Personal Finance Podcast - Should You Save for A House or Contribute to an IRA?!

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