Roth IRAs for Military Families | Military Money Manual Podcast Episode 22

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Spencer and Jamie cover a lot of ground in this short, start of the year episode. Topics include:

  • Spousal IRAs
  • Contributing to last years IRA (during this year!)
  • Roth TSP vs Roth IRA
  • And much more

Did you know if you max out your Roth IRA every year while you work you could easily end up with $1.2 million by the time you retire?

It sounds crazy, but thanks to compounding interest, it's very possible.

Military Money Manual Podcast Episode

[00:00:00] Spencer: Welcome to the Military Money Manual Podcast.

Hello again and welcome to another episode of the Military Money Manual Podcast. I'm your host Spencer, joined as I am every week with my good friend and co host Jamie. 

We just want to wish you all a happy new year and best of luck and success in 2022. And in this episode we're going to be talking about Roth IRAs or individual retirement accounts, or as they're actually officially known by the IRS, individual retirement arrangements, but nobody actually calls them that.

So yeah, no one does. Yeah. We'll just call it an IRA. And it'll be simple enough today. We're going to talk mostly about the Roth IRA, but just about everything that we're going to talk about today also applies to a traditional IRA. So if it makes more sense based on your income, To contribute to a traditional IRA, then just take everything we're saying and about Roth IRAs and translate it to traditional IRA.

I've been back and forth about this which one I contribute to. It usually depends on how much money my wife's making and how much tax free I got in the year. It really does change every year. And I just let my CPA figure it out. And I guess this is another good plug too. Don't be afraid if you're in the military, they have good tax advisors on base and you can also talk to the folks at Military One Source as well.

But sometimes as your income increases, it pays to just, pay an expert and get some good advice. And, a good CPA for a pretty simple return might run anywhere between $200, $300, $400, but hopefully they're saving you more in taxes than what you're paying them. So that's just right.

Little plug there for seeking outside counsel.

[00:01:50] Jamie: Yeah. And the real quick on the Roth versus traditional thing, either way that you go, you're still advancing in your journey. So don't let the decision paralyze you into not doing either. So if you do nothing, that's the wrong answer. If you do Roth or traditional, you'll find an expert that agrees with your decision either way.

[00:02:08] Spencer: Would you say just do something? Jamie do something.

[00:02:11] Jamie: I would say that actually.

[00:02:12] Spencer: Yes. All right. Yep. So it's the beginning of the year and one thing that you're going to want to do is if you haven't opened up a Roth IRA yet, maybe now's the time to go ahead and open it up. I hold mine at Vanguard Schwab.

Fidelity are also great options as well. You can pretty much find the Roth IRA flavor at just about any financial institution, whether it's Wealthfront, Betterment, I think even USA and places like that. Yeah, USAA, Navy Federal, I think have one as well. I'm a big fan of Vanguard. I talk a lot about Vanguard in my book, The Military Money Manual.

Vanguard also has an automatic maximizing your contribution planning tool on their website. And that's really cool. So you can log on there and you can find it under retirement contributions and you put in how much you want to contribute and by which day you want to max it out. And it'll spit out a number of, and say okay, if you want to, if you start contributing in January, you want to contribute every month.

For 2022, the maximum contribution is $6,000. So you should contribute $500 a month or $250 every two weeks. And you can actually set it up so that it automatically withdraws that money from your checking account and it won't go over and it'll make sure you maximize it by the end of the year. So that's another great way of dollar cost averaging into your Roth IRA and making sure that you're capturing the gains throughout the year and you're putting your paycheck to work right away.

One thing I really like about that system too, is it's just automated, right? And you make the one decision at the beginning of the year, and then you don't have to decide again okay, am I going to contribute this week or not? It's just, it's automated, right? And that's one of the things I talk about in my book with the lads system of investing, low cost, automatic, diversified, and simple is anytime you can automate a process and remove yourself, remove the human from the loop.

I think that's a win right there.

[00:04:01] Jamie: It's a great easy way to pay yourself first every month. And then that has huge impacts in the long run.

[00:04:09] Spencer: That's right. So two common questions I get about the Roth IRA is can my spouse open up his or her IRA if I, if they don't make any income? And the answer to that is yes.

So if you're married filing jointly, And you have enough income to cover their contribution. So it's $6,000 per person. So you need at least $12,000 of income in a year. And I don't think it needs to be taxable income. I think it's just. Any income, but I'm not positive about that one. So look that one up.

But if as long as you have some income in the year, you can maximize your Roth IRA and then you can maximize your spouses as well. So you might see this online referred to as a spousal IRA. But you'll never see any financial institution. They would just, an IRA needs to be held in a specific person's name.

So at Vanguard, for instance, I have my IRA and my wife has her IRA specifically in her name. You can't have a joint account in an IRA. It just doesn't work the way the system's set up. But. Basically, Jamie, any military income level once you're past the E-1 E-2 stage, you should be able to, but $12,000 if you're making $36,000 a year, that would be a big sacrifice, right?

But legally, you should, you can, you're able to make the contribution to your spouse's IRA.

[00:05:30] Jamie: And don't let the ability, the inability to maximize your IRA, stop you from doing something if you can only afford to do $3,000 in there, it's better than nothing. So do what you can pay yourself first, but if you have other goals, you're saving up for a house or getting out of debt, or, ideally you do them all at the same time if you can, but if there's something else going on where you can't maximize it, then still do what you can.

So Spencer, right at the end of the year, as we turn the year here and start 2022. 

Should everyone that listens to this podcast immediately start contributing to their 2022 IRA today, or are there some other things they should look at first?

[00:06:08] Spencer: One thing to consider, especially at the beginning of the year is you can actually make contributions to your 2021 IRA up until you file up until tax, your taxes are due basically.

So April 15th would be, I think it is, I think it's April 15th this year. It's usually April 15th. And that's true every year. And I know during COVID they actually extended it. So taxes, I think in 2020 weren't due until uh, something like June. Yeah, June. And so you were allowed until then, until you had to file your taxes, you were allowed to contribute to the previous year's IRA.

So this is actually a really good tool, especially as you're promoting and hopefully, and your time and service is increasing and you're making more money, maybe you were only able to contribute $3,000 to your IRA last year, but. At the start of the year, maybe you've just completed deployment or you've got some money coming to you in some other way.

Now you have the opportunity that you could, you can turn around and make the contribution to the previous year's IRA and then maximize this year's IRA.

[00:07:10] Jamie: And it's a really simple process. If you contribute to your IRA online, there's generally just a check box. Do you want this to go towards 2021 or current year?

IRA. And then that's all it is. And they'll update the paperwork when they send you for tax reporting, all the paperwork will be accurate there. So it's very simple and easy to do. So if you haven't finished your 2021 contributions, or you didn't start for you or your spouse, now's a great time to go ahead.

To and maximize that, finish it up if you can. One other important note, Spencer, is this is all separate. And in addition to the $20,500 limit for the TSP. So remember you can have both. You can contribute to both an IRA and your TSP. It doesn't have to be one or the other. And the limits do not apply to each other.

So you might confuse yourself one time if you're like, Oh no, I over contributed, but they're completely separate.

[00:08:02] Spencer: Yeah. And the other thing to consider is if you do over contribute, you don't go to TSP or IRA jail immediately. It's actually a pretty simple process to unwind it. And if you leave the money in there, the IRS, I think it's like a 6 percent 6 percent tax going forward.

But again, You could, you'd figure it out pretty quickly and you can, you just withdraw the money. Talk to your financial institution, people over contribute all the time. It's not a big deal. Obviously if you can set it up, so it's automated and you don't over contribute, then that's a lot, makes it a lot easier.

I know for 2021 with the TSP, there was a problem where they changed the code, the software, and it actually allowed people to over contribute to the TSP. Whereas it's years. That never happened. So we had a friend and in our squadron who maximizes TSP, I think it was by August, June, July, August, sometime in the summer and then he just left the percentage in there and he kept contributing and he realized that thankfully he checks his LES every month, which is a good habit.

Yeah, good PSA right there. Check your LES every month and download the PDF because after 12 months they disappear from MyPay. Yeah. And it makes it a lot harder to pull it. You can go to finance and you can request them. But if you have the PDF yourself, save it in Google drive or Dropbox or somewhere, in the cloud, there's usually, I don't think there's any personally identifying information on it.

I think just your last four, don't post it on Reddit, but you can save it in the cloud and it's going to be, it's going to be relatively secure. Or just email it to yourself, and then keep it in your Gmail or whatever, and give it a title

[00:09:40] Jamie: Or print it if you're old school, maybe.

Yeah. Yeah.

[00:09:43] Spencer: Yeah. So if you hate trees, yeah, that happened to me too.

[00:09:47] Jamie: Actually, Spencer, it allowed me to over contribute by $85 in our TSP this year. And I tried to contact them and the TSP phone people said, no, you didn't over contribute. It would stop it. If. It's not possible. And it was like right around the time where you're, we're starting to hear these data points of no.

In fact, it glitched this year. And after I think maybe two or two or three LESs later, it showed up as a refund, but there's nothing I could do to get it back until the computer just caught up basically.

[00:10:17] Spencer: Yep. Yep. And that's usually the process there is if you see an over contribution and you still have time left in the year. Go to your MyPay, zero out your contributions for the rest of the year.

Contact your finance office, contact DFS, contact the TSP people. Just let everybody know that it happened. And then, but usually it's a completely automated process. The computers just audit everything, figure out there was an over contribution and then they refund it to you through your paycheck. I'm not sure how it'll work if you.

Separated or retired, but I'm sure there's probably just mail you a check or something. It's probably lost.

[00:10:55] Jamie: Pay attention to that. Yeah. Yeah. Good luck getting that one back.

[00:10:58] Spencer: Yeah. Good luck. You might be out a couple thousand dollars. Yeah.

[00:11:00] Jamie: Another good end of year reminder. We talked about a couple of weeks ago in the end of year and goal setting episodes, you mentioned going into MyPay and setting your percentages. If you haven't done that yet, this is your final reminder to go set up your TSP contributions based on the percentage that you want and on the website, Spencer, you have a really good chart of if you're under the BRS, you want to contribute each month, right?

So you don't lose the match. So you don't want to max it out in August or November, and then miss out on the match in December. And you've done all the math for us and tell us exactly what percentage to contribute to. So if you Google search military BRS. Contributions. It'll pop right up. I was looking at the chart today.

[00:11:38] Spencer: Yeah military. Yeah. Military TSP match 2022 or whatever year you're listening to this. If you Google that actually right now my website is number two. The National Institutes of Health is beating me. 

[00:11:52] Jamie: The term that I use, you were number one.

[00:11:54] Spencer: Okay. Yeah. So whatever Jamie said, just use that and get on there and you can see the percentage of your pay that you should set your MyPay to so that you can contribute. And if you're in the BRS, you'll maximize the TSP by the end of the year. And you might go over a little bit, but like Jamie said, you'll get that money back in a month or two through your normal LES refund process. And you won't, you'll make sure that you leave at least a 5 percent contribution in December.

So you're going to get the max excuse me, the match every month. And you'll max out the Your TSP contributions. So yeah, 20, 20, 500 for 2022. So that's a pretty lofty goal. And it's definitely getting up there. It's crazy just cause like when we got in wasn't it 16, it was pretty,

[00:12:38] Jamie: I was going to guess 16, five, but I definitely wasn't looking at it back then.

[00:12:42] Spencer: That's true. Yeah. All right. And then before we wrap this up. Just another short episode for the holidays here for you guys. I just wanted to reiterate again, Roth TSP and Roth IRA, two different types of accounts. So I get this is, I think this is, I probably get this question at least once a week, if not more often, but it's, yeah, it's, it's emails. It's Instagram @militarymoneymanual on Instagram. If you want to check us out there. And I've had a lot of people DM me pictures of the book that they've been like taking on trips and stuff. So that's really cool.

Somebody just sent me one from Yosemite. So thank you. Thank you, Heather, for that. That was really cool. But yeah, Roth TSP, Roth IRA, completely different accounts, completely different limits. For 2022, it's $6,000 for the Roth IRA and $20,500 for the Roth TSP. And you can, for the TSP, you can even actually go over that, that $20,500.

If you're in a combat tax exclusion zone, combat free tax free pay zone. But we'll have to do another episode about that. Cause that's a whole nother can of worms right there, right?

[00:13:52] Jamie: That's a whole nother there there. That's pretty, pretty advanced, which is great. If you can contribute more than $20,500.

And again, if you can't do it, if you can't max it out, that's fine. Do something. But we, the sooner you can max out the better, but remember the reason we want you to go back and finish 2021 back on the IRA topic is that you never get a chance to go back to a previous year. So you can't be like, Oh, I missed 10 years while I was paying off debt or paying off my student loans.

You, this is your one shot to finish 2021 is between. Now, if you haven't already on April 15th so finish it up and then get a strong start in 2022. When the time comes, you'll be surprised $6,000 a year that the way the market's been going the last couple of years is really nice.

It won't always go up. You remember, past performance doesn't guarantee future, but putting that money away will benefit you and give yourself choices in the future for

[00:14:46] Spencer: Sure. Yeah. One thing that's always crazy to me is if you run the calculation on, if you contribute $6,000 a year for 40 years at 7%, 1.2 million. So if you can maximize your Roth IRA contributions and invest it into, let's just say the S and P 500 index fund, something like VOO. Or VTSAX, the Vanguard total stock market index fund, and you're going to get about 7 percent return for the next 40 years or so based on historical averages.

That's a solid retirement right there. Yeah. Especially just for that one account. That's right. That's right. 

Spotify. Actually is letting you review podcasts now. So we just actually learned about this a couple days ago and we just wanna make sure that anybody in the military out there who wants to get some good personal finance information is finding it.

So if you're on Spotify, if you're listening to us on Spotify, please just give us a five star review there. And I don't think you can leave comments yet, but if you give any comments for us info at militarymoneymanual.com or an Instagram, you can send me a DM but yeah, Spotify you can leave us a review there and Apple podcasts as well, where you've got Oh, 4.7 stars on there. So not bad. All right. We'll let you go. Happy new year. Happy new year. Thanks. From the military money manual. And we'll see you next week. 

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