If you are a beginner looking to start a Roth IRA with Charles Schwab in 2020, then this video provides you a look inside my own portfolio and how I got started at the age of 21.
Key points from the video:
What is a Roth IRA?
A Roth IRA is an individual retirement account, mostly used to supplement any retirement accounts that you already have such as a 401(k) or other plans. A Charles Schwab Roth IRA works the exact same as a Roth IRA would with Vanguard, Fidelity, TDAmeritrade, WeBull, or M1 Finance would.
I learned how to invest in a Roth IRA as a beginner in 2020 by learning a lot from other youtube creators and also studying finance in college.
If your goal is to become a tax-free millionaire then a Roth IRA is the exact place that you would want to start.
A Roth IRA takes advantage of “tax sheltering” to an extent. The money that you put into a Roth IRA is tax-advantaged in that you contribute after-tax dollars to the portfolio and the gains are allowed to grow tax-free. This means that if you make a million dollars from your investments, you will be able to withdraw all of that million dollars without paying anything to the government once you reach the ripe old age of 59 1/2.
The maximum annual contribution for a Roth IRA is $6,000 for someone who is under the age of 50. After you reach the age of 50, you are allowed to make “catch-up” contributions which amount to $7,000 annually.
I do a calculation in the video to see exactly how effective this strategy would be over the long term, and it is crazy the amount of growth that you can reasonably expect.
In the video, I calculated the growth of a portfolio with an annual contribution of $6,000 with an average year over the year growth rate of 8% without adjusting for inflation. Once 35 years had passed, our investments would be worth over $1,000,000 (one million) in the scenario.
What I found most interesting about this was that the amount of principal that would be contributed only accounted for $210,000 and the rest of the $800,000 that made up the portfolio was all in gains.
Under today’s tax laws, if these gains were not in a Roth IRA then I would have to make 20% of that $800,000 to the government because of long term capital gains taxes. This is why having the ability to avoid these taxes is one of the main reasons that people choose to invest in a Roth IRA in the first place.
Later in the video, I talk about my own personal portfolio and the mutual fund/index fund that I invest in. That index fund goes by the name of SWPPX. SWPPX is an index fund offered by Charles Schwab that seeks to track the total return of the S&P 500 index. The fund does this by investing 80% or more of its assets in weighted stocks of the S&P 500 in order to create an accurate representation as possible.
What fees are associated with SWPPX?
The most important fee, in my opinion, to look at when you are considering any index/mutual fund is the net expense ratio. This fee basically tells you how much money is being sliced away to give to the managers of the fund. The higher the net expense ratio, the less money that you have for growth and compounding.
Fees: Max. Front Load none
Max. Back Load none
Short-term Redemption Fee none
Gross Expense Ratio of 0.02%
Net Expense Ratio of 0.02%
As you can see, SWPPX is an extremely low-fee, low-cost fund. It is one of the cheapest funds in terms of management fees that I have encountered in my tenure in investing.
Pros and Cons of SWPPX:
Low expense ratios, allowing you to keep more of your money.
Letting compounding and growth work more in your favor.
Over $50 Billion in assets managed. This is small in comparison to some of the larger Vanguard Mutual Funds and ETFs, however, this is still large enough to show that they have a history of managing funds effectively.
Tracks the S&P effectively, offering percentage returns almost exactly matching what the S&P offers.
Ability to buy “factional shares”.
No minimum investment requirement
Not as liquid as an ETF, so you will have a harder time of getting your money out quickly.
For this mutual fund, for every sell order that is place, it is fulfilled at the end of the trading day instead of immediately.
Low volatility, this correlates directly with liquidity as well. Relatively small in comparison to larger mutual funds
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