5 Costly Roth IRA Mistakes

There’s no question that the greatest investment tool that exists today is the ROTH IRA. Especially if you are a younger investor. And the reason that the ROTH IRA is the greatest investment tool right now is for one and one reason only. And that reason is tax-free money. But tax-free money is awesome but not if you’re putting your money in the wrong thing. And believe it not there four investments that you should never and I mean never put inside the ROTH IRA. We gonna find out what these four investments are. I’m also gonna share with you, what are the biggest ROTH IRA imposters that you want to avoid at all costs. So today we gonna find out what these four investments that you need to avoid and this ROTH IRA imposter right now.
What’s going on y’all, welcome to Wealth Hacker TV. The channel dedicated teaching you new ways to grow wealth that’s not taught you by your parents or in schools. I’m your host Jeff Rose and we’re talking about the ROTH IRA otherwise known as tax-free money. But still, I see a lot of people that have misconceptions about the ROTH IRA. They think the ROTH IRA is an investment, they think that if you open up a ROTH IRA, that it’s going to pay in dividends, it’s gonna pay you interest. The ROTH IRA is not an investment. And if you’re not quite sure how the ROTH IRA works then you need to check out another video of mine where I talk about how to become a ROTH IRA millionaire. So once you understand the fundamentals and how the ROTH IRA works, now it’s time to decide what I’m going to place inside it.
You can buy stocks, you can buy mutual funds, you can buy ETFs. You can buy a lot of different things. But just because you can buy a lot of different things and place them inside a ROTH IRA, doesn’t mean that you should. And that’s what we’re talking about today. So what are these four investments that you should never, as I said before, never put inside the ROTH IRA? We’ll just find out what those are right now.
Alright, the first thing that you should never put inside a ROTH IRA is a penny stock. And for those of you who don’t know what a penny stock is, typically it is a stock that’s trading below a certain price typically under five dollars per share, and usually is not available on the major stock exchange like the New York Stock Exchange, or the NASDAQ. You can easily find it being traded over the counter on the pink sheets and other places like that. So that is what a penny stock is. So the common attraction with penny stocks is that people believe that they can take a small amount of money and buy a lot of shares. So if you’re buying a thousand shares of a 20 cents stock and also that stock goes from 20 cents to three dollars, or maybe 10 dollars, also boom, I just made a lot of money overnight. Psst, that’s not gonna happen. It’s not gonna happen. Now, I’m not really sure what the stats say on what the chances of you loosing money on a penny stock. But I’m gonna safely bet that it is 95% or higher that you’re going to loose money. And the reason why you would never want to buy penny stocks in a ROTH IRA is cause you can only put in a certain amount each year. Right now the most that you can put in is 6500 dollars. So if you put in 6500 dollars and you put all of that money off your contribution into a penny stock, and that penny stock goes kaput, well you just lost your entire ROTH IRA contribution for that year and the IRAs doesn’t allow for do-overs. So you can’t redeposit the 6500 dollars that you lost in the penny stock. It doesn’t work that way. It takes a long time to build a save enough to invest inside the ROTH IRA so you don’t wanna put in something that’s going to prudently lose everything that you have scraped and saved for. And if you don’t think that you can lose all of your money to a penny stock, then you can watch another video where I briefly mention how I lost 5000 dollars. That’s right, 5000 dollars in one penny stock. So yes it can happen.
Alright, the second investment you should never place inside a ROTH IRA is short term bonds. So bonds typically are the start of it as being safe to invest on which they are relatively speaking if you’re gonna pair that to stocks or cryptocurrency. What I don’t understand is why you’d want to place your retirement investments, your potential tax-free money inside the ROTH into a short term bond. Roths are meant for the long term. You wanna put that money in, have a gross so that you have a huge tax free amount waiting for you later on. So if you gonna put that into a short term bond that’s paying you very nothing, very next to nothing and interest, it’s just not worth it. There are different types of short term bonds that you can buy and place inside your ROTH IRA. There are individual bonds, you can buy mutual funds that specialize in short term bonds or you can buy ETFs. That’s specialized also in short term bonds. One of those short term bond ETFs is the Vanguard Corporate short term fund. Right now, the yield on that ETF is currently paying 2.98% so just under 3% interest. And I don’t understand why you’d want to make 3% especially when you have something that’s going to capitalize on compounding interest. So that you have a huge tax free chunk of money waiting for you. How’s the stock going to be huge if your only making 3%? Another variation this I’ve seen is with these robot advisors and investment apps. And they’re marketing the savings account alternatives. And if you look at the market material, it’s saying that all their accounts are paying 20 times more the national savings account rate, which is true. But you have to realize, we’re not comparing apples to apples. We’re looking at basically our short term bonds, treasury bills being compared to savings account. But right now the betterment super saver account is paying 2.18% which… that is great if you’re looking at that as a savings account alternative but if you’re opening up a ROTH IRA and you’re putting in that, into a betterment super saver account that’s only paying you 2.18%, we’re not taking advantage of compound interest. So just to show you the effect of putting your money into a super saver account which is really just short term bonds over the long term. If you are putting a hundred dollars a month over 30 years and you’re making 6% interest at the end of that 30 year period, you’ll have over a 100451 dollars. Now let’s say instead of making 6% on your money, you decide to put it in a super saver account that’s only paying you 2.18% interest over that same timeframe of putting a hundred dollars a month in over 30 years the difference is, you’re only gonna have 50756 dollars. So basically, you just gave up 49695 dollars because you’re putting into a super saver account. And this just emphasizes why you don’t want to have short term bonds inside your ROTH IRA.
Right, the third thing you should never put inside the ROTH IRA is an annuity. I don’t care what type of annuity it is. It could be a fixed annuity, it could be a variable annuity, it could be a fixed index annuity. If you don’t really understand how annuities work, the one thing you need to know first and foremost is that if you put money inside an annuity, it already offered you tax deferral. That’s how these investment products are structured. So you’re already getting tax deferral you don’t have to pay tax until you pull the money out. So why would you put money into an investment that already offers you tax deferral and then you take that and put inside the ROTH IRA? Like you don’t get double tax freedom. Like that’s not how that works. But yet, I see so many different advisors that are selling a new lease inside a ROTH IRA and it doesn’t make sense. And this why I hate when see a new lease inside a ROTH IRA because typically the person that bought it has no idea what they have. They don’t realize that the annuity that the bought has high fees, high surrender charges. Most investors have little to no clue how much fees are associated with annuities. So for example variable annuities. You can find this on the web. The average eternal expense for the variable annuity is 3-5% and that’s not one time like that is per year that you’re paying 3-5% on your money and the best part about it is you don’t even see it. The insurance come may just tax it out they just kinda slide it out there so you never even notice how much you’re paying. Other than the fact that you have the investor for ten years and you try to figure out why didn’t I make any money on this investment and the reason is, you’ve been paying 3-5% every single year. So please, please please avoid annuities especially variable annuities inside your ROTH IRA.
Alright, number four. The last thing you should never inside your ROTH IRA I’ve already kinda mentioned this before is cash. You don’t want to have cash. Always too much cash inside your ROTH IRA. So if you’re opening a ROTH IRA at your local bank and the only thing that they can offer you is a savings account, money market, or CDs, then that’s the only way of return you’re going to get whenever the interest is on that savings account or that money market account or that CD, so the savings account only paying you .1%, then you’re only going to make .1% there’s no way of making more money. That’s just because the bank doesn’t offer any other types of investments. But if you go to an investment firm or open a ROTH IRA online with any online broker, at least there, you can invest into mutual funds ETS like I mentioned before. But so many people think that the ROTH IRA isn’t an investment so when they open it at their bank and the bank only offers a savings account paying .1% or a half percent interest, they think of my ROTH IRA only pays this. No. Its only because the bank can offer you a limited amount of offerings. You gotta go somewhere else that allows you to put your money inside investments inside that ROTH IRA. Alright, so those are the four investments you should never place inside the ROTH IRA.
But at the beginning of this video, I also mentioned that there is a ROTH IRA imposter that you want to avoid. And if you ever hear of financial advisor marketing this imposter as a super ROTH IRA or a rich person ROTH IRA, like that’s when you wanna put on your warning signs and just know that the chance that they’re gonna try to sell you something that’s just a bunch of crap. Let me go and say that right now. So basically all these are an insurance policy and it could be an index universal life, it could even be a whole life policy. And the whole concept is that you’re putting money inside this insurance product. It grows quote tax-free over time. At the end of it you can take out a loan against whatever the cash balance that has accumulated. Now, this sounds all great in theory and if you are making so much that you’ve already maxed out your 401k, you’ve maxed out your self directed IRAs and 401ks and you can’t do a ROTH, then maybe, just maybe that will be an option that you should consider. But if you are at this point where you can’t even max out a ROTH IRA yet because you’re just starting your investment journey and these advisors trying to sell you a super ROTH IRA or a rich person ROTH IRA, you’ve got no business putting your money into that until you’ve maxed out the real ROTH IRA or your real 401k. And the only reason they’re trying to sell it to you is because they get paid a big fat commission. Hard core truth right there. Now, the reason that you get burned on these types of investments is because these advisors will run these illustrations and they’ll show these projections of how much money you’re going to have 20, 30 from now that you can borrow against yourself tax-free. It sounds so so good but the one thing that they always scatter around, or they just kinda gloss over, is the fact of how much it costs to have the insurance that have this product. They never really spend enough time looking at those costs that you never see. So now you’re paying on this thing for 10, 20 years not realizing that men, I could have put my money somewhere else and made a lot more especially inside a ROTH which would have being completely tax-free. So that’s where you have to be careful on. If you having an advisor that’s trying to sell you one of these super ROTH IRAs and you haven’t maxed out your 401k yet, you don’t have your own ROTH IRA to start, then you just need to get away from that person. Just say excuse me I’m out peace. So please, please, please if you’ve not opened up a ROTH IRA yet, please do.
I actually have a link in the discussion below that shares some of the best places that you can open up a ROTH IRA today. That’s right. You don’t need to leave your leaving room, you don’t have to leave your couch, you can go online, open up a ROTH IRA and start investing for your future. Hope you enjoyed this video. Until next time, this is Jeff Rose reminding you that it is your money, it’s your life and only you can make it awesome. Peace.