The First Small Choice…
If I had a dollar for every time I said Roth IRA, I’d bribe my way to having a consistently good parking spot on campus and still have enough to retire tomorrow. Since I can’t do either, I’m telling the story of two fictional Charlotte students, Cole Morgan and Hannah Robinson, to break down how this account actually works.
This chapter follows how the small choices they made in college started shaping their entire financial life. One little Roth IRA becomes the quiet engine that helps them reach their first real milestone together, and sets them up for many more.
It’s November 15, and at 6:37 in the evening, the breeze is light, and the leaves are falling like snow despite the mid-70s temperatures. Cole and Hannah sit outside Cook Out, celebrating a Niners football loss of ‘only’ twenty-one points against UTSA.
Cole is the type who gets mildly curious about anything money-related. Meanwhile, Hannah organizes everything else, making life actually work. As seniors with one semester left after surviving fall finals, they’re nervously excited to jump into the real world.
Cole has an entry-level job lined up at Duke Energy, and Hannah is on track to become a teacher for Mecklenburg County Schools. Together, they want a stable life and a future they can grow into.
Cole suggests they open Roth IRAs, something he heard about in a Niner Times column. After opening a Fidelity account and depositing half his net worth, fifty dollars, he feels like a big-time Wall Street investor when he buys a low-cost exchange-traded fund that tracks the S&P 500.
Even with his on-campus job and a frugal girlfriend, he doesn’t have much money to spare, so he sets up a ten-dollar automatic investment every Friday in the ETF SPYM.
Over the next year, what started as small ten-dollar investments evolved into a habit that gradually became the financial foundation of his early adulthood.
Two years and a week later, after a sweet proposal at that same Cook Out table, Cole and Hannah are knee-deep in their jobs and adjusting to full-time adulthood.
Cole’s tiny ten-dollar-a-week savings have grown to over $2,100, even though he only contributed $1,900. He realizes that his assets have increased by over $200, all without him thinking about it. With a combined annual income of $105,000, they learn that as long as they have earned income reported to the government at the end of the year, each can contribute up to $7,000 annually to their individual retirement accounts.
Before making the decision, they take a minute to understand the difference between the two accounts. A contribution to a Roth IRA is taxed now but grows completely tax-free for life. A Traditional IRA provides an upfront tax break, but the withdrawals are taxed later.
Because they’re so young, Cole, twenty-four, and Hannah, twenty-three, decide to focus on Roth IRAs instead of Traditional Ones to maximize the long-term tax benefit of paying income taxes now, rather than taxes on substantial investment profits later down the road. Additionally, they expect to make more money later as Cole advances in his career. They would rather pay lower taxes now and benefit from a tax deduction later when they switch to a Traditional IRA, allowing them to pay less in their higher income years.
Hannah opens her own and they both start contributing $100 a week into the overall market. Six years later, with a son on the way, Hannah decides it’s time to buy their first house. Homes are costly, but they find an antiquated yet cozy starter home that meets their needs. It wasn’t perfect, but it felt like a new beginning, the first grown-up decision that didn’t involve a residence hall or a roommate contract.
The young couple has saved some cash and earned a promotion to an analyst position. However, their combined income of $130,000 still falls short of the down payment. With baby Caleb on the way, there’s no time left to save more.
Roth IRAs have two superpowers most people forget. One, you can always pull out your contributions without taxes or penalties. And two, you are eligible for a first-time homebuyer exception, which allows you to use up to $10,000 of your profits if the account is at least five years old. Because Cole’s Roth had passed the five-year mark, they could use up to $10,000 of earnings for their down payment without penalties or taxes, and their contributions were already free to use at any time.
With a combined balance of over $32,000, the Morgans take a leap of faith and use $10,000 without taxes, fees, or penalties.
After bribing their college buddies with cheap beer and Costco pizza, they settle into their new home, optimistic about the future. But some headwinds remain. Hannah is leaving her teaching job to care for Caleb during the early years, and the new family worries they won’t have the cash flow to continue saving with all the baby-related expenses coming their way.
Huge raises, surprise medical headaches, and a questionable choice in Caleb’s education planning all push their Roth harder than ever. Good thing this little account eventually gets reinforcements in the form of catch-up contributions, but that’s for next week.
