This isn’t a topic I hear many young people discussing: saving for retirement. Yet, it’s something we all should be talking and thinking about. I opened a Roth IRA when I was a teenager (thanks mom and dad!) and it’s something I’ve discussed with my friends since opening it. Some of my friends have even opened Roth IRAs because I and my parents talked about it with them! There’s no guarantee of Social Security when we’re old enough to retire so it’s important to start saving for your future to ensure you’re covered.
There are different types of retirement accounts out there. I know I know, it can be overwhelming researching and looking in to stuff, but that’s the whole reason for this post. I wanted to break it down and make it easy for you to understand what a Roth IRA is, why you should have one, and how to open one! Read on to learn more.
An IRA is an Individual Retirement Account. The difference between an IRA and a 401k is that an IRA is setup privately by an individual, whereas a 401k is administered by an employer.
There are two different types of IRAs: Roth and Traditional. With a Traditional IRA contributions will lower your taxable income. The contributions are tax-deductible on both state and federal tax returns in the year you make the contribution. During retirement, withdrawals are taxed at ordinary income tax rates. With a Roth IRA there are no tax breaks for contributions, but earnings and withdrawals are generally tax-free. So with a Roth IRA, you pay taxes when you’re making the contributions, and with a Traditional IRA you are taxed when you take the money out at retirement.
Having some sort of retirement savings is massively important! There’s no guarantee that Social Security will be around in the future, so it’s a must to save for retirement on your own to ensure that you do indeed have money saved for later in life. It’s important to have your money work for you. With retirement accounts, you are earning interest on your money which will help it grow over time.
With contributions, the sooner the better as you’ll have more time for the interest to compound and help your funds to grow more over time. It’s never too soon to start saving and in fact, it can impact how much money you have when you’re ready to retire. This graphic showcases how compound interest impacts the growth of your savings over time:
As you can see, Ben on the left made $2,000 contributions each year to his Roth IRA for only eight years between the ages of 19-26. By the time he retried at 65 he had $2.28M in his Roth IRA! Arthur on the other hand saved every year $2,000 from ages 27-65 and ended up with $1.53M when he retired at 65. This goes to show you that it pays to start investing early as compound interest is on your side with time.
It’s a lot easier to open a Roth IRA than one might think. You’ll need to find an investment company you’d like to open one with and most require you to start with a $500-$1,000 investment (this can vary per company). It might seem like a lot if money is tight, but once you have the initial investment, your minimum contribution will be $100 at a time (not so bad). If you’re like me who isn’t very familiar with investment companies, resources like Investopedia and Forbes among others are good places to start.
I was lucky in that my parents helped me open my Roth IRA when I was 13 years old. I’ve been fortunate that they’ve taught me the importance of saving for retirement and have helped educate me over the years and still do to this day. My parents helped open up my Roth IRA at T. Rowe Price. So I personally have not had to search for the investment company for my own IRA, but I know you’ll want to look for a company that fits your style, makes you feel like a valued customer and one that has a good investing track record.
Once you’ve selected an investment company and setup your IRA, you can setup your account to automatically deduct from your paycheck or checking account monthly. I have this setup, which means there’s no way that I’ll forget to make a contribution each month. The company will manage those funds and invest them on your behalf.
Keep in mind, although some of these companies allow you to withdraw funds from your account penalty-free at a certain point in time, it’s not always a good idea to do so. I look at my Roth IRA as the money I will use only when I retire. I want this money to continue to compound and grow over time. I recognize that I could hamper this growth by taking from these funds early. So in my opinion these funds are strictly to remain untouched. If you want to start saving for other big life investments such as buying a car or house, you could open up another investment account for those big ticket items that come up.
Retirement accounts ensure you’re set later in life. I for one know I want to enjoy my later years in life with my family and not have to worry about whether I’ll have enough money to live comfortably. I hope this post was informative in explaining what is a Roth IRA and why you should have one and gets you thinking about your future. I also hope that you recognize that starting to save sooner rather than later is less painless and will ensure you’re better off when you retire. Your future self will thank you!
Do you have a retirement account? What kind of life do you want to lead when you retire?