If you’re in your 20s and embarking on your career, there’s no better time to start saving for retirement. While the days when you are living a life of leisure may seem far off, saving now can ensure that you are able to retire when you’re ready to do so.
Financial experts agree that a Roth IRA is one of the most powerful tools to jumpstart your retirement savings. Read on to learn more.
What Is a Roth IRA?
This federal program allows you to contribute up to $5,000 per year to a tax-free retirement fund. The funds that you put into your Roth account, as well as any interest accrued over the years, are not subject to income tax, nor are they subject to an early withdrawal tax.
Why Is This Important?
In your 20s, you may be concerned that you’ll need the money that you’re contributing to retirement for other things, like a home purchase. However, putting your money into a Roth insures that if you need the funds for an emergency, you can withdraw them without the steep penalties that come with other retirement accounts.
What’s the Bottom Line?
The power of compound interest explains why contributing to a Roth IRA is so important. If you begin socking away the maximum amount at age 25, with an average return on investment of eight percent, you’ll have $1.4 million saved by the time you’re 65. By contrast, a typical retirement account taxes earnings at about 15 percent, meaning that you’ll only have a million if you go that route.
Are There Any Drawbacks?
Just a few. Only earned income can be put in a Roth, so this doesn’t necessarily benefit college students. This also means that you can’t use a Roth to invest graduation gifts, for example, or contributions from parents or grandparents.
How Can I Get Started?
You can contribute any amount to a Roth fund, so once you save a few hundred dollars, decide where you want to open your retirement account. Most large banks offer this service, though their return on investment is typically low. For maximum impact, look for a low fee online brokerage, where you can invest in mutual funds and earn a much higher interest rate than you would at your regular bank.
While saving for retirement may be far from your mind, opening a Roth fund is the single most important thing you can do for your financial future while you’re in your 20s.