Finding the best first investment is a difficult thing. If you are already investing in your employer’s 401k or 403b plan or your employer doesn’t have offer one, you may be looking for the next best place to place your investment. I know this is the case for me. When trying to find the best place to supplement my retirement plan, I decided that a ROTH IRA is the next best thing. As a person in my mid twenties, here’s why a ROTH IRA (individual retirement account) is right for me. Since I know the benefits of compound interest, I want to invest as soon as I am able.
You Can Withdraw the Contributions
It is common for a young person to be afraid of investing their money. They are working hard to earn their paycheck and who would want to risk losing money, right? Young adults also face the risk of investing their money, only to have a huge unexpected expense come up. While investing in a ROTH IRA is not without some risk, you don’t have to worry about having your money stuck. While similar to a SIPP pension plan, ROTH IRA accounts allow you to withdraw your contributions as any time. That’s right, anytime. No taxes, no penalties. Period!
While I won’t go into it now, there are also exceptions to withdrawing a certain amount for qualifying occasions (death, first time home purchase, etc.). Talk about security!
There is a Yearly Contribution Maximum
Many young people put off saving for their future because they are not at the peak of their earning potential. They think that since they will be earning a lot more later, they will be able to start investing for their retirement later. If compound interest were not enough to motivate you to invest now, a ROTH IRA has another reason why you should not wait. ROTH IRA accounts have a maximum contribution. Currently, the maximum contribution is $5,000 per year. If you are age 50 or older, you can contribute $6,000. What this means is that you can’t go back and invest for previous years. Once tax day comes, your ability to contribute money for the previous calendar year is gone.
I don’t Make That Much Money Right Now
Another reason why investing in a ROTH IRA right now is because I don’t make that much money right now. That’s right, I wrote that correctly. One of the benefits of a ROTH IRA is there are tax free withdrawals when I am using the funds in retirement (as long as it has been in there for 5 years and I am 59 1/2 years old). It doesn’t mean that the money you are putting in is tax free. You are already paying taxes on the money that you contribute to your ROTH IRA because it is after tax contributions. While other retirement plans allow you to invest money before taxes, this isn’t an option here.
This is a great thing for someone early in their career. The reason is because you are being taxed a lower rate than you theoretically will be later in your career or when you retire. I sure hope I will retire at a higher income than I am currently making. This means that I am paying less tax now than I would be later if they weren’t tax free withdrawals.