Roth IRAs: Pay Now to Play Hard Later
Retirement planning consists of two phases: pay and play. This means that the earlier you start paying (ie, contributing to your 401k or IRA), the more you will have later to play with, because you are contributing funds over a longer period of time, and the funds have more time to grow. Keeping in mind that retirement plans are subject to different tax laws, limitations, guidelines, etc, it is important to take the time to educate yourself about the rules and regulations of each unique plan.
A Roth IRA (“Individual Retirement Account”) makes sense for young consumers because their tax bracket will generally be higher during retirement than it is today. For instance, you are just out of college and starting your first job – most likely you will be earning beneath the income eligibility limits for a Roth ($110,000 modified adjusted gross income if you file taxes as a Single household). As long as you make at least $5,000 per year, you can contribute up to that much.
So why sacrifice your spending dollars today for tomorrow’s retirement? First, not having the tax deduction advantage of a traditional IRA is no big deal when you are in a lower tax bracket; plus, Roth IRAs have a different valuable advantage: tax-free income during retirement. Not only will the money be tax-free when you need to start crossing items off your bucket list, but it will enjoy decades of tax-free growth. Plant the seeds today and give them time to grow under favorable conditions: you will thank yourself later when you can pluck dollars from your tree without Uncle Sam taking a piece first. Also, unlike a traditional IRA, you can withdraw contributions (not the growth) to your Roth at any time without taxes or penalties, and there are no mandatory withdrawals, meaning it can continue growing if you don’t need the money yet at 59 ½.
Given today’s economic climate, high employment for recent college graduates, and the volatility of financial markets, young workers need to take financial planning into their own hands if they hope to retire with a good lifestyle. This means educating yourself about different types of retirement plans: Roth IRAs are a good place to start. Then, once you know where to put the money, start paying, so you can play later the way you play today.
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