Why Every Young Professional Should Consider a Roth IRA

Roth IRA egg and nest
Image source: Jillonmoney.com

Compounding growth is an amazing thing. Using that that growth tax free? Even more amazing.

If you had contributed to a Roth IRA between December 31st, 2007 and December 31st, 2017, at a rate of $100 per month, you would $19,097* that you could use 100% tax free in retirement. Of course, there’s a catch. First, you must be 59 1/2 or older. Second, you  must have opened your first Roth IRA (not Roth 401k!) more than 5 years ago.

Okay, Scot – the title of this article references young professionals! Why are you talking to me about Roth IRAs if the benefits don’t come until retirement? Here’s why. You can access your contributions penalty and tax free, regardless of age or waiting period. Basically, you can double up on having an emergency fund and retirement savings in one go. That’s the short-term reason.

The long-term reason is this: imagine having two jobs – one which paid you taxable income, and the other which paid you tax free income. How much extra you might you take home by having a tax free income source? Less taxable income means less taxes for two reasons: one, tax-free income isn’t taxed. Two, taxable income is taxed at a much lower rate.

Not convinced? Here are some more reasons to consider a Roth IRA as a young professional:

  • You could eventually be phased out. It might some crazy now, but there may come a day where you have to worry about making too much money. At $120,000 of income, single earners start to be phased out ($189,000 for married earners filing jointly.) This means that the amount you are allowed to contribute to a Roth gradually decreases. You are fully ineligible at $135,000 and $199,000, respectively.
  • A Roth 401k is not enough. If you leave your job and roll your Roth 401(k) to a new Roth IRA, you have to wait 5 years – no matter how long your Roth 401k has been there. Those taking advantage of Roth options through group 401ks would be advised to open a Roth IRA today, even if it’s only funded with a few hundred dollars.
  • It’s a great way to leave a legacy. If you die, you can leave your Roth IRA as a tax free legacy to your spouse, your kids, and even their kids. In theory, it could last generations.
  • Tax laws can change. Will Roths be around forever? It’s hard to say. There’s no better time than today to get started.

Lastly, remember that Roths are just the brand of clothes, and the cash inside is the person. People come in a shapes in sizes, and so do investments – they can be cash, CDs, stocks, mutual funds, and more. You can start up a Roth IRA with very little investment risk. See the infographic below for more information on investing inside of a Roth IRA.

Roth IRA infographic
Source: bankrate.com

The Bottom Line

If you haven’t opened up a Roth IRA, now is a great time to start. Talk to your investment professional about opening an account.

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.

*Assumes that your return is compounded annually and your contributions are made at the beginning of each year. The actual rate of return is largely dependent on the types of investments you select. The Standard & Poor’s 500® (S&P 500®) for the 10 years ending December 31st 2017, had an annual compounded rate of return of 8.3%, including reinvestment of dividends.  It is important to remember that these scenarios are hypothetical and that future rates of return can’t be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that investment funds and/or investment companies may charge.

The contribution limits for Roth IRAs referenced in this article are for tax year 2018. For current Roth IRA contribution limits, see IRS publication 590-A, section 2 on Roth IRAs or visit www.IRS.gov.

 

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