You're in your 20s, freshly launched into adulthood, and retirement feels like a lifetime away. But here's the thing—time is your greatest ally when it comes to building wealth. Starting to invest in a Roth IRA early can set you up for financial success in ways you won't believe. Let's break it down.
The Power of Starting to Invest at Age 21 vs 35
Imagine two people: Alex starts contributing to a Roth IRA at age 21, while Taylor waits until they're 35. Both contribute the maximum amount allowed by law ($6,500 per year as of 2023, adjusting for inflation). Assuming an average annual return of 7%, here's how their accounts could look by the time they're 65:
Alex (started at 21): $1.88 million
Taylor (started at 35): $820,000
So, Alex had over $1 million more than Taylor, just for starting 14 years earlier and investing about $90,000 more. In other words, Alex turned under $100,000 into over $1 million. Pretty good.
Why does this happen?
Compound interest. The earlier you begin, the more time your money has to grow—and the more your earnings start earning. By waiting, Taylor missed out on those critical early years of growth.
Tax Benefits: Why the Roth IRA Rocks
The Roth IRA is like the MVP of retirement accounts for young investors, especially if you're just starting your career. Here’s why:
Tax-Free Growth: Unlike traditional retirement accounts, you pay taxes on your contributions now rather than when you withdraw later. This is a huge advantage because your investments grow tax-free.
Withdraw Tax-Free in Retirement: At age 59.5, your withdrawals—both contributions and earnings—are 100% tax-free. That means more money in your pocket during retirement. This is a massive advantage compared to traditional retirement accounts, such as a 401(k) or Traditional IRA, where withdrawals are taxed as ordinary income. For example, someone in retirement might pay anywhere from 10% to 37% in taxes depending on their tax bracket, on withdrawals from traditional accounts.
No Required Minimum Distributions (RMDs): Unlike other accounts, Roth IRAs don’t force you to withdraw money at a certain age, so your investments can keep growing as long as you want.
If you're early in your career and in a lower tax bracket, this is an ideal time to pay taxes upfront and let your money grow.
What If You Need the Money Before Retirement?
One of the biggest fears for young investors is locking money away, but the Roth IRA is surprisingly flexible:
You Can Withdraw Contributions Anytime: The money you’ve contributed to your Roth IRA (not the earnings) can be withdrawn anytime without penalties or taxes. This can act as a financial safety net if you need it.
Earnings Withdrawals: If you withdraw the earnings before age 59½, you may face a 10% penalty plus taxes, unless you meet certain exceptions (like buying your first home or paying for higher education).
This flexibility makes the Roth IRA a rare combination of a retirement account and an emergency fund.
Why Start Now, Even If Retirement Seems Like a Long Way Away
You might be thinking, “I’m in college or just starting my career. I don’t have an extra $6,500 lying around!” That’s okay. You can start small! Even investing $50 or $100 a month can make a big difference over time. The key is to start early.
How to Get Started with a Roth IRA
Setting up a Roth IRA is easier than you might think. Follow these simple steps to get started:
Get the Help of a Financial Advisor or Choose a Brokerage or Financial Institution Research reputable financial advisors, brokerage firms, banks, or online platforms that offer Roth IRAs. Look for low fees, diverse investment options, and an easy-to-use interface.
Open an Account Once you've selected a platform, navigate to their website or visit a local branch. Most platforms will have a straightforward application process, where you'll provide personal information like your Social Security number, employment details, and bank account information.
Contribute What You Can Don't worry if you can't max out the yearly limit of $6,500 (for 2023). Start with whatever amount fits your budget—be it $50, $100, or even less. Set up automatic monthly contributions to stay consistent.
Invest Wisely After funding your account, you’ll need to decide how to invest your contributions. Many platforms offer helpful tools, like target-date funds tailored to your expected retirement year or robo-advisors to help you decide based on your risk tolerance.
Monitor and Adjust Periodically check your Roth IRA’s performance. As you grow in your career and budget, increase your contributions to stay on track with your retirement goals.
Take Control of Your Future
When you start investing in a Roth IRA in your 20s, you're giving yourself the gift of financial freedom down the road. Whether you dream of traveling in retirement, starting a business, or just enjoying life without financial stress, starting now will make it possible.
So, why wait? Your future self will thank you.