Why Roth IRAs Are Ideal for Young Professionals

by Debbie Dragon on 7 May 2010 10 comments

The sooner you start saving for retirement, the more time you have to save for it and the greater the likelihood that you will have a large nest egg. Young professionals (20s and 30s) who make a decision to start saving for retirement can do so in many different types of savings and retirement accounts.

Financial Challenges for Young Professionals

Most young professionals are still becoming established in their career, so their incomes may fluctuate. For those who are single with no children, they are being taxed at the most disadvantaged tax filing status. So theoretically, they pay more in taxes. For others who decide to get married and start a family, they have to deal with expenses such as wedding costs, larger living space, more vehicles, childcare expenses and other expenditures. This is also a time when people begin making payments on college loans.

When it comes to saving for retirement, young professionals need a way to save for retirement that will allow them to have great flexibility and as many tax advantages as possible.

Roth IRA Flexibility

A Roth IRA may be the answer for most young professionals. You can go online and open up a Roth IRA in a matter of minutes. Whenever you choose you can contribute money to it. You can contribute up to $5,000 per year or up to your taxable income for that year, whichever is smaller. Money in a Roth IRA grows tax-free and can be withdrawn tax-free.

Roth IRA Tax Advantages

Unlike most other retirement accounts, if a young professional wanted to withdraw money that they contributed to their account, with Roth IRA rules, they can make tax-free withdrawals at anytime. This is huge, because withdrawing money from most other retirement accounts before age 59.5 will leave you with a 10% tax penalty along with being taxed as ordinary income. If the money that was contributed to the Roth IRA has any earnings like interest, dividends or capital gains, this money can be withdrawn after a seasoning period and justification period. The simplest seasoning and justification period is reaching age 59.5, but there are other seasoning and justification periods such as becoming disabled or being a first-time home buyer. So when you go to purchase your first home as your primary residence you can withdraw up to $10,000 of earnings tax-free. All of these tax-benefits are not available in any other retirement vehicle, so the Roth IRA is an ideal retirement account for young professionals.

Saving for the future can be a difficult task, especially while you are in your 20s and 30s. Therefore, you need as much flexibility and tax-advantages as possible. A Roth IRA can be the retirement account of choice for most young professionals.

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Guest's picture
Guest

not to mention the fact that with a significantly longer time horizon, young individuals have the opportunity to grow their earnings thereby making tax free withdrawals that much more significant down the road

Guest's picture
Brandon

You hit the nail on the head. That's the number one benefit of a Roth IRA for young people.

Guest's picture

Saving is considered as one great defense in times of financial uncertainties. Learning to be prepared for future is a wise decision because life has many obstacles that we can never tell when it's coming. Saving for retirement provides financial security as time comes. It's better to save while your still young and productive for this period comes only once.

Guest's picture
Equifaxpfb

ROTH IRAs also have benefits for married couples (young or old) and offer additional tax breaks past the age of 59 1/2 on your money that has already been saved. Check out Dan Solin's article, too: http://bit.ly/aB6vyC

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Guest

what is a good website that you can trust to start a roth ira?

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Guest

Any large brokerage firm. I use scottrade. Set it up online, have made 3 years of contributions and they give me tax forms electronically. Completely hassle free and just make deposits through ACH straight from my bank account. I've never had to meet someone in person, but if I did, I can just go to a scottrade branch.

2 other advantages:
1. you can invest in anything that the brokerage house offers (stocks, bonds, mutual funds, etc...) 401k is limited to very few investments in comparison.
2. The money you put in is post tax, so when you withdraw after retirement it is TAX FREE. As opposed to 401k which is pre-tax today, and then you're taxed on withdraws in retirements.

Guest's picture
Chad

The Roth is a good tool. I have recently made the decision to convert my Traditional IRA to a Roth. I learned that if I complete this transaction this year, before December 31, 2010, I will actually be able to split the income taxes that will be due over two years instead of paying all the taxes in one year.

You may look into if converting would be right for you. I like the thought of letting my retirement grow tax-free instead of tax-deferred.

I did not know about this rule until I located it along with some other good information on IRAs at getmyra.com.

Guest's picture
Ted

Chad,

Thank you for the information. I was not aware of this rule about being able to split the tax. I will check out www.getmyra.com for some additional information as well.

I too like the thought about growing the account tax free as opposed to tax deferred. I suppose the real questions is do you think that the rules for the Roth will change in the future?

Guest's picture

It's definitely wise to start your Roth IRA while your young just in case you need it early to if something happens. Or get it to grow for your future.

Guest's picture

I think part of the problem is that past generations held stable work positions for many years offering a consistent plan. With the younger generations today many move between employers sometimes every few years and that disruption causes a disruption in the mind set.