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
Why Roth IRAs Are Ideal for Young Professionals
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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 Money in a Roth IRA grows tax-free and can be withdrawn tax-free.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that was contributed to the Roth IRA has any earnings like interest, dividends or capital gains, this money can be withdrawn after a seasoning period and justification period.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.
Best of Wise Bread
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.
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
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.
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?
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.
