Who doesn’t want to live a tension-free life after retirement? Most of us want to enjoy retirement without the looming shadow of taxes, and an early Roth IRA can help turn this dream into reality. The problem, however, is that most people, especially those just joining the workforce, don’t know much about the Roth IRA and its benefits.
The term ‘IRA’ refers to an ‘Individual Retirement Account,’ which reflects its purpose. However, this account’s benefits make it way better than other retirement plans or accounts. It provides a perfect way to leverage the tax-free growth of your post-retirement funds. Are you still confused about starting a Roth IRA early in your career?
If yes, then learning this article will resolve all your confusion and make you interested in starting it as soon as possible. Read on to learn more.
Tax-Free Growth
You should understand that the contributions to a Roth IRA are made with dollars you get after taxation. This is where a Roth IRA differs from a traditional IRA or any other retirement fund account or plan. Because you make tax-free contributions to this account, the growth in your savings is also free of tax. Not only that, when you withdraw your savings from the account, you won’t be taxed again as you have already made a contribution with after-tax income. Simply put, you are not liable to pay the IRS a single dime on your gains thanks to tax-free savings and growth. So, when you start contributing to a Roth IRA early in your career, it works as a smart long-term investment because of maximized tax-free compounding.
Flexibility
Another prominent benefit of starting a Roth IRA at a young age is the flexibility it offers. IRS allows you to contribute $6,500 if you are under 50. This option enables you to make as many contributions as possible at a young age. However, it doesn’t mean you must contribute $6,500 annually. Roth IRA’s flexibility enables you to skip a year or even contribute less if you can’t manage sufficient funds. You can also make contributions of $7,500 after 50 to catch up. You don’t get this much flexibility anywhere else, and even employer-sponsored retirement plans can’t compete with Roth IRA in this regard. Hence, the flexibility of this retirement account offers you complete control over your long-term investment for life after retirement.
Higher Compound Interest
Starting a Roth IRA at a young age, just when you have entered the workforce, also gives you the early bid advantage. Investing money at the right moment is key to getting better returns, and this retirement account enables you to do that if you start it early in your career. The time serves as a valuable asset for you and enables you to earn returns on your initial investment as well as the earned returns. Hence, starting a Roth IRA in your early 20s or 30s will allow you to get significantly larger gains when you retire. Simply put, more years of contribution means a higher compound interest. If you are still unsure about it, use a Roth IRA calculator to estimate an account that starts with a $5000 annual contribution. Compare the compound interest you will gain when you start at 25 with the post-retirement gains if you begin at 35. The calculator will easily tell you how significant the difference will be in your final returns because of a 10-year difference.
No Restrictions Regarding Required Minimum Distributions
A Roth IRA also differs from other retirement accounts because it doesn’t implement required minimum distributions (RMDs). Hence, you can leverage the option of growing your investments for as many years as you desire and withdraw funds when they are actually required. Those who start a Roth IRA early in their career will be the greatest beneficiaries of this option as they can grow their investments without worrying about forced withdrawal once they turn 60.
Early Withdrawal Option
You may come across a scenario when you need a hefty amount to resolve issues that may arise anytime in your life. Starting a Roth IRA early in your career gives you an easy solution. This account allows you to withdraw your contribution anytime without paying tax and facing any penalty. Hence, you can easily use your contributions over time to such a retirement plan as your emergency backup fund without worrying about anything. While we don’t suggest you withdraw the amount from your retirement account until or unless necessary, having the flexibility to do so with a Roth IRA gives you the confidence that you are ready to face any challenge.
In the End
When it comes to the best financial decisions, nothing comes closer to starting a Roth IRA early in your career. Long-term benefits, flexibility, and tax-free growth make it the best retirement plan you can think of. You can use a Roth IRA calculator to understand how beneficial it can be to start early and enjoy the gains of this long-term yet highly flexible investment. Hopefully, you have found this article valuable and started considering starting your account as soon as possible. We wish you luck with your retirement investment!
