<p>My family isn’t the most financially savvy and I’ve been doing some research on my own about the concept of a Roth IRA, but I’m still a bit hesitant as to if I should open one now. I’d appreciate any advice from the wise forum!</p>
<p>From what I understand, anyone with a job and earned income can start one, and since I’m younger than 50, I can contribute up to $5,500 a year or up to the maximum that I earned from my employment if it’s less than $5,500. This money is being taxed on the front end so that it and my earnings can be untaxed when I take it out, and there are less penalties if I were to take some out early. Additionally, the Roth IRA account serves kind of like a container for stocks, bonds, CDs, etc, and one should think long and hard about the kinds of investments they make.</p>
<p>Obviously I’m not very seasoned with investing and such, but would it be reasonable to maybe open up an account with perhaps a $1,000 CD or something? I know they say that you can retire rich if you start putting away money when you’re young, but should I be worried about this just yet?</p>
<p>I have enough money to sustain my living expenses for my last couple of years of college, so adding the little bit wouldn’t break me financially. Basically, is there anything else I should consider/look into before I do this?</p>
<p>You are never too young to open a Roth IRA. My kids started as soon as they got their first jobs. The power of compounding interest means that if you start early, you will be way ahead of someone who waited until they were older and had more money to contribute. Put whatever you can and keep it up.</p>
<p>I showed my kids an article I read when they were in their teens that said that if an 18 year old contributes $2,000 a year for six years and then stops. Then his twin starts contributing the same year, so at 24, How many years would the second have to contribute before he matches what the first has saved? The answer was surprisingly that the second will never catch up.</p>
<p>I would not recommend a CD though. I would suggest a mutual fund. You are investing for the long term. </p>
<p>I opened one, but the thought I had after I did it (too late) was that I shouldn’t. The thing I’m thinking is that chances are I’ll be withdrawing less money in retirement than I’m making now, thus paying less tax on any income. I should have a traditional IRA instead, so I don’t pay taxes on money going in, and instead pay taxes when I take it out. So you should consider if the Roth IRA is better for you, or the Traditional IRA, based on how much you make and how much you would expect to withdraw in retirement. </p>
<p>Perhaps someone else can chime in as well to confirm or refute my understanding, as I’m not sure of it.</p>
<p>Yes, contributing as a young adult is the best use of a Roth, as explained by @3bm103. The Roth is such a good deal that it may eventually be phased out. If you earn above a certain amount you can no longer add contributions, so it’s best to start early. I highly recommend a n online investment company called Betterment for young investors. They will automatically balance your investment according to your age and goals, using a very easy to navigate interface.</p>
<p>When my s’s were in HS they managed the computers and software stuff for my office. Paid them and then converted it immediately to a Roth. They were under 18. Start as early as you can.</p>
<p>I think you know it’s the smart thing to do. It is likely the Roth option will not be around forever, it is far too good a deal, and of course our government wants us to be taxed up the ying-yang. That money you’re making? It doesn’t belong to you, it’s theirs. You only get to keep what they will allow. At a certain point, you may make too much money to ever contribute to a Roth again (though for right now, even high incomes can do a back door Roth, but that probably will disappear).</p>
<p>For those that are deciding between a Roth and a traditional IRA, it’s a little more complicated. If you aren’t making much money, the tax deductibility of a traditional IRA isn’t very significant, so of course you want to contribute to a Roth, where you will never be taxed on those gains. If you were high income, maybe it’s better to get a big tax break from the IRA. Probably best to do both, if you are certain you won’t use that money. I’m having a hard time advising my son. He is young, but high income, probably will pay about 30% in city/state/federal taxes. But his income is increasing, so he probably won’t be able to contribute to a Roth much longer. His money is piling up, so he really needs to do something.</p>
<p>But do not put this in something with a crappy return, like a CD. Put it in a reliable index fund. Either a mutual fund or an ETF. Vanguard is really low cost and easy to follow, though I think you might need 3K minimum in order to put it into a mutual fund. I’m not sure.</p>
<p>Can someone explain to me why Roth is such a great deal? It seems like a worse deal in most cases than a traditional IRA, because you’re probably making more than you’re going to withdraw from it in retirement. Meaning you’re paying more taxes on it. It seems like it would only be a good deal if you’re not making much. </p>
<p>It is never too young to start saving and never too young to open a Roth IRA if you qualify. The lifetime advantage to saving when you are young and especially to contributing to a Roth IRA are incredible. While a CD is agreeably a crappy return, I wouldn’t let the choice of what to invest in stop you from opening and funding an account. You can let the account sit in a money market fund while you learn. If it were me, I would fund the account and spend the next several months figuring out and understanding your investment options. Busdriver11 has some great thoughts upthread!</p>
<p>One great thing about the Roth to remember is that contributions can be withdrawn without a tax penalty. If an emergency happens (like long-term unemployment) you will be better off withdrawing the money than you would be a traditional IRA or taking a distribution from a pension account. While I don’t recommend taking the money from any retirement account, the Roth does offer an advantage.
Also, if you are successful, you will not be forced to take distributions from the Roth IRA. You could leave it to your grandchildren for their own education expenses. </p>
<p>@vladenschlutte, I started my daughter with a Roth IRA when she was 15, I gave her the gift of time that is why Roth is better. For traditional IRA, the money is also growing tax deferred but you have to pay all that when you take it out. So if you are young do Roth, time is on your side.
For those who could afford both, I would have 401K and then a Roth IRA on the side. If you don’t know anything about investment, follow the sage Warren Buffet, he puts his wife’s money into S&P 500 Index fund or ET(if you are comfortable with that).
And don’t time the market, I put money in a Roth in 2008, the market dropped in 2009, I lost about 30% and now it’s recovered to a lot more than when I put in.
Both of my kids are typical of this millennial generation, they are so afraid of the stock market, they told me to put their money in CD, but I put in stock anyway. What do they know?</p>
<p>What those who claim that if you are paying a high tax now it’s best to use a traditional IRA are forgetting is that not only are the contributions taxed when you withdraw from a traditional IRA but so are the earnings. With a Roth, the earnings are tax free. So maybe, if you’re approaching retirement age and you are very high income and expect it to go down, you should stick to a traditional. But if you’re young, as in the case of the OP, all that money earned in the Roth IRA until they retire can then be withdrawn tax free. Not only that, but when you reach 70 1/2 you are required to withdraw money from a traditional IRA even if you don’t need it and you will pay tax on that. There is no mandatory distribution from a Roth. You can also leave it to your heirs tax free.</p>
<p>Also, there are income limits on how much you can earn and still contribute to a Roth IRA (the amount a single person can contribute to a Roth IRA is reduced if their income is above $114,000 in 2014 and there are no allowable Roth contributions for a single person’s income above $129,000).</p>
<p>However, someone could get around these limits using a backdoor Roth IRA.</p>
<p>I like @3bm103’s comment, with the only caveat worth mentioning that, yes, the Roth IRA can be left to the heirs tax free, as long as the estate does not exceed the federal estate tax exemption ($5.34 million in 2014).</p>
<p>…and if someone was to leave their Roth IRA to their grandchildren (instead of their spouse), now you’re really talking…</p>
<p>“Can someone explain to me why Roth is such a great deal? It seems like a worse deal in most cases than a traditional IRA, because you’re probably making more than you’re going to withdraw from it in retirement. Meaning you’re paying more taxes on it. It seems like it would only be a good deal if you’re not making much”</p>
<p>@Vladenschlutte, let me give you a specific example.</p>
<p>We gave an investor friend, less than 20K from a traditional IRA about 17 years ago. He has had an annual return of approx. 18% for that time period. We truly hope he keeps it up, and we really hope he doesn’t retire!</p>
<p>In 2010 that IRA was worth approx. 125K. We had a choice, we could keep it as an IRA, or pay the taxes on it and convert it to a Roth. we chose to pay the taxes (about 45K, just about killed us), and converted it to a Roth. It is now worth about 335K. If he keeps up that return until we are 70 (I know it’s unlikely, but what if?), that Roth will be worth 7.7 million.</p>
<p>Had we left it in an IRA, we’d have to start withdrawing at age 70 1/2, and pay taxes at our tax rate on all withdrawals. We will have a high tax rate at retirement (at least 30%), plus we are certain that tax rates will go way up. I suspect at least half of that theoretical 7.7 million would go to taxes.</p>
<p>Converting it to a Roth means the entire gain will not be taxed. Ever. We will not have to withdraw it at any particular age, we can withdraw it when and if we choose.</p>
<p>If you are going to invest in something super safe with a very low return, a Roth might not be worth it. Something with potentially very large gains, definitely worth it. Taxes will eat up much of your gain.</p>
<p>@busdriver11 - if your Roth IRA keeps growing, then you would just have to worry about Washington changing the rules on you, such as capping how much you can have in retirement accounts:</p>
<p>How do you provide a cap? I’m sure his proposal would limit deduction of additions to your existing IRA if it’s already reach a certain limit. For Roth IRA, even if you have to withdraw at 70.5, it’s still beneficial because it’s tax free unless some more laws will pass.</p>