Why Should Young People Invest in a Roth IRA?


“The bare necessities of life will come to you; they’ll come to you.” Baloo, jovially strolling about the jungle, believed that vital resources would simply drop into his lap – and, as evidenced by the many falling squishy bananas – he was quite correct. Unfortunately, outside of Kipling’s Oriental fantasy, the bare necessities can be astonishingly hard to get. That’s why there are IRAs (individual retirement accounts); they help people save for their hopeful and eventual joyful retirement. Young professionals have a gamut of investment opportunities from which to choose for retirement. They would do well to examine a Roth IRA.

What Is a Roth IRA?

A Roth IRA, the baby of its chief legislative sponsor, William Roth, is an individual retirement account under the 1997 U.S. Taxpayer Relief Act. It is designed to safeguard private retirement funds through investment in the economy. After a seasoning period of five years and after the account holder is 59 ½ or older, money may be withdrawn tax-free. Anyone, regardless of age, can set up an account so long as he or she has earned income from work. Individuals can, as a general rule, contribute $5,000 per year or the equivalent of their taxable income, whichever is less. For 2010, single taxpayers with an income higher than $105,000 or married couples with an income of $167,000 or higher cannot contribute to a Roth IRA. An account does not have to be suspended if income limits are exceeded, but no contributions are allowed for that fiscal year.

Basic Benefits

The obvious perk of a Roth IRA is that contributions can be withdrawn tax-free. In a traditional IRA, withdrawn funds are taxable; however, original contributions can be listed as tax deductible, while Roth contributions are not. The account gives career-oriented young professionals a simple, effective measure to store their wealth without having it shaved by mushrooming inflation or seized by invasive taxes. Many young people prefer a Roth IRA to a traditional IRA because of lower risk – they pay taxes on their contributions now in the hopes that tax rates thirty-plus years later will be higher.

Rules for Premature Withdrawals

Traditional IRAs frown upon early withdrawals, often charging a steep fine of 10% and counting withdrawals as taxable income. In contrast, Roth IRAs allow holders to withdraw funds early for select purposes, such as purchasing a first home, paying for a collegiate education or disability reasons – and the funds are not taxable. If an owner does withdraw money prematurely without granted reason, the funds are not penalized, but they are subject to taxes as ordinary income.

It Takes Two to Tango

Marriage can wreak havoc on tax statuses. Thankfully, Roth IRAs transfer easily between the single life and the domestic one. Spouses can hold their own individual accounts or can share jointly, provided the couple files taxes jointly. Also, if both spouses have their own account, and one spouse dies, the other can combine accounts with incurring penalties.

Financial Flexibility

Flexibility is paramount. Roth IRAs allow holders to invest a variety of diversified entities, including stocks, bonds, CDs, savings accounts, mutual funds, real estate, and more. They seamlessly transfer between employers, spouses and other life situations. In contrast to a 401(k), money withdrawn from a Roth IRA does not have to be repaid. They can be opened by a discount brokerage firm, mutual fund, bank, or other financial institution.

In the complicated world of finances, many just want to relax as they slip down a warm river eating bananas and humming catchy tunes. They just want the bare necessities. When life is young and green, thinking about the distant future seems pedantic and persnickety. But with a Roth IRA, planning for the future becomes a breeze – and coupled with a few bananas, you will have much more than the bare necessities.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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