When to Invest in a Roth IRA

When people find out I am a financial planner, they often like to ask me about their money, and what they can do to get more out of it. I don't mind. After all, I've made it my business to try to convince people, especially younger earners, that they need to start saving and investing now. It can be a hard sell. Many young professionals recently spent years as students with almost no income. Now that they finally have money to spend, the last thing they want to do is save it for some murky, far away future.

Well, I'm here to tell you that right now is the very best time to start saving for the future, and a Roth IRA is the easiest and least financially painful way to do it. In fact, if you don't open a Roth IRA now, while your income is still relatively low, you could miss out on the chance to do so. By the time you make what you consider enough money to think about saving some, it may be too late. And if you happen to marry someone who also makes a good income, that "too late" day could come even sooner.

Think about it this way: Your goal should be to work hard so that you get to the point where you earn too much money to qualify for a Roth IRA. But until that day comes, open a Roth IRA now and fund it every year. Here are the advantages a Roth IRA gives you, especially if you open one early:

--Tax free income upon distribution. No matter how big your fund grows, all the money in it--both contributions and growth--will be tax free in retirement when you take it out.

--Continued tax free growth even after you stop contributing. If you get to the point where you make too much money to be eligible for a Roth IRA, you can keep the money there and it will continue to grow, tax free.

--Your choice on how the money is invested. Whether you are interested in investing in stocks, mutual funds, CDs, or bonds, you can be as risky or conservative as you want with the money you invest in your Roth IRA.

--Freedom to take out your contributions at any time. There are no penalties if you want to withdraw some of the money you put in, although there are certain limitations if you want to take out investment growth before you turn age 59 1/2.

--No mandatory distributions. Unlike a traditional IRA, you are not required to start withdrawing money at any particular age.

The longer your money stays in a Roth IRA, the more it is going to grow. Starting at age 25 is better than starting at 30, and starting at age 30 is better than 35. It may be difficult to imagine now, but an extra five years of contributions at the start of your career can equal several hundred thousand dollars more in tax free retirement income. Once your income exceeds the Roth's limits--around $126,000 if you are single--then you can begin contributing to a regular IRA. While the income in a traditional IRA will not be tax free in retirement, you do get a yearly tax deduction for your contribution.

If you decide to exit the rat race early and become a painter or a poet, your lower income will make you eligible to make Roth IRA contributions again. Young people and those in a low tax bracket should consider saving for retirement in a Roth IRA. Then you can be secure in the knowledge that even if you aren't making a lot of money now, it will be there for you when you decide to retire.

Jeff Rose is a certified financial planner and U.S. combat veteran. He blogs at Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance to educate young adults on the importance of saving.



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