Would you know what a Roth IRA is? Samantha Loies, a junior at Walter Payton College Prep, admitted that she doesn’t understand Roth IRAs and that she hadn’t thought about planning for retirement. When you are young, it is easy to view retirement as far off in the future. Ironically, when investing for retirement, it is crucial to start as early as possible since investments compound over time. One opportunity for young people is to invest using a Roth IRA (Individual Retirement Account), which can easily be opened by a variety of brokers, banks, and other financial institutions..
A Roth IRA is different from a traditional 401k because contributions are made post-tax instead of pre-tax. “People tend to be in a lower tax bracket when they are younger than when they are in retirement”, which is one reason why Roth IRAs are good for young people. Since the contributions come after tax if you withdraw the account’s gains at the minimum age 59½ you will incur no fees (Investopedia, 2024). This means that all gains on the account are not eligible to be taxed as income when withdrawn because the contributions were taxed beforehand.
Another feature making Roth IRAs great for young people is the fact that “you can always access the money you contributed without penalty, no matter your age. Any gains in the account, however, may be subject to taxes and penalties if withdrawn before age 59½” (O'Brien, 2023). All the money you put into the account was already taxed and can be withdrawn without penalties, meaning that unlike a 401k which is subject to taxes and fees if withdrawn before retirement, the initial investments made in a Roth IRA can be accessed whenever needed.
In an interview with Liz Stack, a financial professional and CFA (Certified Financial Analyst) Society charterholder, she highlighted that on top of the tax benefits, “a Roth IRA is a great way for young people to save for retirement since they might not have access yet to a retirement plan like a 401k offered through an employer and there are no age limits for opening a Roth IRA.” This makes it perfect for young investors who want to begin investing and get a leg up to start building wealth.
Sources:
Articles:
Interviewees:
Samantha Loies (Junior at Walter Payton)
Elizabeth Stack (financial professional and CFA charterholder)
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