Remember that lunch you bought last week or your daily morning coffee? Delicious, right? While those purchases provide temporary satisfaction, that money can be put to better use. What if the money you spend could be worth thousands of dollars by the time you retire? Income you invest in a Roth IRA may do that for you.
A Roth IRA is an individual retirement account where contributions grow tax-free. You can contribute up to $6,000 yearly. To open a Roth IRA, you have to be 18 or with parent approval. Sadly, this cannot be done through babysitting or a lemonade stand, but requires a job with a verifiable pay stub.
Why now? Despite one of the strongest economies in decades, only 1 in 4 Americans feel financially prepared for retirement (CFP Board, “New Research Confirms Americans Are Not Prepared for Retirement”, 2019). Starting an account at a young age is preferable, since Roth IRAs grow your money through compounding interest (the addition of interest to the principal sum of a loan or deposit). Lucy K., a college student who recently started a Roth IRA, states, “It makes me feel a lot more mature and releases some of that anxiety and fear of the future.”
There are some drawbacks to starting an IRA account since Roth IRAs are designed for retirement. Although you can withdraw your contributions at any time, to avoid penalties you must consider the following requirements for withdrawing earnings. “You must satisfy two requirements for a qualified distribution to avoid taxes and a 10% early withdrawal penalty. First, you must have held a Roth IRA account for at least five years... Second, you must be at least 59½, disabled, dead (the distribution is taken by heirs) or using up to $10,000 toward a first-home purchase” (O’Shea, “Early Withdrawals from Roth IRAs …”, 2019). Anuraag Tripathi, co-founder of Manifest, a company that facilitates IRA and 401K transfers, comments that, “Kids will want to start trading and investing, and IRAs limit that activity.”
If you decide to invest in an IRA, you must be aware of your earnings and budget, and prevent yourself from withdrawing money early. Find a balance. Don’t wait, start now!
On the Money would like to thank State Farm Insurance Companies® for their sponsorship of this issue and State Farm Agents Doug Kramer, Tina Tzinares, Jon Guderjan, Linda Mitchell, Vic Portillo, Trevor Halloran, Matt Gross, and Georgelyn Hicks for their volunteer support.