You’ve probably heard it before: it’s never too early to begin saving for retirement. That said, we know this is easier said than done. Confidence among millennials that they will eventually be able to retire dwindles with each passing year. But if you start contributing to a Roth IRA as a young professional, you might just have a shot at retirement.
Here are a few reasons why young professionals should start a Roth IRA.
What’s a Roth IRA?
Before explaining why you should start one at a young age, we ought to explain what distinguishes a Roth IRA from a traditional IRA. To put it simply, the fundamental difference is that, in the case of Roth IRAs, you contribute post-tax dollars, your money grows without taxes, and after the age of 59 ½ you can make tax-free withdrawals.
Regular IRAs, on the other hand, are tax-deferred. You contribute a pre-tax amount, but your withdrawals are subject to taxes, just like regular income when you make withdrawals.
Perks for Young Professionals
But what makes young professionals the perfect fit for opening a Roth IRA? The greatest perk for young professionals is that, at a young age, people tend to be in a lower tax bracket than they would be if they waited until later in life.
Even small contributions that you make in your 20s and 30s will have the advantage of growing completely tax-free for decades.
Many people are put off from Roth IRAs because you have to pay taxes on them upfront. This is understandable. The prospect of making tax-free contributions to a traditional IRA may seem too good to pass up. Still, we would like to caution against this impulse. After all, you will end up having to pay taxes on your traditional IRA distributions when you are older and presumably in a higher tax bracket.
Here are a few challenges faces by millennials that make saving for retirement tricky:
- Exceptionally high student debt
- Elevated costs both for homes and rentals
- Lack of employment
It makes sense for millennials to invest in a Roth IRA because time is on their side. Once the taxes have been paid on your contributions, you can put them out of mind. As time goes by and your contributions begin compounding, you will be impressed just how much they add up.
Contact Bowman & Company Today
Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. We offer our services to clients throughout the Washington, D.C., metropolitan area, including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.