Securing Your Financial Future: The Power of Starting Early with a Roth IRA
By Everett Oehler
At what age did you start thinking about saving for retirement? The most common answer to that question is probably somewhere between your mid 20s and early 30s. But if you’re able to start even earlier – such as when you’re in high school or college – those extra few years of saving and investing may make a notable difference in the long run.
I am currently a junior at UNC, but I became interested in personal finance and the world of investing during my junior year of high school. An interesting retirement vehicle that I discovered amidst my early research was a Roth IRA (Individual Retirement Account). After learning about the potential tax benefits of the Roth IRA and the benefits of compound interest, I became hooked and immediately asked my parents to help me open an account.
Why a Roth IRA?
When it comes to retirement savings accounts, many people have heard of 401k plans. A 401k is a company-sponsored retirement account where employees can contribute a percentage of their income. Employers often offer to match at least some of these contributions. You can usually make either Traditional or Roth 401k contributions:
Traditional 401k: contributions are deducted from gross income, reducing taxable income, and withdrawals are taxed when distributed in the future.
Roth 401k: contributions are made with after-tax income, and withdrawals in retirement are tax free.
However, if you don’t work for an employer that offers a 401k OR you’re just looking for an alternative savings vehicle, you can consider looking into an Individual Retirement Account (IRA). Unlike the 401k, an IRA is not a company-sponsored account. But similarly to the 401k, there are both Traditional and Roth IRAs, offering similar tax benefits. For more details on the difference between Traditional and Roth IRAs, check out these Hilltop blog posts:
If you’re able to start investing early, a Roth IRA can be an especially interesting option because:
You are probably not too concerned about saving money on taxes yet, and
You have a longer time frame for the money to be invested.
Typically, the earlier you can start investing, the better. This is because your investments have more time to potentially grow – five or ten years of extra time in the market may make a notable difference.
Actionable Steps:
If you’re interested in opening a Roth IRA to start investing, here is the general process:
Confirm your eligibility. If you have earned income that is below the IRS limits (for 2024, the limit = modified AGI of $161,000 (single) or $240,000 (married filing jointly)), you can potentially contribute up to $7k in 2024 to a Roth IRA.
Pick a financial institution. Almost all investment companies offer Roth IRAs; some of the most common institutions are Fidelity, Schwab, and Vanguard.
Fill out paperwork to open the new account. You can typically do this electronically. You’ll usually be able to link your bank account to the Roth IRA and name who you want to be a beneficiary on the account.
Make an initial contribution and invest the cash. You will want to pick investments based on your risk tolerance and time horizon. We typically recommend building out a diversified portfolio of investments that includes a mix of stocks and bonds, from companies both in the US and abroad.
Set up a contribution schedule. You can usually set up automatic contributions into your Roth IRA. This is a great way to save without having to think about it!
In summary, starting early with a Roth IRA may make a significant difference in your financial future. By taking advantage of tax-free growth and compound interest, you could position yourself for success and flexibility in the long term. Remember, the earlier you start, the more time your money has to grow. Start investing in your future now!
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.
Hilltop Wealth Advisors does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. As with any investment or strategy, the outcome depends upon many factors, including investment objectives, income, net worth, tax bracket and risk tolerance. Individuals should consult with their tax accountant and/or legal representative before implementing any tax or legal strategy. IMPORTANT: ALL ASSUMPTIONS OF GROWTH RATES DISCUSSED IN THIS PLAN AND/OR SHOWN ON ANY CHARTS ARE HYPOTHETICAL AND ARE NOT A GUARANTEE OF THE FUTURE PERFORMANCE OF ANY ASSET. Past performance is not indicative of future results.