Open Roth IRA now, avoid taxes later
McLEAN, Va. (10/2/12)--You've landed your first "real" job, you've got an awesome new apartment and you're ready to conquer the world. Believe it or not, this is the perfect time to think about your retirement. Once you take care of bills and expenses, and contribute to your employer's 401(k), think about opening a Roth IRA (individual retirement account) (USAToday.com Sept. 21).
A Roth IRA lets you set aside a specified dollar amount of income after taxes, providing tax-free growth of your money. You won't get a tax deduction as you make contributions but, starting at age 59 ½, when you start making withdrawals, you won't pay taxes. With a traditional IRA, contributions are tax-deductible, but you'll pay taxes on withdrawals at retirement.
For young people especially, a Roth IRA can be a great investment because of:
Early withdrawals. You'll avoid the 10% early withdrawal penalty if you're using the money as a first-time home buyer, or if you're disabled.
Low tax rates. If you're in your 20s, you're most likely paying a lower rate than the anticipated higher tax bracket when you retire, making it a better deal for you to pay taxes now.
Ease and simplicity. When you retire, it's easier to take tax-free withdrawals than to calculate what you'll need for living expenses after taxes and to send estimated payments to the Internal Revenue Service.
For 2012, you can contribute up to $5,000 to a Roth IRA. (If you're older than age 50, you can contribute up to $6,000.) The professionals at your credit union can explain the differences between Roth IRAs and traditional IRAs, and can help you decide which option is best for you.
Benefits of compounding. Because of your early start, you'll far outpace any progress your peers make if they start 10 years later, even though their incomes and ability to make contributions could be higher then.
For related information, read "IRA Withdrawals: The Good, the Bad, and the Ugly" in the Home & Family Finance Resource Center.