If I could travel back in time as my current self and visit my then 18-year-old self, this is the wisdom I would dispense:
- Stop using MySpace. It’s dumb, and you’re going to feel dumb that you ever had an account.
- If you wear that puka shell necklace one more time, I’m going to punch yourself… myself in your… my face.
- Take some of that Jamba Juice income and open a Roth IRA. NOW!
It’d be an awkward, embarrassing encounter, but it’d all be worth it if it meant meeting Mr. Roth in 2003 instead of last year. In 2013, I rolled over my former employer’s 401k into a Roth IRA, and also opened up and maxed out brand spanking new accounts on New Year’s Eve. That should give you a really good idea of how these wild and crazy twenty-somethings party!
Roth IRAs are actually a lot less intimidating than they sound. And while there’s really not a lot to opening an account and jumping into the Roth-inator (which is the name I would have gone with), I figured it’d help if I first sold you on why you should open one. So let’s jump right in.
1. Because you’re going to get old
It’s a rough fact of life, but this near-mediocre physique will one day be even more mediocre and wrinkly and stretchy. And with that elderly age will (hopefully) come retirement. Most retirees will need to have saved 8x their final salary in order to have enough money to last their final 25 years. That’s a lot of dough. For those of us in our 20’s, 30’s, and 40’s, the time to get ahead is now. A Roth IRA is a great retirement investment vehicle.
2. No taxes on withdrawal
Unlike 401k’s and traditional IRAs, you invest already-taxed money in Roth IRAs. That means that at the time of retirement, you’ll be able to withdraw everything tax-free — clean and simple. This is usually advantageous for younger folks who are currently in lower tax brackets and will most likely be taxed at a higher percent at retirement age.
3. Early withdrawals are cool with Roth
Many retirement vehicles carry stiff penalties for withdrawing before you reach 59½… why. Why the half birthday?! So dumb. Anyway, what’s rad about the Roth IRA is that you can always take your principal (the money you invested, minus gains/losses) out free of penalty and tax. And while you probably wouldn’t want to touch the money you put in there, it’s nice knowing you can get it back whenever you want. There’s also no penalty for first-time homebuyers who wish to withdraw their earnings to put toward their home purchase.
4. Compound interest (aka money babies)
Joanna has explained this masterfully before, so I’ll just let her do it again:
“The earlier you jump in, the more money you stand to gain in the long run, thanks to a little principle called compounding interest. The interest that you earn starts earning its own interest. Basically all your money starts having babies. And their babies have babies. And the longer time you give it, the more babies there will be. The key is duration of time. I’d show you a graph with a gradual incline that suddenly spikes upward, but I’m not very good with Excel. So just pretend that you see it in your head. And trust me that lots of money babies are a good thing.”
So to summarize… Roth IRAs are a great way to invest for retirement and they’re forgiving should you ever need early access to the money. Easy stuff, right? So now that you know the why, it’s time to read our part two that covers how to open a Roth IRA.
Anyone else have any perks or Roth IRA experiences to share? Questions? Does anyone know whether you get any special bonuses if your name is “Roth”?