Should I Start a Roth IRA at 18? Insights and Benefits
Starting an IRA as a young adult can be a shrewd financial move, particularly if you start at 18. The potential benefits of early retirement savings can significantly impact your financial future. This article explores why starting a Roth IRA at 18 can be highly beneficial, leveraging the power of time and investment growth.
Why Start a Roth IRA at 18?
According to investment experts, it is highly advisable to start a Roth IRA as early as possible, especially if you begin earning an income. The importance of starting early cannot be overstated. Your younger years offer a significant advantage when it comes to building a solid retirement portfolio. Early savings compound over time and can provide substantial returns come retirement age.
Early Savings Grows Over Time
Let’s consider a simple scenario: If you start saving $100 per month from the age of 18, assuming a 10% return (a conservative estimate for long-term stock investments), over 50 years, you will accumulate approximately $1.4 million for retirement. This example clearly demonstrates the exponential nature of early savings.
However, if you delay starting your Roth IRA until age 28, investing the same $100 per month for 40 years, your total savings will amount to a mere $530,000. This stark contrast illustrates how the early years of saving can dramatically affect your final retirement savings. Even doubling your monthly contributions (to $200) for 40 years still falls short of the $1.4 million accumulated when starting at 18 for 50 years.
Eligibility and Earnings
Before you can contribute to a Roth IRA, you must have earned income from a job, whether part-time or full-time. Passive income sources such as royalties or songwriting income do not count towards the eligibility criteria for a Roth IRA.
Mixed Opinions on Priority
While it is generally recommended to invest early, some argue that financial obligations such as vehicle expenses and future homeownership can make saving for retirement more challenging. However, the benefits of starting early often outweigh the immediate costs of other expenses. For instance, you can set aside money for other priorities, such as a down payment for a house, while still contributing to your Roth IRA.
Tax Considerations
The choice between Traditional IRA (tIRA) and Roth IRA is indeed tax bracket sensitive. The younger you are, the lower your income is likely to be, placing you in a lower tax bracket. In this scenario, a Roth IRA is often the better choice because you can pay lower taxes now on contributions and avoid taxes on withdrawals in retirement. However, if your income increases significantly by the time you retire, you may find yourself in a higher tax bracket, necessitating a different tax strategy.
Although you can take out the money you contributed from a tIRA for expenses like a down payment on a house, this defeats the purpose of long-term investing meant to maximize savings. It is often recommended to let the money grow until retirement, using other savings for immediate needs.
Personal Experience
Personal experience also plays a crucial role in making the right choice. For example, the author of this article initially made the mistake of contributing to Traditional IRAs when young, staying in a lower tax bracket. However, with increased income and retirement savings, transitions to higher tax brackets necessitated Roth Conversions. By staying in the lower 12% bracket, they contributed to Traditional IRAs. These conversions are now essential to manage tax implications during retirement.
Starting a Roth IRA at 18 is a strategic move that can lead to significant savings over a lifetime. The power of time and dollar-cost averaging cannot be underestimated. Younger investors have a unique opportunity to leverage these benefits, making early retirement planning a wise decision.