Disclaimer: I’m no financial expert, just a guy with a passion for personal finance who is sharing his own personal opinion, it’s your choice to do whatever you want.
I’m 20 years old and have just opened a IRA up, and plan to contribute the max allowed which is $6,000 this year. I wish I had done this sooner because of the benefits including tax free withdrawal when I retire. The only reminder I have is how much worse it could be – I could be 30 or older, so I still have time for the money to compound.
A Roth IRA is different than a traditional IRA based on the fact that you pay taxes when you put it in, not when you take it out. Why is this important? Because if you’re young like me you’re usually either in a lower tax bracket like 10% or 12%. That means instead of withdrawing the money and paying 22% or 35% you’re only paying the aforementioned 10% or 12% in taxes – you’ll save 2x or 3x as much in taxes than someone who chooses a traditional Ira. Let’s say you make a million dollars at the 22% bracket and you choose a traditional Ira – that’s $100,000 more paid in taxes than someone who chose a Roth IRA at 12%; enough to buy a few pizzas amiright?
Another benefit to choosing a Roth IRA so young is your money has a chance to compound, I used an online calculator for this so take it with a grain of salt, but assuming you open a Roth IRA at 18 and contribute the full amount of $6,000 and gain an average of 10% and withdraw it at the full retirement age of 67 you’d have made $7 million dollars, plus you can withdraw your social security benefits also. At age 62 getting partial social security benefits you’d still end up with a whopping $4.3 million. In my opinion the minimum needed to retire in today’s dollars is $1 million per person in a family, so if you’re married you need $2 million and if you’re polygamous then you need $1 million x the number of spouses. But let’s pretend it’s just you – using this rule you could retire after 30 years of work a millionaire – and that’s not even counting company 401k matching: a great amount to live comfortably.
So start up a Roth IRA, and contribute the maximum amount of 6k, that’s only 120 a week – you can do it!!!
Ricky J. Smith 