Roth Iras Are A Powerful Tool For Young Investors

A Roth IRA is a powerful investing tool for a young investor who is just starting out in his or her career. Created in 1997 by Congress, the Roth IRA allows investors to make after tax contributions to an investment, typically a mutual fund, and then later withdraw the funds tax free in retirement. A Roth IRA will not lower an investor’s tax burden like a 401k retirement plan that reduces the amount of taxable income up front in their careers. Rather, a Roth IRA’s true value shines later in retirement when the principle and interest are withdrawn with absolutely no taxes paid to the government because they were taken out of the investor’s paycheck earlier when the deposits were made.

Young Investors Can Harness Roth IRA’s Power

Roth IRAs can help a young investor harness the power of compounding interest. As of 2011, an individual can invest $5,000 per year in a Roth IRA assuming that they are under the age of 50. Those over 50 years-old can make an additional $1,000 annual catch up contribution to their Roth account. If a person can invest $5,000 per year from the very start of his or her career, that investor will have a nest egg worth millions assuming a decent rate of return. But, delaying investing for even just a few short years can cost a young investor hundreds of thousands of dollars later in retirement. The best advantage a young investor has is time to allow his or her investments to compound over decades.

Start A Roth IRA Early While In Low Tax Bracket

A Roth IRA is the perfect investment tool for a young investor who is in a low tax bracket initially in their career. Roth IRAs allow investors to invest with after tax dollars initially and let their capital, dividends, and interest grow tax free. Investors then withdraw both the principle and interest during their retirement years tax free.

Roth IRAs Are Easy For Young Investors

A Roth IRA is one of the easiest investments for a new investor to begin. Any mutual fund company and most banks can help an investor set up a Roth IRA. A Roth is not an investment itself but more of an accounting classification for a mutual fund. For example, an investor can buy shares in a S&P 500 index fund in either a normal taxable investment account or they can open the mutual fund account as a Roth IRA an invest up to the $5,000 contribution limit.

A Roth IRA is a powerful tool for a young investor because of the tax advantages the program offers. Paying a lower tax bill earlier in a career on the money invested in a Roth IRA while in a lower tax bracket and then withdrawing the money tax free later while in a higher bracket has the potential to save investors thousands of dollars. Many investors use a Roth IRA as the cornerstone of their retirement portfolio because of these tax advantages.

By: Hank Coleman

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Hank Coleman is the founder of several financial blogs, focusing on topics such as how to plan for retirement with a Roth IRA. Always looking for a trusted financial institution for advice and tips he tends to look up information at www.discoverbank.com more often than not.