Start Your Roth IRA Now? Start Early Finish Early #FI

Start Early Roth IRA Bossmanjax.com

What are people saying about Roth IRA investing? I wish I started investing in my Roth earlier. Why is that so commonly said by 40 and 50 year old folks? Or, even by millennials in the mid-30s? Several reasons. Let’s take a quick look at the benefits of early investing in Roth IRAs.

Roth IRA Investing

Start Early, Finish Early #FI

In most cases, your income is lower when you are in your 20s when compared to your income in your 30s, 40s, and so on. And, Roth IRAs don’t result in a tax break at the time of the contribution. In other words, you pay taxes while in a lower tax bracket if you start your Roth IRA when you are younger.

Unlike a Traditional IRA or 401(k) contribution, a Roth contribution doesn’t lower your taxable income. However, investing in a Traditional IRA is more “tax advantageous” when your income is higher and you are in a higher tax bracket. Usually, later in your career.

Also note, most people can put a lot more money into a Traditional IRA or 401(k) through time. For example, business owners can setup a SEP or Solo 401(k) which have significant tax advantages. Roth contributions are often limited for many in comparison to other types of retirement programs. Whatever you decide, I follow the advice of the “Automatic Millionaire” – pay yourself first! And, start with a Roth IRA.

Individuals under 50 years old may contribute $6,000 to an IRA in 2019 ($5,500 in 2018). If age 50 or older, the IRS allows these individuals to contribute an additional $1,000 as “catch up” contributions for a total contribution limit of $7,000.

According to Fidelity, more than half of IRA contributions are Roth IRA contributions. They are particularly popular among people age 23 to 38. Millennials? They opened 41 percent of new Roth IRA accounts in 2018. Fidelity also indicated that 74 percent of millennial contribution dollars are going into Roth IRAs.

NOTE: Not everyone can contribute to a Roth IRA due to certain IRS income limits. Visit the IRS website for the regulatory limits, etc.

Compounding Investment Growth

Distributions in Retirement Tax Free

Over a 20 or 30 year period, your Roth IRA(s) will grow significantly. And, you can access your contributions (principal) tax-free and penalty-free before you reach retirement age. Although you don’t want to touch your retirement accounts until you retire, you can in an extreme emergency. In addition, all of your contributions can be used tax free once you reach retirement age (both principal and capital gains). This is important for planning your taxes in retirement.

You can always withdraw your original contributions to your Roth IRA tax- and penalty-free at any time. However, if you’re withdrawing earnings before age 59½ and before your account is five years old, you may pay taxes and penalties on the distribution. You can, however, avoid the penalty if you’re withdrawing money to buy a first home, cover qualified education expenses or pay for unreimbursed medical expenses and health insurance premiums.
(SOURCE: How to Build Wealth in Your 30s with a Roth IRA).

As an example, let’s assume your Roth IRA maximum annual contribution limit is $6,000. Start saving the maximum at age 30 and continue doing so until age 66. If you invest the money and earn a 7 percent annual return, your Roth will grow to over $1 million. In other words, saving $500/month in just your Roth can make you a millionaire in 36 years.

Roth IRA millionaire - bossmanjax.comBankrate.com Compound Interest Calculator for Savings

Taxes in Retirement

Retirees are losing thousands to taxes in retirement because they didn’t plan in advance. For retirees with insufficient funds in their Roth IRA accounts, they are often paying more in taxes due to their taxable income in retirement. Your social security income is taxable. Your Required Minimum Distributions (RMD) are taxable, and so on. Those that plan ahead are using their Roth IRA distributions in retirement to stay in lower tax brackets, whenever possible.

There are no required minimum distributions for Roth IRAs. That means you can leave Roth funds in your account for as long as you live. And, you can continue contributing to your Roth IRA as long as you have qualifying earned income and your modified adjusted gross income doesn’t exceed certain limits.

Starting early allows you to avoid a common recommendation financial planners tell their clients,

Consider an IRA conversion. You don’t have enough in your Roth to optimize taxes in retirement.

It is important to note, you’ll pay taxes when you convert. I heard that recommendation at two financial planning seminars I attended. Most of the attendees were older. One said to the presenter, I wish I started my Roth IRA earlier!

Withdrawing your Roth IRA funds (your contributions, plus earnings/capital gains) tax-free when you retire, in most cases, can be more advantageous to you in the long run. In other words, you end up with more although you don’t get a deduction now.

The bottom line, a Roth IRA gives you more tax flexibility in retirement.

As always, consult with a financial professional to determine what’s best for you. We are not financial advisers and we don’t provide financial advice at BossManJax.com; we just provide educational information and related resources to help others reach financial independence – go #FI.

Additional Resources

CNBC Article: The one thing no one tells you about investing in a Roth IRA

Other

3 Comments

  1. I always try to max out our Roth IRA early in the year; usually the first month (January 2019 this year). Pay yourself first and make it automatic! The Roth IRA does give you the most flexibility with taxes in retirement from what I’ve learned from financial articles and advice I’ve rec’d from professional financial planners.

    “Wish I started earlier with my Roth IRA funding”, for sure. As a small business owner, we also use Solo 401(k) IRAs. They allow you to really max out your savings, and tax deductions for the current year. This is a great vehicle for retirement savings if you are trying to save a high percentage of your income.

  2. Are you an entrepreneur, self-employed? Advisors like that entrepreneurs have the option of taking a loan from a solo 401(k), if it’s absolutely necessary. I’ve heard you can’t do that with an IRA!

  3. Why did we go with a Solo 401(k)? Entrepreneurs wear two hats in the eyes of the IRS when it comes to retirement savings. You are both the employer and employee. Therefore, you can contribute up to $56,000 to your retirement plan and save considerably on your tax bill now (later if you go with the Roth IRA option).

    You can make employee deferrals of up to $19,000, plus $6,000 if you are 50 years old or older. Entrepreneurs can also make employer contributions to the plan, based on their net self-employment income. Business owners with a solo 401(k) can also add a Roth option.

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