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Ask The Expert: Contributions

Q:
Asked by Nicole 7/1/12

When is the best time to start a Roth IRA?

Matthew Malone A:
Answered by Matthew Malone 7/9/12
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210 out of 383 people found this useful.

Hi Nicole,

As with most investing, the earlier the better. With a Roth, you get two benefits. A Roth doesn’t allow you to deduct contributions when you make them, but you take all the money out tax-free during retirement.  If you start when you’re young, the tax rate you’ll pay on your contributions will likely be lower than it will be during retirement. By starting early, you also increase the impact of compounding. In simple terms, over time, your investment returns increase because they are based not only on the amount you initially invested, but also on the earnings from those investments.

For example, if you invest $1 and earn 10 percent in the first year, you’ll have $1.10. You made 10 cents. If you leave the $1.10 invested and, in the second year, earn another 10 percent, you have $1.21. You’ve made 11 cents. That’s compounding in action.

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