Why Roth IRAs are Ideal for Young Professionals

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The sooner that you start saving for retirement and the more time you have to save for retirement the greater the likelihood that you will have a larger nest egg. Young Professionals (20s and 30s) who make a decision to start saving for retirement can do so in many different types of savings and retirement accounts. However we will take a look at why a Roth IRA is ideal for young professionals

Financial Challenges for Young Professionals

Most Young Professionals are still becoming established in their career, so their incomes may fluctuate as they become settled in their careers. For those that are single with no children, they are being taxed at the most disadvantaged tax filing status. So theoretically, they pay more in taxes. Many young professionals decide to get married and start a family. With that come expenses such as wedding cost, larger living space, more vehicles, childcare expenses and other expenditures. We did not even mention college loan repayment cost. So this is a time in a person’s life when their income is most unstable, they are taxed heavily and their expenses are high from paying down debts. So when it comes to saving for retirement, young professionals need a way to save for retirement that will allow them to have great flexibility and tax- advantages.

Roth IRA Flexibility

A Roth IRA maybe the answer for most young professionals. The reason being is that it offers great flexibility and tax advantages. A young professional can go online and open up a Roth IRA in a matter of minutes. Whenever they choose they can contribute money to it. Of course all of this can be done electronically as well. They can contribute up to $5,000 per year or up to their taxable income for that year, whichever is smaller. Money in a Roth IRA grows tax-free and can be withdrawn tax-free.

Roth IRA Tax Advantages

Unlike most other retirement accounts, if a young professional wanted to withdraw money that they contributed to their account, with a Roth IRA they make tax-free withdrawals at anytime. This is huge, because withdrawing money from most other retirement accounts before age 59.5 will leave you with a 10% tax penalty along with being taxed as ordinary income. If the money that was contributed to the Roth IRA has any earnings like interest, dividends or capital gains, this money can be withdrawn after a seasoning period and justification period. The simplest seasoning and justification period is reaching age 59.5, but they are other seasoning and justification periods such as becoming disabled or being a first-time homebuyer. So when a young professional goes to purchase their first home as their primary residence they can withdraw up to $10,000 of earnings tax-free. All of these tax-benefits are not available in any other retirement vehicle, so the Roth IRA becomes an ideal retirement account for young professionals.

Conclusion

Saving for the future can be a difficult task, especially while you are in your 20s and 30s. Therefore, you need as much flexibility and tax-advantages as possible. A Roth IRA can be the retirement account of choice for most young professionals.