There’s no better time to start saving than right now. Seriously!
You’re young, you’re free, and you have time on your side. You have the energy, hustle, and drive. With a little bit of discipline and know-how, you can start building the retirement you’ve always wanted.
So, how should you get started? Where should you put your hard-earned dollars? A Roth IRA might be a good choice for you.
With a Roth IRA, you don’t have to be 18 to start investing (as long as your parents are willing to help you open an account). That’s right, if you’re employed and eager to start stashing away money for your golden years then you can start doing so even before you can drive a car or grow a mustache.
So, do yourself a favor and read on to learn more about Roth IRAs and why they’re pretty awesome.
Where to find a Roth IRA for young adults
If you’re interested in opening a Roth IRA but you’re not sure where to find one, here’s a helpful list of options.
Betterment is an online investment company that you can use to find the right IRA (they offer Traditional, Roth, and SEP IRAs), assist you with retirement planning, and automate your investments. To get started you just answer a few simple questions and Betterment helps you to decide which IRA you should use.
Betterment offers a number of money management services from cash management, to investment, and retirement savings. And, the best part, Betterment is a fiduciary service which means they have to act in a way that puts your interests ahead of theirs.
Wealthfront is an automated investment service that works with you to optimize your finances. How does it work? You deposit your paycheck to Wealthfront and then they automate the rest.
Wealthfront is designed for young professionals, anyone from passive investors who want expert digital guidance, to people who want to be smarter with money. Investment management is automated with tried-and-true algorithms but strategic—and tuned in to your individual risk level.
Low fees, free planning guides, and multiple tax perks make Wealthfront worth a look.
- Automated management
- Tax-loss harvesting
- Ability to customize portfolios
- No fractional shares of ETFs in automated accounts
- No human advisors
Using their software, you can have some of your money go to pay your bills, some go to an emergency savings account, and then you can invest the rest. Basically, you give all of your money a job rather than having it sit idly in a regular bank account.
Wealthfront can also help you to plan for the retirement that you’ve always wanted. To get started you need to link your financial accounts to Wealthfront and then their team of professionals can crunch your numbers and forecast how much money you will really need to retire. After you create a plan you can begin investing with the support of Wealthfront. And, you can rest assured that your interests will be taken care of because like Betterment, Wealthfront offers the full fiduciary standard of service. And, when it comes to investing in an IRA, Wealthfront offers Traditional, Roth, and SEP IRAs.
E*TRADE is one of the OG’s of online investing and trading. Their platform has been around since the 1980s – way before online trading was cool.
E*TRADE offers a wide array of services and accounts. Specific to retirement, they have all sorts of IRA accounts from Traditional and Roth to Rollover IRAs (move funds from an old employer-sponsored plan to an IRA).
E*TRADE wants to make it easy for you to start investing in your future. They offer an award-winning app that makes it easy for you to trade or access your retirement accounts from anywhere at any time. So, if you’re looking for a great digital experience, you might want to check it out.
J. P. Morgan Self-Directed Investing
J. P. Morgan Self-Directed Investing is an online investing platform that provides access to the tools and expertise you need to maximize your investing potential.
J.P. Morgan Self-Directed Investing offers Chase clients tremendous convenience and new investors a clean and intuitive investing toolkit. The research-based interface makes it ideal for those who are interested in learning the market with no investment minimums attached.
- Exceptional customer support
- Simple, intuitive interface
- Integration for Chase customers
- Limited functionality
- Portfolio Builder requires $2,500 min.
When it comes to retirement planning you can choose to open a Traditional IRA, a Roth IRA, or you can rollover an existing account from a previous employer. If you need help or have questions about retirement you can choose to work with a J.P. Morgan advisor, or you can invest online on your own and refer to some of the informative resources they have on the J. P. Morgan Self-Directed Investing site.
What is a Roth IRA?
A Roth IRA is an individual retirement account that offers tax advantages including tax-free growth on your investments and tax-free withdrawals in retirement. Yay!
A Roth IRA is funded with post-tax money, meaning the money you’ve already paid your taxes on.
As of 2020, people under 50 years of age can invest up to $6,000 per year or up to the total earned income for that year, whichever is less. Those over 50 years are allowed to invest an additional $1,000.
Who can open a Roth IRA?
If you have a baby hustler and you want to get them on the right financial track early, you can open a Roth IRA and invest for them, as long as you have “earned income” (aka, a job or your own business). However, they will need a custodial guardian to manage the account until they come of age.
While young people who are under 18 can technically contribute to a Roth IRA they need to do so using a custodial guardian.
The custodial guardian is usually a parent and their job is to manage the account until their child turns 18 (or 21 in some states).
While the funds belong to the child, the parent controls the account until they come of age.
If you have a teenager with a part-time job (or you are a teenager with a part-time job), this is a great way to start saving for your future.
What types of IRAs can young adults invest in?
While the Roth IRA is probably one of the best choices for young investors, you can also consider opening a Traditional IRA.
How does the Roth IRA compare to a Traditional IRA?
For starters, both Roth IRAs and Traditional IRAs are tax-advantage investment tools and both allow you to save for your retirement. Where they differ is in the specific tax advantages they offer.
While a Roth IRA offers tax-free growth and tax-free withdrawals, a Traditional IRA is tax-deductible. This means that the contributions you make to your Traditional IRA will help to lower your taxable income.
With a Roth IRA, you pay your taxes now and reap the tax-free withdrawal later. With a Traditional IRA, you reap the rewards now with the tax deferral but you have to pay your taxes later when you start to withdraw the money.
Why Roth IRAs are best for young adults
Roth IRAs are a good choice for young adults because at this point in your life you’re probably in a lower tax bracket (find out your bracket here) than you will be when you retire.
A great feature of the Roth IRA for young people is that you can withdraw your contributions anytime and without taxes or penalties. However, this is only when it comes to your contributions (the earned money that you put into a Roth IRA). You may have to pay taxes and penalties when it comes to any investment earnings (the money that comes from interest payments).
To avoid paying taxes or penalties make sure you are making qualified distributions (a qualified withdrawal from a qualified retirement fund). The IRS provides a list of what is considered a qualified distribution here.
For withdrawals that don’t meet the requirements for a qualified distribution, you may be subject to taxes and/or a 10% early distribution penalty.
Because you can withdraw your contributions at any point, a Roth IRA can also act as a backup emergency fund. If you find yourself in a position where you’re unemployed or you need money to pay for an unexpected cost, you can dip into your contributions. But only if necessary. The goal is to leave the money in your account for as long as possible so you can reap the rewards of compound interest.
Why should a young adult consider a Roth IRA?
Young adults should consider opening a Roth IRA as soon as possible. Think of the growth you can achieve if you leave your investments to grow tax-free for decades. With some patience and the power of compound interest, you will be on your way to funding the retirement you’ve always envisioned.
To sum up, here are a few reminders of why the Roth IRA is a great choice for young people:
- Tax-free growth.
- Tax-free withdrawal.
- You’re probably in a lower tax bracket now than you will be when you retire so it makes more sense to pay your taxes now, invest your money, and then withdraw it tax-free later.
- You can use it as an emergency fund if necessary.
Just to demonstrate the power of investing when you’re young, let’s do a little bit of comparison.
Let’s look at how much you can save over time if you start investing different amounts at different ages. Let’s assume the following:
- You want to retire at the age of 65.
- The market is giving an average of 7% return.
- You have a starting balance of $5,000 in your Roth IRA.
- You make $30,000 per year, so you’re sitting at a marginal tax rate of 12%.
|Age (years)||Invest $1,000/year||Invest $6,000/ year (max contribution)|
This table was calculated using MU30’s Investment Calculator.
Look at the difference. If you start investing when you’re 20 vs. 50 years old, you will have more than six times the money saved up.
This can mean the difference between a retirement where you have to live a very frugal and disciplined life in order to make ends meet versus a retirement where you can travel the world and spoil your future grandbabies.
There you have it. If you’re a baby with a job or a young adult just starting out in your career and you want to start saving for retirement, the Roth IRA is a great option. As long as you’re earning income (and have your parents help), you’re never too young to start investing in a Roth IRA.
If you’re a teen with a part-time job, talk to your parents about opening a custodial Roth IRA. If you’re an adult, check out one of the online options listed above. You don’t have to have a ton of money to see major results in your future. Time is on your side – take advantage of it!