April 11, 2019

Why a Roth IRA is a Great Choice for Young Investors

As a young professional it is often hard to look far enough into the future to consider retirement, although it is one of the most crucial time periods in life to plan for. Whether you are fresh out of college or have been working for a couple of years, it is often common for young professionals to feel lost when looking for a way to begin saving for retirement. Employers may offer a 401(k) contribution that matches your personal contribution, but how can one supplement this? Fortunately, the Roth IRA offers some extremely attractive benefits that allow you to do just that.

A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals during retirement. Although both the Traditional and Roth IRA offer generous tax benefits, the timing of these benefits is different. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution, although withdrawals during retirement are taxed at the regular income tax rates. Some of the benefits of a Roth IRA include: no required minimum distributions (RMD), no age limit, no employer plan restrictions, and finally, no taxes for your beneficiaries. Most traditional 401(k)s and 403(b)s require that part of the tax-deferred savings must be withdrawn each year, starting at 70 ½ years of age. Although, with a Roth IRA there are no minimum withdrawals and the money can stay invested for as long as the owner chooses. Per the updated regulations in 2019, an individual under 50 can contribute up to $6000/year, and an individual over 50 can contribute up to $7,000/year.

There are 3 basic steps to follow when opening a Roth IRA:

• Ensure your eligibility
  • If you earn less than $122,000 and are filing independently, you are free to contribute the full $6000.

• Determine your investment style and custodian
  • Once your account is created, you are free to invest in the securities of your choice. Whether it be equities or fixed income, you are free to set up your investment portfolio as you wish.
  • In addition, you can choose from a typical online custodian such as Charles Schwab or TD Ameritrade where you can monitor and trade your assets electronically. Alternatively, for a more hands-off approach, you could invest with a robo-advisor that tailors your asset allocation to your degree of risk aversion.

• Monitor your growth
  • It is important to monitor your account closely to ensure it is performing as you wish. Alternatively, a registered investment advisor, such as Chicago Partners, can assist you with crafting a balanced portfolio and would optimize and rebalance it for you.

It can be difficult for college students and young professionals to think about retirement (as it seems millenniums away for us), although it is one of the most crucial events in life to plan for. Setting up a Roth IRA is one of the best ways to begin saving and investing at an early age. For any young investor, it is important to set up a savings plan, such as putting aside 10% of each paycheck to put toward the Roth IRA. If invested correctly, the amount in the IRA will grow over time and become an extremely valuable asset come retirement.