When Should You Start a Roth IRA?

by Raptor Staff on March 2 2022

When it comes to the Roth IRA, it’s never too early to start. The earlier you start contributing to the Roth IRA, the more time your money has to grow. There’s no age limit to open an account, neither are there any required minimum distributions. You can open an account at any age as long as you have earned income and you can contribute as much as your earned income. Starting a Roth IRA account early can help you get a head start saving for a comfortable and secure retirement.

What Is a Roth IRA?

A Roth IRA is a type of individual retirement account that offer exceptional tax benefits including tax-free growth on investments and tax-free withdrawals on reaching retirement.

The account is funded with post-tax funds, which means you would have already paid taxes upfront on the money that you contribute to your Roth IRA account. Once the money is put into the account, it grows tax-free. After retirement, you can withdraw the money without having to pay taxes on the withdrawals.

Opening a Roth IRA when you’re just starting out, as early as your first paycheck, is a smart financial move. Not only will your money get maximum time to grow but you also fall into a lower income tax bracket when you’re just starting your career. As you move further along in your career, you’re likely to face higher income taxes.

How The Roth IRA Works

The Roth IRA offers some amount of flexibility, so you don’t have to wait until retirement to withdraw the money. You can withdraw your original contributions whenever you want, without having to pay any taxes or penalties. This is because you’ve already paid income tax on the money before putting it into the Roth account. You can do this regardless of how long your account has been open. It’s important to remember that tax-free withdrawals only apply to original contributions. You may have to pay tax or penalties on investment earnings.

The ability to withdraw before retirement is a huge advantage because it means you will be able to withdraw your contributions without paying taxes or penalties if and when an emergency arises before retirement. Financial experts recommend using this only if you have no other options available to you. This is because the Roth IRA is essentially designed as a retirement tool and works best when used as a long term strategy. Still, it’s a relief to know it’s there if you need it.

When you withdraw any money from a Roth IRA account, your original contributions always come out first. The interest only start coming out after the original contributions are exhausted.

Benefits Of a Roth IRA

A Roth IRA offers a relatively long list of compelling benefits including:

  • The potential tax savings is the single biggest advantage of opening a Roth IRA account. Generally, as you advance in your career and earn a progressively higher income, your tax rate will also increase. Because you pay taxes on the money before contributing to the IRA, chances are you’ll start off when your tax rate is still relatively low. It’s smart to pay those taxes now and contribute to a Roth account in return for tax-free withdrawals after retirement, when your tax rate would be much higher.
  • You can contribute to a Roth IRA as well as a 401(k), racking up those savings.
  • Original contributions can be withdrawn at any time without incurring income tax or penalties.
  • There’s no minimum age requirement for opening a Roth IRA. You can open an account at any age, provided that you’ve earned income. You cannot contribute more than your earned income.
  • There are no restrictions on the schedule for adding money into your account. Depending on your circumstances, you can choose to contribute the entire $6,000 at one time or split it over several months during the year. You have until the tax deadline to contribute for the previous calendar year.
  • When you complete 59 ½ years you’re allowed to withdraw your original contributions as well as earnings from your account without incurring federal income tax. The only stipulation is that you should have held the account for at least 5 years.

When is the Best Time to Start a Roth IRA?

You know that there’s no minimum age restriction for starting a Roth IRA account. You’re eligible to open an account at any age provided you have earned income. But you may wonder if it’s really a good idea to start an account that early, especially when you are still paying off student loans.

Here’s what financial experts have to say about starting a Roth IRA account early. Most experts advise young adults to open their Roth with their very first paycheck. This is when their income and tax bracket are still relatively low. According to them, starting a Roth IRA and funding it regularly every year is the easiest way to start saving for the future.

Advantages Of Starting a Roth IRA Early

There are several advantages of following the advice of financial experts.

Advantage 1

You’re likely to be in the lower tax bracket when you’re younger rather than when you’re in retirement. This allows you to save a lot of money. You can then take out all the money from the account – contributions as well as earnings – tax free during retirement when you’re in the higher tax bracket. This tax-free withdrawal applies regardless of how big your fund grows.

Advantage 2

The second significant advantage is that you enjoy continued tax-free growth even after you stop contributing. If your income grows to a point where you’re ineligible for a Roth Ira, you won’t be able to put any more money into your account. But whatever money is already in the account can stay there and continue to grow tax free. Think of it this way- the earlier you start, the more you’ll have in the account before your income hits the limit.

Advantage 3

Another advantage is that you have a choice as to how the money is invested. You can choose to invest in mutual funds, stocks, bonds or CDs and can be as conservative or risky as you want with the money in your Roth account.

Advantage 4

The flexibility to withdraw your contributions and earnings at any time, which allows you to enjoy the best of both worlds. You can invest your money in a Roth IRA and let it grow tax free knowing that it is not completed locked in. Any money that you put in is available to you at short notice in case of an emergency. So, your account does double-duty as an investment and emergency fund. The only limitation is that the earnings on your contributions can be withdrawn only after you turn 59 ½ years of age.

Can You Start a Roth IRA Before You Turn 18?

We said earlier that you can open an account at any age as long as you have earned income. So, yes, if you start earning an income before you turn 18 (or 21 in some states), you can technically start contributing to a Roth IRA. However, there is one condition – you’ll have to open the account with a custodial guardian. This could be a parent or other adult relative who is responsible for managing the account on your behalf till you turn 18 (or 21 depending on your state of residence). The funds belong to you. The custodial guardian only controls your account until you come of age.

If you’ve started earning an income doing part-time jobs as a teenager, starting a Roth IRA account right away is a great way to start saving for your future.

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