Roth IRA: Don’t Let the Best 10 Years Pass You By

I had a conversation the other day with an acquaintance who happened to be a disenchanted lawyer; I’m sure you all know one of those. The lure of a big-firm paycheck had finally given way to her need to have a life, and she was in the process of changing careers and becoming a work-at-home mom.

As we talked, she told me one of the most useful things she had learned in law school came from her “accounting for lawyers” professor, who had lectured the class to open a Roth IRA immediately, because “the first 10 years of an IRA are worth more than the next 25 put together.”

The advice hit home. She had called up her family’s investment advisor the next day and sent him $3,000 of the money she had earned as a summer associate to open a Roth IRA. She continued to fund her account every year and now, 13 years and three kids later, had a nice start on her retirement fund that made it much easier for her and her husband to allow her to walk away from a six-figure paycheck.

I love her story because it illustrates everything I’m trying to teach new entrants into the job market about how smart it is to open a Roth IRA as soon as they start earning. To put it another way, the best time to start investing for your retirement is at a time when that retirement seems so far off that I might as well be talking about a day when flying cars are the norm and the Cubs win the World Series. (And please, don’t say that day will never come).

A Roth IRA is a great investment vehicle for new earners – in fact, it is practically tailor-made for them. Think about it the way my friend did:

  • You can contribute up to $5,000 to a Roth IRA every year, or less if you prefer. That amount is fairly “doable” for most young, single professionals and soldiers who don’t have many other big expenses.
  • You have the freedom to choose how the money in your Roth IRA is invested – you can be as aggressive or risk-averse as you want.

The money in your Roth IRA starts to grow immediately, and if you start young, you will have a lot of years for that money to increase before you need it to retire.

When the time comes to withdraw from your Roth IRA, the money is completely tax free. If, like most young professionals, you expect your income (and tax bracket) to grow as you progress in your career, those tax free dollars can amount to a huge sum at a time when you are paying a lot in taxes on your other income.

If you get used to making a contribution to a Roth IRA every year now, it will become a habit that will be easier to keep even when you have more expenses in your life.

As my ex-lawyer friend explained, “retirement feels a lot more real on this side of 40.” She and her husband “maxed out” their income eligibility on their Roth IRAs around year eight, and now she can contribute to a traditional IRA knowing that the money in her Roth account will continue to grow, tax free, until the day she needs it.

Jeff Rose is an Illinois Certified Financial Planner and Iraqi combat veteran. He blogs at Good Financial Cents and Soldier of Finance. He loves Crossfit workouts, writes about Roth IRA rules  and cheap life insurance, and craves In-N-Out burger. You can follow his updates on Twitter.

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