I am a huge proponent of saving and investing money for retirement, even as a relatively young professional. One of the best accounts to use is a Roth IRA. Here are 4 reasons why.
1. It allows you to save/invest money for retirement which can help you build your net worth quicker. A Roth IRA is a type of retirement account that you can invest in with income you earn from your job. The benefit of contributing money into this account is that although the account technically is for retirement, it has many other benefits as well. One of the biggest benefits is that it allows you to invest money in a way that builds your net worth quicker (since there are fewer fees and taxes associated with it). The sooner you are able to build your net worth, the more options you will have in life. Not only can you retire early, but you can also choose to work part-time, accomplish many of your financial goals a lot sooner, and rethink how you want to spend your life. If you choose to stay at your current job you may do so, but if you decide you instead want to take a year-long sabbatical to travel or work for a non-profit organization you can do that as well. Building your net worth sooner rather than later allows you to re-define how you want to spend your life. Investing in a Roth IRA makes this easier.
2. It’s tax-efficient, so you don’t have to pay taxes on the profits or the withdrawals. Taxes may not be the top thing on your mind, but when it comes to making and investing money, it is something that I think about often. The taxes you pay each year, from each paycheck, is likely your largest expense. If you are able to find ways to reduce your taxes, then you’ll likely have a lot more money in your pocket each month. One of the reasons I like the Roth IRA is because it’s tax efficient. Instead of having to pay taxes on the profits you make from your investments or paying taxes when you withdraw your money from the account later in life, a Roth IRA works differently. Since you contribute to a Roth IRA with earned income from your job (which is money that you have already paid taxes on), you never have to pay taxes on that money again. This means that any profit you make from your investments is tax free and you don’t have to pay at least 20% in taxes like many other people do with other types of accounts. Plus, when you withdraw the money in retirement, that money is also tax free.
3. There is more flexibility on when you withdraw money, so it can serve as an extra emergency fund. Unlike many employer-sponsored retirement plans like a 401K or a 403b, a Roth IRA is not tied to your place of employment. This means you have a lot more flexibility in the type of investments you can make. Instead of being limited to the funds supported by your job, you can use a Roth IRA to make various other real estate or stock investments. You also have a lot more leeway on when you can take the money out of the account. Although the goal is to leave money in the Roth IRA until you retire, you can take out the money you contributed sooner rather than later if you need. In fact, as long as you leave the investment profits you make inside the account, you can withdraw your contributions at any time tax-free. This means if you desperately need the money to pay off student loans, buy a home, or move to a new city, you can technically just withdraw the money from your Roth IRA account to do so. It can serve as a back-up emergency fund.
4. You can give the money to your children tax-free, which gives you an extra way to leave your family an inheritance. I am a single young professional with no kids, yet. However, at some point, I’ll have children and would ideally like to leave them an inheritance. Unlike other accounts you can set up for your children as an inheritance, any money you give your future kids in a Roth IRA is tax-free. This means they won’t have to pay any taxes on this money when they get it. The less taxes they pay, the more money they keep. Thus, each year you can contribute to your employer sponsored retirement accounts to work on building your own net worth AND contribute to Roth accounts which you can then use as extra money for yourself and eventually gift to your children as an inheritance.