A ROTH for Molly?

My partner Sarah wrote a great blog last week that addressed the difficulties that parents face when trying to access medical information for their almost-grown children. In that same vein of graduate advice, I would like to touch on the somewhat more pleasant topic of retirement savings.

As most of us know, “start your retirement savings early” is a common refrain for young savers. However, convincing an 18-year-old to open a retirement account can be next to impossible. In fact, my dad forced me to do just that when I was working as a cart kid at a local golf course. To me at the time, contributing to a retirement account was akin to throwing money out the window! I had a very hard time understanding the long-term benefits of starting to save now vs. when I got a “real job.”

There are many great examples out there illustrating the benefits of saving early (and we’ve posted some before), but below (click to enlarge) is a good example from JP Morgan. Note that if this type of saving/investing were done in a ROTH IRA, all of the earnings would be tax free. In the case of Consistent Chloe, that’s $297,700 of tax-free growth!

A ROTH IRA might be the perfect solution for a summer worker, and/or a good solution for someone new to the full-time workforce. If you aren’t already aware, you contribute after-tax (no deduction) dollars to a ROTH IRA, and the key benefit is that it grows TAX FREE until retirement. This also means that when the money is withdrawn to provide retirement income, the growth is not taxable. With most other vehicles (Traditional IRAs and 401ks), the money is taxable as income when withdrawn.

Note that many firms allow minors to open ROTH IRAs as long as a parent or guardian signs on his or her behalf. So, if you or your children are under the age of 18, a ROTH can still be a great option. In Virginia, you generally need to be at least 14 years of age to work. So, my plan to send our youngest (Molly) to work now that she’s graduated pre-school is not going to work! 😊

Not quite ready for a ROTH IRA. Photo credit: Big Bro

Once a ROTH is funded, you can continue to put money in each year, or decide to stop funding it altogether. Usually, adding new money stops because there is a plan offered through work that is a better option. However, whatever you have been able to add will continue to grow tax free until you’re ready to use it after age 59 ½ .

Lastly, there are some exceptions that allow you to access ROTH money before retirement age, but they should be viewed as somewhat of a last resort. Probably the best use is for a down payment on a house. You can withdraw up to $10,000 of earnings tax and penalty free as long as you have met the 5 year rule.

Congratulations to all of the graduates out there! I bet you can’t wait to open your first ROTH IRA! 😊

Categories : Financial Planning

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