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Getting Started: Roth IRA is Like a Free Gift for your Future

September 30, 2021

By LARRY MENDEL, VP of Sales

Roth IRA

I am often asked about what is a good vehicle to get young professional children or grandchildren started towards saving and learning about investing. I have young professional children of my own, so the answer comes easily for me: Set up a ROTH IRA while they still qualify. According to current IRS rules, to contribute to a Roth IRA in 2021, single tax filers must have a modified adjusted gross income (MAGI) of $140,000 or less, up from $139,000 in 2020. If married and filing jointly, your joint MAGI must be under $208,000 in 2021 (up from $206,000 in 2020). Hoping they will be successful and at some point in the future may no longer be allowed to open a Roth IRA, I figure now is the time. My explanation to my own young adult kids is that not only will they get tax-free growth, but even better: That growth will have time for a large compounding effect.

When speaking about investing to younger adults, I always start with the phrase, “It’s the last double that matters”. The younger you are when you open an IRA, the greater your saving potential, because you get that tax-free compounding working for you. If you can make your money double 5 times instead of 4, the compounding is huge. For example, if you can average 7% on a $10,000 initial Roth IRA, starting when you are 25 instead of waiting to start when you are 35, the difference in potential value when you are 75 is $320,000 vs $160,000 and all tax-free when you take it out. Tax codes can change and the tax-free benefit could be less… but either way, getting started early makes a huge difference.

Roth IRA Pull QuoteWith traditional IRA’s or 401(k), people often forget that their retirement plans require you to pay income tax as you take the money out, so the actual spendable dollars are much less than the actual value of your fund account balances. Hence a great benefit of the Roth IRA.

No one knows what the future holds or how tax code legislation will be applied down the road, but for those of you with wealth, Roth IRA’s may become more appealing and worthier of a conversation with your tax consultant. For those of you that have young working adults and grandchildren, there are many advantages for just getting started early, not to mention the gift of compounding.

 

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