A Roth IRA can be a great way to take earned income and stock it away for retirement. But for many Millenials just entering the work force, retirement is the farthest thing from their minds. But according to CNN.com, the best thing they can do is start planning right now.
“While many Americans are falling short on savings,” CNN.com reported based on a Fidelity Investments survey released late last year, “Millennials are most at risk of being unable to afford essential retirement expenses — such as food, shelter and medical care.”
So what exactly is a Roth IRA? And how can it help? Maggie McGrath from Forbes Magazine offers a helpful breakdown:
“A Roth IRA is an individual retirement account that you can open on your own, with already taxed dollars,” McGrath writes. “All earnings in this account are tax free, provided you save them for retirement.”
She goes on to add that “since Roth IRA contributions are made with after-tax dollars, you can take back your original contributions at any time, without interest or penalty, making this a very flexible way to save.”
So how do Millenials go about weeding through the myriad of companies offering Roth IRAs as a saving options? And what is the difference between a Roth IRA and a traditional one? Neda Jafarzadeh from US News helps answer that question:
“Choosing a traditional IRA means you don’t pay taxes upfront on your contribution, but you will pay taxes when you withdraw money,” Jafarzadeh explains. “If you open a Roth IRA, you pay taxes upfront based on your after-tax income, but then your investments grow tax-free, so you can collect your money later on without having to pay any other taxes on it.”
If all this sounds too complicated for a generation whose toughest decisions to date are whether they were Team Edward or Team Jacob in high school, fear not. The world of retirement planning can be complex even for more business savvy folks who’ve already invested themselves in the work force for several years already. Determining whether a Roth IRA will help is just one of the many decisions Millenials will face in the upcoming years.
In the end, each person is faced with their own unique financial situations and will have to learn to have to deal with them individually. The best piece of advice that can be offered to anyone looking to plan for retirement with or without a Roth IRA is an easy one. Start saving now!
[Image Courtesy of Forbes.com]