When Should You Start a Roth IRA?

The short answer is “right now.”

The slightly longer answer is, “as early in your life as possible after eliminating your debt and filling your emergency fund.”

See below for a full video of this post.

What is a Roth IRA?

A Roth IRA is a retirement account that allows you to grow your money tax free.

IRA stands for Individual Retirement Account. There are seven types of IRAs, but just two that we’re going to focus on for now: A Roth IRA and a Traditional IRA. As of 2021, you are allowed to contribute a maximum of $6,000 per year to a Roth IRA.

The tax benefits of using a Roth IRA can be huge. The idea here is that you pay your taxes before putting any money into your Roth IRA account – which makes sense to me. You get a paycheck. You give some to the government like you’re supposed to. Done. Now, any money you put into a Roth IRA will grow tax free until you take it out. This means that all the compound interest you earn on top of your money will not get taxed in any way.

You’ll never pay taxes again on that money when you put it into a Roth IRA.

Why do I believe so strongly in a Roth IRA?

First and foremost, compounding interest is the most magical money tool anyone can use. The best thing you can do for yourself financially is give your money time to grow. The earlier you place your money into a long-term investment account the better.

Secondly, taxes suck. We all know it. And with a Roth IRA, you don’t have to worry about taxes anymore. The amount of money in your account is YOURS and no one else’s. If you grow your Roth IRA to a million dollars over time, then congratulations, you’re a millionaire. No capital gains tax. No income tax. It’s yours.

Why Does Time Matter So Much?

You may have heard me say it before, and you’ll probably hear me say it again. Compound interest is magical.

Interest is a payment you receive above your initial investment. A quick and easy example of this would be: if you invested $100 at a 10% annual interest rate, at the end of the year you would make $10 in interest, and you’d have $110 total.

Compound interest simply means you’re making interest on your interest. In the short example above, after the first year you are no longer earning interest on just your initial investment. You will be earning interest on your new total at the end of the year. This will continue happening over time. Your money will continue to grow at faster and faster rates with no extra work from you simply because you’ve given your investment time to grow.

If you don’t believe how magical compound interest can be, try one of these retirement calculators and play with the numbers yourself. These can be a fun way to start getting an idea of the importance of investing at a young age.

(Click here to check out a Roth IRA Calculator)

When Should You Start a Roth IRA?

In an ideal world, you would start a Roth IRA today. Right in this very moment.

Most larger brokerage firms offer a Roth IRA option. I use TD Ameritrade for my Roth IRA. You could use Fidelity, Charles Schwab, etc. You could also do a quick Google search for the best Roth IRA account options. There are lots out there. You may even choose to go with a robo-advisor that makes automated investment decisions on your behalf. Don’t overthink this decision right off the bat. The important piece of the equation is having a Roth IRA as early as possible and starting to fill it.

Because I know we don’t always live in an ideal world, the next best time to start a Roth IRA is when you are debt-free and have a 3-month emergency fund set aside for yourself.

It is so important to eliminate your debt. A Roth IRA pays you interest. Debt charges you interest. We want money to work for us, not against us! Debt keeps us from saving well, making good investments, and building long-term wealth. Get rid of it and keep it away for good.

An emergency fund is simply an account you don’t touch that could cover 3 months of your expenses should anything unexpected happen in your life. By setting this aside, you’ll protect yourself from stress if you lose your job or have a medical expense pop up.

Once these two priorities are checked off your list, get started on your Roth IRA. Your future self will thank you.

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