Many of us join the corporate workforce upon graduation, which grants us the immediate opportunity to save for retirement. With most savings accounts earning 0.13% interest, inflation is getting the best of your hard-earned money, so consider the Roth Individual Retirement Account (IRA) as an alternative investment vehicle for the short term. Maximizing the benefits of a Roth IRA in concurrence with your other retirement accounts will propel you farther than you currently realize.
The information I include in this blog comes from my undergraduate business degree background and finance experiences; it does not represent financial advice. I recommend contacting a professional financial advisor for specific details if you are interested in a Roth IRA.
Firstly, I want to address the most common misconception regarding the Roth IRA— the liquidity of your annual $6,000 taxed contribution to the account. Each yearly contribution to the account can be withdrawn at any time, penalty free! The only drawback is you can never replace the respective year’s contribution, so it’s easier to consider the Roth IRA as more of an emergency savings fund. There remain two savvy advantages this type of account has over a brokerage & traditional savings account.
- House Purchase Aid
The average age of the MSA class of 2023 is 25. Naturally, many of us will be considering our first home purchase over the next 5-7 years. The Roth IRA can help tremendously with this buying process if you’ve had an account for at least 5 years, as you’re able to withdraw $10,000 in gains from your account, penalty and tax free – aiding your first down payment.
- Tax-free Growth
Now that you understand the implications of contributing to your Roth IRA and an early advantage to opening one, the next step is to give it the potential to grow. The investment options for a Roth IRA are much more flexible than a traditional 401k and resemble the asset availability of a brokerage account; however, the clearest advantage behind a Roth IRA is the tax-free growth on your contributions over time. Since you pay taxes on your contributions each year, whatever the amount grows to over time in your Roth IRA is yours to access at age 59½.
Available for a Limited Time
Lastly, there is a time limit for how long we’ll be able to utilize a Roth IRA with the average salary of a 2022 MSA graduate at ~$108,000. The single income range limit is $129,000 – $144,000 and married (filing jointly) is $204,000 – $214,000; so as we progress beyond our “residency” and inevitably earn more, we’re stuck with a 401k & highly taxed brokerage account (as your earnings increase especially) for retirement vehicles.
Consider where you keep your saved money and analyze how and if it’s working in your favor. The ease of withdrawing your contribution from a Roth IRA makes it easy to use it for the same purpose as a rainy-day fund or emergency savings account. The real opportunity this account affords you is placing stronger growth prospects in many available assets for your funds — much better than the average 0.13% from savings accounts. Wayne Gretzky said it best, “you miss 100% of the shots you don’t take.” Now it’s up to you to find that next Amazon or Tesla stock and give yourself a shot at living out your wildest dreams!
Columnist: Michael Drewery