Saving enough to live comfortably in retirement should be everyone's goal. And for most people, one of the ways to ensure that happens is to take advantage of the various retirement accounts and let time work its magic. One of the best retirement accounts you can utilize is a Roth IRA -- and the earlier you begin, the better.
Here are three reasons to start your Roth IRA as early as possible.
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1. You may eventually be ineligible
Unfortunately, not everyone is eligible to take advantage of a Roth IRA because of the income limits. If you're single and your modified adjusted gross income (MAGI) is less than $129,000, you can contribute the full $6,000 ($7,000 if you're age 50 or older). If you're married and filing jointly, you can contribute the full amount if your MAGI is less than $204,000. If your MAGI is $144,000 or higher ($214,000 or higher if married and filing jointly), you're not eligible to contribute.
Roth IRAs come with great tax benefits that you should take advantage of while you still can. Hopefully, you may find yourself excelling career-wise to the point where you're ineligible to contribute to a Roth IRA -- but if you're currently eligible, you should consider it.
2. Compound returns need time
One of the greatest wonders for investors is compounding. Compound returns occur when the investment income you earn begins to earn returns on itself, and its impact on creating wealth for investors can't be overstated. There's a reason why Albert Einstein is often said to have called it the "Eighth Wonder of the World."
Let's imagine that you invested $5,000 into a fund that returned 10% annually. To showcase the power of compound returns, let's assume in one scenario that you reinvested your earnings back into the fund, and in another scenario you removed your annual earnings. If you reinvested your earnings, here's how much you can expect to have after 25 years:
| Year | Starting Balance at the Beginning of Year | Interest Earned | Ending Balance at the End of the Year |
|---|---|---|---|
| 1 | $5,000 | $500 | $5,500 |
| 2 | $5,500 | $550 | $6,050 |
| ... | ... | ... | ... |
| 25 | $49,248 | $54,174 |
Data source: author calculations
With just a single, one-time $5,000 investment, compound returns increased your investment tenfold without any additional contributions. Now, had you removed the earnings each year, you would only have $17,500 total -- your original $5,000 investment and the $500 you earned annually for 25 years ($12,500).
Time is one of the best resources investors have, and starting to contribute as early as possible to your Roth IRA can work wonders in the long run.
3. Roth IRAs have more investment options than a 401(k) plan
One of the key differences between a 401(k) plan and a Roth IRA is the investment options. With a 401(k), your employer and plan provider provide you with investment options to choose from, and it's usually a combination of target-date funds, your company's stock, and funds put together by market capitalization. On the other hand, Roth IRAs operate similarly to regular brokerage companies because you can invest in any asset that you would through your brokerage company.
Having the freedom to invest your money wherever you see fit is a great perk, because you can use your own due diligence to determine if an investment is right for you instead of relying solely on your limited choices. There's also a good chance that some of the 401(k) plan options may be costlier than other investments you can purchase in a Roth IRA -- like low-cost index funds or single-company stocks.
