The sooner you begin saving for retirement, and the more time you have to save, the greater the chances that you’ll have a nice, big nest egg when you’re ready. Millennial investors in their 20s and 30s who decide to start saving have multiple options.
A Roth IRA is arguably the very best way to invest there is, particularly for young investors. Based on some of the most recently available data, the Employee Benefit Research Institute found that 28.5 percent of all individuals have a Roth IRA account. While it’s a relatively new investment option, established just over two decades ago, there are many reasons for young investors to contribute.
The allure of a Roth IRA is quickly growing, and there are many reasons it’s become such a popular investment that young investors should really take advantage of it.
A young investor can easily go online and open a Roth IRA account in just minutes. Whenever you choose you can contribute money, up to $5,500 annually, or up to your taxable income for the year, whichever is the smaller amount. The money in a Roth IRA grows tax free, and it can also be withdrawn tax free.
Tax Free Withdrawals Anytime
Unlike the majority of other retirement accounts, millennials can make tax free withdrawals anytime they’d like, a huge benefit as withdrawing money from most other retirement accounts before the age of 59 1/2, incurs a 10 percent tax penalty on top of the income tax required on the withdrawal amount. If the money contributed to the account has earnings such as capital gains, dividends or interest, the equivalent of that amount can be withdrawn without penalties, tax free after five years if you meet certain criteria such as becoming a first-time homebuyer or have reached the age of 59 1/2.
Using Your Roth IRA as a ‘Hard Money’ Lender
You may be able to use your Roth IRA to invest in a company that flips houses, you know, the popular investment referred to as “fix ‘n’ flip” that so many have gotten on board with or have been thinking about. The company may even give you a percentage per flip based on the amount you invest. While some are under the impression that an IRA can’t finance a property, that’s simply not true. When pursuing a loan, a bank or other lender will examine your credit, determine the interest rate and appropriate term, and ask for collateral. While your Roth won’t be seen as a person with a credit rating, an IRA-owned investment property can serve as collateral.
Both Contributions and Money Earned Can Be Drawn Tax Free at Retirement
The biggest payoff when it comes to a Roth IRA is that when you retire, all your contributions and the money it’s earned over the years can be withdrawn totally tax free. With Traditional IRAs, you’ll get the deduction when you start and won’t have to pay taxes until you retire, but your original contribution and all earnings will be taxed at your current income tax rate every year. Once you turn 70 1/2, you’ll have to make the required minimum distributions every year that increase taxable income, whether you need it or not.