I recently suggested to my son that he open a Roth IRA. Here are the 3 reasons why.
1) He’s Young
The Roth IRA offers a huge advantage over a regular IRA. This is particularly so for younger people. With the IRA you are (generally) allowed a tax deduction for this. The IRA grows tax deferred. You can begin to take distributions after age 59 1/2 without penalty. You must begin taking distributions after age 70 1/2. This is called the Required Minimum Distribution (“RMD”). Distributions from the IRA are taxed.
With a Roth IRA there is no income tax deduction. However all of the distributions are tax-free assuming the account has been opened for at least 5 years and you are over age 59 1/2. The compounding of tax-free accounts over many years is huge. Unlike the IRA, the Roth IRA has no RMD requirements for the account holder or their surviving spouse.
2) He Had Earned Income
To be eligible for a Roth IRA you need to have earned income. This can be from wages working as an employee or net income from self-employment. My son had worked the local golf course last year which made him eligible. The maximum someone under age 50 can put in is currently $5,500 per year. He was unable to do that amount. He was able to put some money away however and get started. This is perhaps the most important point, getting started.
3) He Is Financially On His Own
OK, for now he’s not totally on his own. He’s still (partially) “on my payroll.” I’m working very hard however to get him fully off my payroll as soon as possible. Long term however he is totally on his own.
In the past, many people were able to rely on these three big institutions:
Back in the ‘old days’ someone would go to work for their employer and spend their entire career there. When they retired, they would be eligible for a pension. With a pension and social security they could have reasonably comfortable retirement.
Do you think young people can rely on these institutions going forward? Not likely. Do you expect to see any 20 year old ever collect a dime of social security from the government? I wouldn’t count on it. Depending on which projection you read (and believe) the social security system should be bankrupt around 2035.
Most employers have terminated their pension plans. These have been substituted with a 401(k) plan. Employees need to sign up for their employer 401(k) plan to help fund their retirement.
For my son simply put, he needs to financially take care of himself.
Have you encouraged your son or daughter to open a Roth IRA?
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