Most 20-somethings don’t even give retirement savings a thought, partly because it’s too far and partly because they are already caught up with student debt. But, if you are not saving for retirement in your 20s, you are missing out on major opportunities to boost your nest egg into a massive retirement reserve.
So, if your goal is to retire on time and you want a financially secure future, then 20s are when you should start saving.
Start Saving as Less as a Latte a Day and Retire a Millionaire at 65
Yes, it’s true! All you need to invest is $3 of your latte every day into a retirement account and you’ll have a million in your retirement account when you hit 65. This is the magic of compounding interest. A small trade-off today will pay off in a big way tomorrow. So open up a retirement account today, start investing and set yourself up for a stress-free and financially secure future.
But before you get off to a good start, it is important that you know the types of IRA. There are 5 major differences between both the types of IRA and they include income limits, age limits, distributions, tax treatment and withdrawals.
1. Traditional IRA
• With a traditional IRA, you will be able to save on taxes up front but you’ll pay income tax on your contributions and earnings when you withdraw.
• The required minimum distributions in a traditional IRA kick in when you reach age 70 ½. So you must take it even if there is no need because if you fail to do so, the IRS will forfeit half the RMD that is due.
• The maximum contribution that can be made to a traditional IRA annually is $5,000 but those who are 50 years and older can contribute up to $7.000 and catch up.
2. Roth IRA
• The contributions made to a Roth IRA are not eligible for tax deduction at the front end but all your withdrawals are tax-free.
• The income phase-out limit for singles is $120,000 to $135,000 and for married couples is $189,000 to $199,000.
• With Roth IRA, you can make contributions at any age without being subjected to the rules governing required minimum distributions.
Now let’s understand both the types of IRA with an example. We will suppose that you contribute $5,000 every year to a traditional IRA starting at the age of 23 years and continue until you reach 63 years of age. Assuming that you are saving $5,000 for 40 years at a 10% rate of return, your traditional IRA will grow to $2,212,962. But, you will pay income tax on each withdrawal.
Now if you fall in the tax bracket of 25%, every $100,000 withdrawal will actually come down to just $75,000. On the other hand, if the same amount is invested in a Roth IRA, it will still grow to $2,212,962 and all your withdrawals made after retirement will be absolutely tax-free!
While Roth IRA is clearly the wisest long-term investment in this case, regardless of your investment choice, your 20s are the perfect time to take charge of your finances. So start sooner and maximize your retirement ROI!
Call (866) 639-0066 for expert guidance that will significantly improve your prospects of a stress-free and financially sound retirement.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.