Today’s question comes from a 20 year old who wants to know if a Roth IRA contribution, even a small one, is worth it. Other miscellaneous questions about Roths.

Jack answers miscellaneous questions from /r/personalfinance. This is not advice, seriously….(read more)

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As a 20-year-old, the thought of retirement may seem like a distant dream. However, it’s never too early to start planning for your financial future. One of the best ways to do this is through a Roth IRA. But is it really worth it at this age?

First, let’s understand what a Roth IRA is. A Roth IRA is a retirement account that allows you to invest after-tax dollars. This means that you don’t get a tax break now, but you don’t have to pay taxes on your earnings when you withdraw them in retirement. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs). You can let your money grow tax-free for as long as you want.

Now, let’s consider the advantages of starting a Roth IRA in your early 20s. Time is your greatest asset when it comes to investing. The earlier you start, the more time your money has to compound. Even small contributions made now can grow significantly over time. For example, if you contribute $5,000 per year to a Roth IRA from age 20 to age 65, assuming a 7% annual return, you could have over $1.7 million at retirement. That’s the power of compound interest.

Another advantage of a Roth IRA is flexibility. You can withdraw your contributions (but not your earnings) at any time, tax-free and penalty-free. This makes it a great option for emergency savings or other short-term goals. Just keep in mind that once you withdraw your earnings, you’ll be subject to taxes and penalties unless you meet certain requirements.

Additionally, a Roth IRA can provide tax diversification in retirement. If you have a mix of tax-deferred and tax-free retirement income sources, you’ll have more control over your income taxes in retirement. This can help you avoid paying higher taxes or triggering other taxes, such as Social Security taxes.

However, there are some considerations to keep in mind before starting a Roth IRA. First, you need earned income to contribute. This means you must have a job or be self-employed. Secondly, there are income limits for contributing to a Roth IRA. If you earn more than the limit, you may not be able to contribute to a Roth IRA directly. However, there are other ways to contribute indirectly, such as through a backdoor Roth IRA.

Ultimately, whether a Roth IRA is worth it at 20 depends on your financial situation and goals. If you have extra money to save, a Roth IRA can be a great way to start investing for the long term. However, if you’re struggling to make ends meet, it may not be the best option right now. It’s always a good idea to talk to a financial advisor to determine the best strategy for your individual situation.