Gather Little by Little

In recent years, I have begun to change great deal of my views on saving for retirement 401k’s, IRA’s and the like. The truth is that I am far less likely to spend a great deal of time and effort saving money for retirement than I used to be . . . but that is a topic for another day. Today, I am participating in the Roth IRA Movement which is an event where nearly 150 personal finance bloggers (who knew there were so many?) plan to write about and draw publicity to the Roth IRA this week.

You can find out what a Roth IRA is here, you can compare a Roth IRA with a Traditional IRA here and you can read about how and why I cashed out my IRA a  couple of years ago here. The truth is that the Roth IRA is a great idea for most people who are considering saving for retirement. I especially want to recommend the Roth IRA to young people – high school or college aged young people. If you are a young person with any income at all, you need to consider opening a Roth IRA for at least these three reasons:

The early bird gets the worm

Here is the thing about investing and compound interest: TIME is a more important factor than SIZE. The sooner that you can open a Roth IRA account, the closer to your savings goals you will be. A person of any age can open a Roth IRA, you simply need to show that you have earned income in any given year.

If I had opened a Roth IRA during my junior year of high school in 1992 – of course, the Roth IRA had not yet been established, but for purposes of argument – if I had opened a $500 Roth and only added $500 a year until 2012, I would have an account worth nearly $20,000 (assuming a conservative 5% annual rate of return) after only a $10,000 investment. Here is where things get a little crazy: after another 20 years of investing $500 a year, I would have a nest egg of over $60,000 and still have only invested $20,000 of my own money.

Of course, I didn’t do it, but maybe you can.

You do have the money

A Roth IRA can be started with any amount of money. If you are working at all, surely you can find a way to scrimp together $500 to $1,000 a year, especially if you are still living at home or if you have chosen not to go to college. A great way to get your Roth started is to use part of your IRS tax refund (provided you qualify). If you are a good worker and a good planner, you can find the cash.

Help in an emergency

You cannot take a distribution (take money out of) from your Roth IRA without penalty until you are at least 59 and 1/2 years old. But it is important to remember that a Roth IRA is not just about having a good time when you retire. The Roth legislation and rules are written to allow you to use the money that you have invested in a Roth IRA for any of the following needs or emergencies:

• Distribution because of disability.
• Distribution to an estate or beneficiary in the event of your death.
• Distribution for first-time home buyers. You may receive up to $10,000 from your Roth IRA to buy, build, or rebuild a first home
• The distributions are part of a series of substantially equal payments. This is a complicated option and you must take the distributions according to the IRS distribution guidelines.
• Distributions for significant, un-reimbursed medical expenses. The amount that you can take under this exception is found by subtracting 7.5% of your Adjusted Gross Income from your total unreimbursed medical costs.
• If you are paying medical insurance premiums after losing your job.
• Distributions are not more than your qualified higher education expenses. If you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax.
• If the distribution is due to an IRS levy of the qualified plan.
• If the distribution is a qualified reservist distribution.
• If the distribution is a qualified disaster recovery assistance distribution.
• If the distribution is a qualified recovery assistance distribution.

Furthermore, if your money emergency does not meet any of these qualifications, you still have access to the money after you pay a 10% penalty. This option is not a great one, but it can be a huge help in a pinch.

Still not convinced? It is true, a Roth IRA might not be for everyone, there are certainly some who would rather spend their cash on an iPhone or a sweet new pair of sunglasses or maybe the latest Tim Tebow jersey . . . but at least take a little time to think it through.

barnaby kerr