Just because you are young and are just getting started in the working world doesn’t mean you shouldn’t be thinking about saving for retirement. One of the best investments you can make in yourself is an Individual Retirement Account, whether it be a traditional plan or a Roth option. Investing now will reduce the amount of tax you’ll pay during your lifetime. Finally, the more time the money is in a retirement account, the more it will work for you.
For 2013, you can contribute up to $5,500 plus an additional $1,000 if you are at least 50 years old. At first, you may not be able to reach these contribution limits, but you should try to invest as much as you can. Once the deadline has passed, you can longer invest in an IRA for the year.
There are two main types of IRAs you can invest in. A traditional plan is funded with pre-tax money. This lessens your earned income the year you can contribute. Taxes are deferred meaning you don’t pay them until you withdraw from the account. The Roth option is funded with after-tax dollars. You do not receive the immediate tax break, but withdrawals are generally tax free.
Investing when you are younger also help to minimize the risk in the markets. Historically, stocks rise over the long haul. There are fluctuations from year to year that might hurt you when you are older. However, when investing young, there’s no need to panic if there’s a dip in the market since you’ll have years to make up for it. Patience is the key when dealing with volatile markets.
Finally, as I said earlier, the more time your money has to grow, the more earning power it will have. The reason for this is compound growth. What this means is that when your investments produce returns, those gains are also invested to produce even bigger gains. The sooner this starts, the faster your money will grow. A simple $5,000 contribution that earns 7% will turn to about $10K in ten years, $20K in as many years and $40K in 30 years. Just think how that will he equate when contributing every single year!