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Even though retirement may seem light-years away, it is never too early to invest your finances into a retirement account. By investing in a Roth IRA, your account can generally grow without the burden of taxation. Best of all, you won’t be responsible for taxes when it is cashed in. Through investing a little each year, it is easy to accumulate a sizeable retirement account in a way that will not cause any major financial hardships.
A Roth IRA is an individual retirement account established in 1997 under the US government, named for the deceased William Roth of Delaware. Roth IRA’s allow investments in mutual funds, stocks, securities, as well as a few other areas. Through compound interest, the young investor will notice significant growth in their investments. Roth IRA’s maximum investment is $5,000 per year as of 2010, and you may not invest more than your annual income. The major benefit of a Roth IRA account is most certainly its tax advantage. While you cannot typically withdraw earnings from this account until you’re fifty-nine-and-a-half (retirement age) and investments are not tax deductible, the interest rate is superior to that of a traditional savings account.
If you are still under retirement age, there are some circumstances that will allow you to withdraw from your IRA account without being penalized. The US government allows removal of up to $10,000 from accounts over 5 years in age to be utilized for first time home purchases. This money can be removed tax free without incurring an early withdrawal fee. In addition, contributions can be removed at any time without penalties; however, earnings are subject to taxes and fees if removed before retirement age.
Roth IRA accounts offer the young investor several options in terms of how to allocate their funds. For maximum return, stocks are your best bet. If you are inexperienced in terms of the market, a mutual fund will allow you to diversify your portfolio and eliminate some of the major risks. For the less adventurous investor, IRA funds can be put into money market accounts directly through your bank, and even into savings bonds. Many financial institutions require a minimum investment and/or minimum contributions, however these vary per location. Research the different providers in your area to find the branch that works best for you.
Once you have decided where to open your Roth IRA and what you want your money to be invested in, it is very easy to watch that money grow into a sizeable retirement account. As a young adult, it may be difficult to justify setting aside funds to donate, but in the long run that is the best option. By simply paying yourself first, you can set aside a bit of money each month to invest in your retirement, and insure yourself a better Golden Years.
Even a small nest egg should be divided among several investment options - understand what this means to you.
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