So you want to know how to start investing as a teenager or young adult? That's great! When most people think about investing, the last thing that comes to their mind is their retirement savings. However, retirement should be on everyone's radar, as a relatively small investment at a young age can grow into a much larger sum later, after decades of compounding. One of the easiest places to start? A Roth IRA.
What is a Roth IRA?
A Roth IRA is a retirement account that offers some really valuable tax benefits, including tax-free growth on your investments. As a teenager or young adult, time will be your best friend. So, let's check it out.
Let's say that for every year from 25-65 you invest $5,000 in your Roth IRA at an 8% return. By the age of 65, you would $1.4 million, tax free. Now, if you started investing the same $5,000 at an 8% return from 18-65, you would have a whopping 2.4 million, all without having to pay more taxes.
For any teenager of young adult, $2.4 million dollars is a pretty impressive number.
So, how does a Roth IRA work?
Basically, a Roth IRA is a retirement account that holds your investments, versus being an investment itself. Just like how you invest at a brokerage, not in a brokerage. Within a Roth IRA, you can invest in stocks, bonds, exchange-traded funds (ETFs), or bank saving products.
Throughout the year, you can invest up to $6000, or the amount of earned income you had that year, whichever is smaller. That means that if you make $3,000 a year, you can only invest up to $3,000 in your Roth IRA.
For long-term growth, Jumpstart recommends investing in high-return stocks and bonds. Check out what investments Jumpstart recommends here.
Wanna sign up? Learn where to open a Roth.
What are the Advantages of a Roth IRA?
- NO AGE LIMIT: One of the best parts of a Roth IRA, is that you can open an account at any time as long as you are earning income. In fact, if you are under 18, you can open up a custodial account to cash in on extra years.
- TAX FREE: The money that you invest in your Roth IRA is post taxes, and when you turn 59 1/2 that money is all yours, tax free. All of the compound interest that you have earned over the years, isn't subject to pesky taxes or fees.
- COMPOUND INTEREST: Compound Interest is really powerful. As explained in our example above, a difference of 7 years of investing between 18-25, ends up being a monetary difference of 1 million dollars. If you want to calculate your own rates and investments, check out this Roth IRA Calculator.
How to Open a Roth IRA
Roth vs. Traditional IRA
IRA vs. 401k