The Younger, The Richer: Start Saving Early with Roth IRA

By Jeffery Levine, IRA Technical Expert  
Follow Me on Twitter: @IRAGuru4EdSlott

One of the most effective ways to accumulate a large retirement nest egg is to start young. And no age is too young. In fact, the younger the better. Even a one year-old can make an IRA, or better yet, a Roth IRA, contribution as long as they have earned income – perhaps as a model in a Gerber Baby Food commercial. In reality though, most people don’t start contributing to retirement accounts until much later on in life.

If you ask young people – perhaps like yourself or your child or grandchild – why they aren’t contributing to retirement accounts, you’ll usually get one of two answers. You might hear something like “Retirement? That’s like 50 years from now. I’ll be lucky if I even get there!” Well, as we already said, the younger you start the better, so that’s not really a good excuse. The other common response you can expect to hear is “Where am I going to get the money to contribute to an IRA?” And that’s something we can comment on.

On December 23, 2011 Congress passed a two month extension of the payroll tax holiday effective through the end of February 2012 (it has since been extended through the end of the year). So what exactly is the payroll tax holiday? It’s a reduction of 2% of the Social Security tax that’s assessed on wages. Normally, the rate is 6.2%, but effective at least through the end of the year, the rate is 4.2%. Someone earning a $50,000 salary would end up with an extra $1,000. That may not sound like a lot of money, but believe it or not, contributing even just a thousand dollars a year over an extended period of time can add up to big bucks. For instance, if a 22 year-old were to begin contributing $1,000 a year to a Roth IRA and did so until he retired at 65, compounded at 8%, he could expect to have over $350,000 in his Roth IRA – completely tax free!! That’s not chump change.

Maybe it’s the money that will be saved thanks to the payroll tax holiday, maybe it’s working an extra overtime shift once per month or maybe it’s eating out one less time a week – however you do it, it’s clear that starting to save early is one of the true keys to successful retirement saving.

Today’s article is part of the #RothIRAMovement. Nearly 140 financial writers and bloggers are spreading the Roth IRA word across the web today. Ed Slott and Company is a proud participant of the idea created by Jeff Rose over at Good Financial Cents.