Wednesday, October 8, 2014
Retirement Starts in High School
Why? Because the earnings are tax free forever. Just about all other income you will ever have will be subject to taxation.
Why is this so important? Most middle class Americans will pay 25% of the last dollar they earn, 28% is they have a good job and make more money than most. If you're still in high school and you're reading this, chances are you will be paying 28% or more.
If you're in high school, you're probably looking at 40 to 50 years of working. In 50 years, $500 will grow to $6,000 at a modest 5% interest rate. If you saved the same $500 in a regular taxable account, you would have to pay tax on the interest every year. You could do a little better by putting it in a regular IRA account. In the end you would still have to pay tax on all the earnings leaving you with about $4,300, not bad, but not as good as a Roth IRA.
For 2014, you can put as much as $5,500 into a Roth IRA, but you can get started with far less. The two important keys are the time you have for it to grow and that the earnings will be tax free.