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Carla Fried: For 20-somethings, how to choose the right retirement account

Carla Fried, on

Published in Home and Consumer News

According to the IRS, in 2018 more than 34 million taxpayers in their 20s were eligible to contribute to an individual retirement account (IRA). Fewer than 5% did so.

Of course, some may be doing some retirement saving through work. But even if you’re a 20-something with a workplace 401(k), an IRA — specifically a Roth IRA — is the smartest retirement move to make. The IRS estimates only 1.25 million 20-somethings contributed to a Roth IRA in 2018.

If you’re a parent, grandparent, aunt or uncle who is looking for a way to help a 20-something build financial security, keep in mind it’s totally kosher to gift them money to contribute to a Roth IRA as long as they have earned income equal to their Roth IRA contribution.

The blown opportunity of not saving in a Roth IRA

The absurdity of our retirement system is that it requires people in their 20s to choose to save money they won’t use for 40 or 50 years, and the same system does a lousy job explaining why waiting a decade (or two, or three) to focus on retirement saving is a huge miss.

Here’s the sales pitch: Your 20s are the optimal time to take advantage of compound growth. A dollar invested at 25 has 45 years to grow before you retire at 70. A dollar invested at age 40 has just 30 years. Sounds like a big “so what?” It’s anything but. That time is the secret sauce of investing for retirement.


Invest $100 a week starting at age 25 and keep it up for 45 years, and you will have nearly $882,000, assuming a conservative 5% annualized rate of return. Start at age 40 and you will have less than $362,00 at age 70. If you wait until age 40 to get focused, you will need to save about $245 a week to end up with the same $882,000. That essentially means doing a lot more of the heavy lifting.

When you start at age 25, the sum of all those $100 weekly deposits will be $234,000. Start at 40 and you end up needing to save $380,000 to end up with the $882,000. That nearly $150,000 difference is simply the cost of not using compound growth to its full advantage.

Why Roths rule

IRAs, and many 401(k)s, come in two flavors: traditional or Roth. The only difference is when you pay tax. With a Roth IRA you pay the tax upfront because the money you invest is from income that has already been taxed.


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