The Advantages of Opening an IRA Young

by Maggie McCormick

IRAs offer tax advantages when it comes to saving for retirement. A traditional individual retirement account invests pretax dollars, and the account grows tax-free until you need it. A Roth IRA is funded with after-tax dollars, but you will not have to pay taxes on the withdrawals you make during retirement. Whichever type of IRA you choose, it's smart to start saving early.

Time

Time is on your side when you start investing young. Even if you earn no money on your investments at all, you could build up a sizable nest egg over time. Saving $200 a month for 40 years will total almost $100,000. If you had only 20 years to save this amount, you'd have to save $417 a month.

Compound Interest

The real advantage to starting your IRA young is the power of compound interest. As your investment grows, the money that it earns is added to the principal amount, so that your interest also earns interest. The effect is not so great during the first few years, but as your money sits there for several years, it adds up. For example, a one-time investment of a mere $100 at 10 percent compounded interest will grow to more than $11,000 after 50 years, according to the Finance Professor. Adding money to your account each month will increase the amount you have over time.

Risk Management

Investments in an IRA are usually tied to the market. There are high-risk/high-reward investments and low-risk/low-reward investments, but there is always a chance that your investments can lose money. When you are starting young, you have a lot longer to make up for any dips in your investment.

Roth IRA Eligibility

You must meet certain income limits to contribute to an IRA. As of 2011, a single person had to make less than $107,000 to contribute the full amount to a Roth IRA, and if she earned more than $122,000, she could not contribute at all. Married couples must have earned less than $169,000 for the full contribution, and they could not contribute if they make over $179,000. As your career progresses, you might no longer be able to contribute to a Roth IRA. But if you started it early when your salary was lower, the money in that account will still grow and will be available to you after you retire.

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