Retirement feels a long way off when you’re in your twenties or thirties, which is exactly why starting a Roth IRA early is one of the more useful financial moves available to young professionals. The mechanics are simple enough to set up in about ten minutes if you’re comfortable banking online.
What a Roth IRA Is and Who Qualifies
A Roth IRA is an Individual Retirement Account you open yourself, unlike a 401(k), which comes through an employer. Contributions are made with money you’ve already paid income tax on, which is the whole point: the money then grows tax-free, and qualified withdrawals in retirement are tax-free too. Because most people earn less early in their career than later, contributing while your tax rate is low means you lock in that lower rate instead of paying it on withdrawals decades later when your rate may be higher.
Contribution limits and income eligibility change annually and are worth checking each year directly on irs.gov. As an example of how the limits move over time: the annual contribution cap was $5,500 for 2018 and $6,000 for 2019. Income limits also apply and adjust yearly. For 2018, single filers earning $135,000 or more couldn’t contribute, with a phase-out starting at $120,000; married couples filing jointly phased out between $189,000 and $199,000. For 2019 those thresholds moved to $137,000 for single filers and $203,000 for married couples filing jointly. If your income drops in a given year, whether from a job change, a lower-paying role, or uneven freelance income, or if pre-tax 401(k) contributions bring your taxable income below the threshold, you may become eligible again even if you weren’t the year before.
Contributing to Both a Roth IRA and a 401(k)
You’re not choosing one or the other. The order that makes sense for most people: contribute enough to your 401(k) to capture the full employer match first, since that’s an immediate return you don’t get anywhere else. Then max out your Roth IRA. If there’s still room, increase your 401(k) contributions further. Running both gives you tax diversification, the ability to choose in retirement whether a given withdrawal comes from pre-tax money (401(k), taxed on the way out) or post-tax money (Roth, not taxed on the way out), depending on which keeps you in a lower bracket that year.
Setting One Up and Funding It
Opening and funding a Roth IRA can be done entirely online through brokerages like Betterment, Vanguard, Schwab, or Fidelity. Link a checking or savings account for automatic transfers, then choose your investments, which can also be automated. If you’re decades from retirement, that generally means leaning more heavily toward stocks than bonds; research fund allocations on Morningstar if you want to build your own mix, or use a target-date fund that rebalances automatically as you age, or a robo-advisor that builds the portfolio for you. Contributions for a given tax year can be made up until tax day of the following year, so you have more time than you might think.
If cash flow is tight, a few habits make contributing easier: set up smaller automatic transfers instead of one lump sum, pay yourself first by funneling money into savings before covering discretionary bills, look for recurring expenses to cut (unused subscriptions, memberships, bills you can renegotiate), and route windfalls like bonuses, raises, and tax refunds straight into the account instead of spending them.
Benefits Worth Knowing
Roth IRAs come with flexibility that tax-deferred accounts don’t. Withdrawals are fully tax- and penalty-free after age 59½. Before that, you can withdraw your contributions, not the earnings, without tax or penalty once they’ve been in the account at least five years, and penalty-free exceptions also exist for a first home purchase or qualified education expenses. Unlike a 401(k) or traditional IRA, Roth accounts have no required minimum distributions, so the money can stay invested indefinitely, which also makes them useful for passing wealth to heirs: they inherit the funds without owing income tax on them, though they will still need to take distributions on their own schedule.
Fees deserve attention too. A 1% expense ratio sounds small, but compounded over decades it can cost you a meaningful share of your total returns. Look for funds with expense ratios under 0.5%. Index funds tend to be cheaper than actively managed funds, and ETFs often cheaper still. You can check any fund’s expense ratio on Morningstar before you commit to it.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
