There are many types of investment accounts, including regular brokerage accounts, retirement or “IRA” accounts, and 401ks. If you are able to leave your money in longterm and maximize the advantages of compound interest, consider opening an IRA account. An IRA account is where you can purchase mutual funds and hold them as they grow in worth.
Here’s an example:
A 20-yr-old makes a one-time $5,000 contribution to a Roth IRA and earns an average 8% interest annually.
Even if they never touch that $5,000 investment, it would grow to $120,000 by the time they retire at 65.
But if they wait until they’re 40 to make that single $5,000 investment, it would only grow to $24,000.
That’s because the original investment, which earns 8% each year, doesn’t have as much time to “compound.”
There are a few rules with IRA accounts, such as a maximum annual contribution and a penalty for cashing out what you put in, although you are free to cash your gains out at any time. There are two types of IRAs:
A Roth IRA is a retirement investment account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you’ve already paid taxes on the money you put into it. Instead of an up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you don’t have to pay tax.
A Traditional IRA is the opposite, in that you can deduct your deposits on your taxes, which can be a nice tax break. However once you take the money out at retirement, you’ll have to pay taxes on the final value of your investment.
IRAs are basically open to anyone who has income, but some employees at larger companies have the option of investing in 401(k)s. If you have access to a 401(k) and your company offers a matching contribution, that’s usually the best place to start. If your employer matches your 401(k) contributions dollar-for-dollar, that’s free money. Who doesn’t want that?
By investing early on in life, your money stands to grow significantly over time. That’s why your age is your edge.