1Financial Issues and Challenges Young Professionals Must Consider

Owing to the fact that young professionals are mostly intent on establishing their careers, it is often the case that earned incomes will tend to fluctuate. Such professionals who have yet to get married and have children, or are basically single, are subjected to the highest tax filing status and as such they surrender more to the taxman. Those who opt to settle down early are not so much better off because there are expenses to take care of including higher house rent amounts, childcare expenses, car maintenance costs, wedding expenses, etc. Both categories of young professionals are also expected to start paying back their college loans.

All these financial responsibilities need to be taken care of and it can become quite a juggling act especially with the aforementioned fluctuating incomes. A glimpse into the future will definitely reveal that one’s retirement age is impending and that "the hay needs to be made when the sun is still shining". The proverbial hay in this case refers to retirement savings and young professionals need to identify a means to save that will be advantageous in terms of expanded flexibilities and plenty of tax advantages. This is where an IRA comes in.

2The Definition of an IRA

As mentioned previously, IRA stands for Individual Retirement Account and there are two types of these: the Roth IRA and the traditional IRA. Both of these share an identical annual quota as determined by Congress. There are fundamental differences between the two as explained below:

For the traditional IRA a tax deduction for the money deposited into the account is made up front and no taxation is applied to the contributions and earnings until the same is distributed following retirement. This is referred to as tax deferment.

For the Roth IRA, money in the form of after-tax is put into the account as contributions. These contributions and earnings accumulate tax-free even after distribution following your retirement.

3Why the Roth IRA Makes Better Sense for Young Professionals

Young professionals and graduate students whose families are not too well off financially will really find the Roth IRA option the best way to go and for more reasons than one. These advantages are highlighted below:

• It is most likely that at retirement age one will be in a higher tax bracket as compared to one’s present tax bracket. In terms of figures, the tax bracket for most graduate students who have the luxury of a stipend is 15% while the bracket for a real salary earner is 25% plus tax; the Roth IRA option is definitely big on savings. This is the option to go with whether you are hopeful of earning increasingly higher salaries down the line or whether you are concerned that the Federal tax rates will increase with time.


• Secondly, the Roth IRA option makes for increased flexibility since one can at any time make withdrawals, even for the total contribution, minus any penalties. The only downside about exercising this option is that you cannot return these monies later.


• With the Roth IRA option you are not bound to any compulsory age-based distribution schedule – a feature which sets it apart from other tax-deferred retirement accounts. This provision means that your income stream remains manageable after retirement and you can bequeath all your savings to your descendants in your preferred way.


• The Roth IRA option is such that it makes for more personal contributions compared to the traditional IRA option. This is because for the Roth IRA the quota applies for your contributions after tax while it is for pre-tax contributions in the case of the traditional IRA. Practically, the Roth IRA will be the best avenue for a young professional who has joined the retirement savings bandwagon late and is intent on catching up.

4Possible Savings Scenario with a Roth IRA

In coming up with this scenario it is assumed that the annual quota for a Roth IRA is $4,000, the figure set by Congress back in 2006. Jack, our imaginary young professional, was 30 years of age when he decided to open up a Roth IRA account in 2006. He will be due for retirement in 35 years time which means that it will be the year 2041.

He started with annual contributions of $4,000 for both 2006 and 2007 but had to increase this figure to $5,000 afterward since Congress raised this limit in 2008. Computations made using an annual rate of return of 9% indicate that Jack will have accumulated a tax-free amount of $1,049,385 by the year 2041 when he finally retires at age 65. After applying a 3% rate in terms of annual inflation this figure will be something like $544,822 in current dollars; quite a useful lump sum by any definition.