Great question! A Roth IRA is a great thing to be asking about. Not only are tax rates low for individuals in 2018, but it allows more time to take advantage of the "8th wonder of the world" - compound interest.
Your future self will thank your current self at a later date!
Certainty + flexibility: While you can contribute to either a Roth IRA or a Traditional IRA, and everyone's financial situation can be different, it's likely that you are paying less in taxes now than you will in the future with a higher income.
- Certainty - This means you can "lock in" your tax rate on the account based on the tax rate you're paying in the tax year in which you contribute the funds to your IRA. With a Roth IRA, you won't have the money taxed as personal income a second time under current law as you would with a Traditional IRA, leading to more certainty.
- Flexibility - A Roth IRA is a great risk management tool to give you peace of mind. If you fall on hard times, you can always withdraw what you contributed assuming your investment doesn't lose money (because you already paid taxes on it). At the opposite end of the spectrum, if all goes well and you have the opportunity to leave money to heirs, there's no required minimum distribution / forced taxation of your funds in retirement as there would be for those who used a Traditional IRA. You can also use a portion of your Roth IRA as a down-payment for your first home. Among other benefits, your money is better protected from creditors or lawsuits in a Roth IRA vs. a taxable brokerage or bank account.
Hidden benefit: I've found a Roth IRA actually protects the money from me as well. Wait, what!? I'm simply less likely to ever withdraw the money for frivolous reasons as I might if it was sitting in a taxable savings account. That's simple psychology at play, since a withdrawal from a Roth IRA, even if you you're only withdrawing the money contributed = more paperwork and hassle. I'd be taking the "8th wonder of the world" away from my future self!
What a Roth IRA is, and isn't: A Roth IRA is a vehicle, not an investment itself. You want both the vehicle and the investments you put inside this vehicle into a good "garage" that doesn't charge much in fees (e.g. brokerage account or bank). You can decide what investments to put in your "vehicle" depending on how far you want to drive and how long you expect it'll take to get there. If you want to save up to buy a house in 3-5 years, starting a Roth IRA bank account and using CDs might not be a bad option (this would be a short road trip). Over a longer time-frame, a brokerage account might make the most sense (savings for ultimate retirement or to leave to heirs tax-free).
What I did personally: I started contributing to a Roth IRA when I turned 18 using a simple self-directed brokerage firm, which was friendly to those new to investing. I paid no fees except on trades. I later switched to a more advanced platform after getting some experience in '08-'09 and the years following. Some folks might not want to be as "hands-on" and would rather have the simplicity of a simple Roth IRA savings account at a bank or get help from a financial adviser.
Taylor recommends the following next steps:
Roth IRA are really great because you're not taxed at the end like with a traditional 401K or other retirement account. That means you'll recognize the full value of the money you put in today (minus a front end fee) when you retire dozens of years later. It's a great savings tool to start when you're young, even if you're just putting a little bit in it each month!
A Roth IRA is an investment vehicle that allows you to save for retirement. The idea is that you can pay taxes upfront rather than when you withdraw funds at retirement. It is great to use when you are young because you would assume you will be in the lowest tax bracket at the beginning of your career rather than at the end of your career when you retire. There are penalties for earlier withdrawal, and you need to be aware of any transfer of basis should you want to convert your Roth investment accounts to a traditional IRA (this would typically happen if you change jobs and the only way to redeem would be to roll into another IRA account).