How long does it take for a young aggressive investor to double their money with an 8% average annual return? The answer is every 9 years. Time is on their side because of the power of compounding interest for someone under the age of 40.

Many young workers have small rollovers around $5,000. Due to the trend to move jobs often for advancement purposes, they may have several lower balance traditional 401k accounts.

The $40,000 mistake is to take those accounts and withdraw the cash where there are federal and state income taxes PLUS an additional 10% federal tax penalty. This distribution is taxed on top of current annual income. In most cases, you will be paying around 40% in taxes. This makes the $5,000 worth only $3,000. Instead, consider converting the money over to a Roth IRA. There will be income taxes today but NOT the extra 10% penalty. That likely means your tax return will be a bit less in April. Pay the taxes when you are younger and they are lower – don’t wait until the taxes are much higher on that block of money. This Roth IRA will be worth approximately $40,000 when you reach retirement.

Key takeaways for Roth IRAs:

• Money grows tax-free and withdrawals are also tax free

• You are allowed to use your contribution amount

• No required minimum distributions (RMD)

• Tax flexibility in retirement

• Hedge against future tax hikes

• Leave tax-free money to heirs

Investing in a Roth IRA comes down to taxes. It makes sense to see if you would benefit from one.