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Millennials, who include people between ages 18 and 35 today, are at various stages in their retirement savings efforts. Those on the younger end of the generation may not have even begun to think about setting money aside for retirement, while those on the older end may already have significant portions of their nest egg stashed away. Still others could just be getting started in opening retirement investment accounts and are wondering how to begin. One retirement savings vehicle that will benefit Millennials is the Roth IRA—an account that taxes the money you put in, but that does not tax the money when you withdraw it in retirement. The benefits of having a Roth IRA for Millennials include its tax treatment, but also have to do with a selection of other Roth IRA characteristics.
Consider these six benefits of having a Roth IRA for Millennials.
- It offers tax advantages over a 401(k) or traditional IRA. Any investment gains you earn through a Roth IRA can be withdrawn any time after age 59.5 without being taxed. Among the benefits of having a Roth IRA for Millennials, therefore, is the fact that you will be paying taxes now on your contributions (when you are in a lower tax bracket) compared to paying taxes later (when you will be in a higher tax bracket). A 401(k) or traditional IRA works the opposite way.
- It’s an option when a 401(k) is not available. If you are lucky enough to work for a company that offers its employees a 401(k), great—you should take advantage of it. However, more and more Millennials are finding themselves in employment positions where a 401(k) is not an option, such as working several contract jobs, working for a start-up company or starting their own businesses. In this case, you’ll have to take it upon yourself to establish your own retirement accounts, like a Roth IRA.
- It could offer more investment diversity. You may have a 401(k) through your employer, but it may limit your investment options and charge you high fees. A Roth IRA is a type of account that generally offers a great selection of investment options, and often at lower costs. It is suggested that you invest in your 401(k) up to your company match, but then place additional savings in a Roth IRA.
- It can be used to pay for your education. The rule is that if you withdraw earnings from a Roth IRA before age 59.5, you will be subject to a 10 percent withdrawal penalty. However, there is an exception to this rule. If you withdraw your contributions (but not your earnings) and use it to pay for your education, you will not be subject to penalties or taxes. If you do decide to withdraw earnings as well, you will be subject to income tax. This can be useful for Millennials who are in school or who are planning to go back to school; however, remember that the more you use your Roth IRA to pay for education, the less you will have to spend on retirement.
- It can provide access to emergency cash. With a Roth IRA, you can take your contributions (but not the gains) without penalty at any time, which essentially makes them a source of emergency savings. You shouldn’t make this a habit, but in a time of financial crisis when you do not have as many assets to your name earlier in life, it can be helpful. Just remember—any contributions you withdraw mean a loss of potential investment gains from that money.
- It allows you to contribute indefinitely. Unlike a traditional IRA, with which account holders must start taking withdrawals at age 70.5, a Roth IRA does not force you to make withdrawals at any time. With the idea of traditional retirements fading, people are working longer—and even working in retirement. Thus, a Roth IRA can help you continue to realize gains on your contributions much longer than any other type of retirement savings vehicle.
The benefits of having a Roth IRA for Millennials have much to do with its flexibility to contribute as long as you want, access your money when you need it and pay taxes when your tax bracket is lower rather than higher. The Roth IRA is an effective place to start in the wealth-building process.
For more helpful retirement savings tips, continue to follow Ty J. Young Inc.’s Retirement You Earned blog! If you need help putting your retirement money in a vehicle that will keep it protected and growing at the same time, call the Ty J. Young Inc. team today at 877-912-1919 to learn more.