Roth IRA for Millennials and Gen Z

One of the most overlooked and unique benefits of the Roth IRA is that, unlike traditional IRA contributions, your contributions can be withdrawn at any time, for any reason, penalty-free and tax-free.

Many people in their twenties are not thinking about retirement. They are starting careers, getting married, paying bills and struggling to balance a new set of responsibilities. Annual Roth IRA contributions are normally not high on the priority list for someone who is 25 years old. However, there are tremendous advantages to making contributions to a Roth IRA for Millennials and Gen Z.

Understanding the Value of Compound Interest

The amounts saved when people are in their twenties have time to grow and take advantage of the magic of compound interest.

Here’s an example of compounding in action:

A 25-year-old investor makes a one-time contribution of $5,000 to a Roth IRA. The contribution grows at 10% annually and all earnings are reinvested until age 60. At that time, the contribution made at age 25 has grown to an estimated $140,000!  

So, how does a Roth IRA work?

It’s a retirement savings account that allows your money to grow tax-free.

• Contributions are made after-tax, meaning you’ve already paid taxes on the money you put into it and cannot take a current-year income tax deduction like a traditional IRA.
• The investments grow in the account tax-free, and because the contributions are after-tax, the withdrawals are tax-free–no taxes!
• For 2022, individuals can contribute up to $6,000 annually or $7,000 if you are over 50.
• In 2022, maximum contributions are allowed for single filers with income up to $129,000, and married filers with income up to $204,000.
• For those making over the income levels noted above there is a phase-out on direct contributions. If you are single and making over $144,000 or married and making over $214,000 you cannot make a direct Roth IRA contribution. However, those over these income limits may have another route to take to make contributions which will be covered in our next article on Roth IRAs.

What are some advantages to a Roth IRA for Millennials and Gen Z?

• One of the most overlooked and unique benefits of the Roth IRA is that, unlike traditional IRA contributions, your contributions can be withdrawn at any time, for any reason, penalty-free and tax-free.
• Roth IRAs offer you tax-free withdrawals, giving you a powerful savings tool
• No required minimum distributions to worry about
• While it is more tax-efficient to leave money in the Roth IRA for as long as possible, the funds can be accessed without penalty to meet savings goals.
• Roth IRAs can be used for an emergency fund, home purchase, flexible savings buffer, and advanced tax planning.

How do you open a Roth IRA account?

To open a Roth IRA, you just need to be 18 or older and have earned income in the year of the contribution. For example, if you are still in college and have a paid internship for the summer, you can contribute the lesser of your earned income or the annual maximum.  This allows you to get ahead on your retirement savings even if you don’t qualify for your employer’s retirement plan.

When creating a Roth IRA account, you’ll need a few pieces of information, such as a government-issued photo identification, date of birth, social security number, proof of employment (if applicable), beneficiary, and your bank information for transferring funds.

There are many financial institutions that offer IRA accounts. Once you open your Roth IRA, all you have to do is consistently make contributions and watch your retirement fund continue to grow!  You will thank yourself later. If you’re interested in contributing to a Roth IRA but your income exceeds IRS limits, you still have options to save for retirement by doing a Roth conversion or Backdoor Roth IRA. Stay tuned for more on this topic in our next article.

Questions?

As always, should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.

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For current limits and qualifications for Roth IRAs per the IRS, click here.