The kids are going to be alright. In a recent study, the Center for Retirement Research indicated that 41% of IRA contributing households are under the age of 40 and almost 20% of Roth IRA account holders are in their 20s¹. In a time where there may be conflicting financial concerns – student loans, young families, future home ownership – the emphasis on retirement planning is encouraging. What makes a Roth IRA appealing for Millennials and Gen Z?
Early start. Roth IRAs have income limitations which may forbid high income earners from participating. When you’re just starting your career, you might be at a lower income level, allowing you to open and contribute to a Roth IRA. This allows compound interest to work, even if you ultimately reach a point where contributions might not be permitted.
- Tax advantages. With a Roth IRA, you pay taxes at the time of the contribution. “While a 20- or 30-year-old might not know what tax bracket they’ll be in when they’re in their retirement years, they know what they’re currently paying and can plan accordingly,” states Brian Douglas, Vice President of BPAS IRA Services. “The upfront tax treatment allows for tax-free growth and qualified tax-free distributions”.
- Flexibility. Younger generations have a balancing act when it comes to finances. A Roth IRA provides flexibility with distributions, if they’re needed before retirement. You can withdraw your contributions at any time without a tax or penalty. This may be helpful if you’re buying a first home or other significant expense, but keep in mind that the best way to take advantage of a Roth IRA is to wait until you’re at least age 59 ½ so that all earnings are also tax and penalty free.
- Motivated and informed investors. Millennials and Gen Z are more likely to consume information through social media platforms, YouTube, and podcasts compared to older generations. And there are multiple online financial resources that are targeted towards this audience. Whether it’s a Financial Independence (FIRE, FINE, FILE) movement, or just plain frugal living, Roth IRAs are mentioned as an integral step in the planning journey. While older generations have always been encouraged to save for retirement, the exact investment vehicle wasn’t as broadly promoted.
- Gig worker mentality. Millennials & Gen Z may be working a few part-time jobs, doing a side-hustle in addition to their full-time position, or may not be eligible for their Workplace Retirement Plan just yet. You can contribute to a Roth IRA in addition to a Workplace Retirement Plan, providing additional investment opportunities and flexibility.
The next generation. The Roth IRA might be appealing for Generation Alpha and future generations as well. As long as you have taxable income, you’re eligible to contribute to a Roth IRA. Something to keep in mind for the kids working after-school or during summer break.
To learn more about Roth IRAs, visit IRA Select https://iraselect.com/iras/ and BPAS University.
¹ https://crr.bc.edu/do-iras-actually-help-more-people-save-for-retirement/
