Why Do Young People Hear So Much About Roth IRAs?

Why Do Young People Hear So Much About Roth IRAs

Roth IRAs. If you’re a Millennial or Gen Z, chances are this is the financial account you’ve heard the most about in your life. But why is this? Are they really as beneficial as people make them out to be? Read on to find out!

What is a Roth IRA?

Let’s start with the basics. Think of a Roth IRA like a special “bucket” you fill with your after-tax dollars for retirement. The cool thing about it is that once you’ve put your money in, it grows tax-free. Plus, when you withdraw it in the future, you don’t have to worry about taxes1. It’s a flexible and tax-friendly way to save. For many, a Roth IRA can be a smart way to amp up their retirement savings.

What are the pros of a Roth IRA?

  1. Tax-free growth: Investments in a Roth IRA grow tax-free, so you don’t pay taxes on dividends, interest, or capital gains. This is a pretty great benefit!
  2. Tax-free withdrawals: Not only do your investments grow tax-free – qualified withdrawals2 from a Roth IRA during retirement are also tax-free. This includes both your own contributions and the account’s earnings over time.
  3. Tax diversification in retirement: Managing tax brackets is a big deal – especially once you reach retirement. Having a mix of taxable, tax-deferred, and tax-free retirement savings (such as a Roth IRA) can provide flexibility in managing your taxes during retirement.
  4. Flexibility: Another big plus is that you can take out the money you put in (i.e. contributions) whenever you need it without any penalties or taxes, which makes it a bit more flexible than other retirement accounts. There are certain rules associated with this feature, so be careful!
  5. No RMDs: Ever heard of Required Minimum Distributions (RMDs)? Roth IRAs don’t have them! Unlike Traditional IRAs, there’s no requirement to withdraw money from your Roth IRA during your lifetime. This allows you to let your investments accumulate as long as you’d like.
  6. Estate planning benefits: Roth IRAs can be passed on to heirs tax-free (via a trustee-to-trustee transfer), providing a tax-efficient way to transfer wealth.

What are the cons of a Roth IRA?

  1. No immediate tax break: Unlike Traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, so you don’t get an immediate tax deduction. Think of it like depositing your take-home pay. This is a deal-breaker for some – you’ll need to weigh your options to make a prudent decision here.
  2. Income limits for contributions: Because of income limits set by the IRS, high-income earners may not be eligible to contribute to a Roth IRA. If you file MFJ and make more than $240,000/year (2024), you cannot contribute to a Roth IRA.
  3. The opportunity cost of paying taxes upfront: By paying taxes on contributions right away, you lose the chance to invest the tax savings and allow them to grow over time.
  4. Annual contribution amount limits: There are annual contribution limits to Roth IRAs. For 2024, the contribution limit is $7,000 for those under 50 and up to $8,000 for those 50 or older. This may not be sufficient for individuals looking to maximize their retirement savings (but there are ways to get more $ each year into a Roth structure!)
  5. Complex rules for withdrawals of earnings: While contributions can be withdrawn at any time without taxes or penalties, withdrawing earnings before age 59½ may result in taxes and penalties. There are exceptions to this. You also must have had the Roth IRA open for at least five years before you can withdraw earnings without penalty.
  6. Impact on financial aid eligibility: Roth IRA assets may be counted as part of your assets when applying for financial aid. This could potentially reduce the amount of financial aid you are eligible to receive because it makes it look like you have more money to contribute to college expenses.

Why should you care about Roth IRAs?

Starting a Roth IRA when you are young has the potential to put you in a more secure financial position in the future by allowing you to take advantage of tax-free growth and the power of compound interest.

Among a myriad of different investment account options out there, Roth IRAs stand out as a valuable tool for retirement planning. Roth IRAs provide a unique combination of tax advantages, flexibility, and estate planning benefits that can make them an important component of your retirement savings strategy.

Take the time today to figure out if a Roth IRA is right for you.

Bonus! Steps To Setting Up A Roth IRA

  1. Confirm Eligibility: Make sure that you meet IRS criteria for setting up and funding a Roth IRA.
  2. Fill Out Application: You will have to provide personal details such as your DOB, Social Security number, address, etc.) Don’t forget to designate beneficiaries as well!
  3. Fund The Account: Make your initial contribution. Keep in mind the annual limits ($7,000 or $8,000 if 50+ in 2024).
  4. Choose Investments: Select investment options aligned with your overall financial plan.
  5. Annual Contributions: Contribute each year according to your retirement savings strategy.

Johnson is a fee-only, fiduciary financial advisor with Asset Dedication, LLC DBA Branning Wealth Management. He provides hands-on, practical financial advice for millennials, young families, and those starting out in their working careers.


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Footnotes: 1., 2. *Subject to Roth IRA rules, which generally require the account be held for 5+ years AND account owner having reached 59.5 years old.

Disclaimer: This presentation is intended for information purposes only. Investments are subject to market risk, including the loss of principal, and the investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices, in general, may decline over short or extended periods. The information contained does not take into account any investor’s specific individual investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting, or tax advice, or a representation that any investment or strategy is suitable or appropriate. Information in this report has been obtained from sources deemed to be reliable, and is not guaranteed. The above information is subject to change without notice.

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