IRA (individual retirement account) accounts have the advantage of allowing you to save and invest, even if your retirement years are years down the road. But what about Roth IRAs? These accounts could be helping you save for retirement even more. And if you’re a millennial, they can be a great retirement solution to get you started on your retirement savings journey.
Consider checking out the list of Best IRA Accounts & Rates (Our Top 6 Picks for 2019) for additional information on choosing an account that’s right for you.
If you’ve never heard of Roth IRAs before, here is some info to help get you up to speed:
Roth vs. Traditional IRA
There is one main difference between Roth and traditional IRAs. The money that you invest in your Roth IRA grows tax-free, and you can also choose to withdraw money income-tax-free regardless of your age. After you turn 59 ½ (or meet certain criteria), you can withdraw any dividends, interest, or capital gains that the account accumulates tax-free as well. This contrasts with the traditional IRA, which is taxed as income.
Traditional IRAs allow you to take tax deductions on any funds that you contribute annually. This will save you on taxes now. However, Roth IRAs can save you even more in taxes with you actually want to withdraw your money. You can take deductions on traditional IRAs if you make less than a certain amount of money (you’ll need to check what the amount is each year), and it varies if you file single or file jointly. Depending on your income, a Roth IRA might be a better fit.
Another lesser-known advantage to Roth IRAs is that they do not require minimum distributions after you reach age 70 ½. You can continue to build upon your investment for your entire life instead of reaching a limit at a certain age. You’ll never outgrow this account.
Here’s Why Millennials Should be Taking Advantage
If you’re a millennial, it is a no-brainer to start saving for retirement as soon as possible. The earlier you start saving for retirement, the more you’ll have the day you retire due to compound interest. Compound interest means that the sooner you put in money into an account, the more time it’ll have to accrue interest, which means more money in the long-term. Because of the tax advantages of Roth IRAs, you can withdraw more once you reach retirement than you could’ve with a traditional IRA. Essentially, you can withdraw all of your money without paying any taxes.
Another great advantage for millennials is that you can withdraw your Roth IRA funds including interest, dividends, and capital gains if you are purchasing your first home. You can withdraw up to $10,000 from your Roth IRA tax-free in this special circumstance. You should talk to your mortgage lender and see what the best option might be for your situation. Remember, it’s always better to leave the money alone to continue to take advantage of the compounding interest.
But What About Student Loans?
Many millennials are not saving for retirement because they are still paying off their student loans. If this applies to you, consider your good debt versus your bad debt. Good debt usually qualifies as being a long-term loan of 10 years or more (and if you can use the debt as a hedge against inflation), you have a fixed interest rate, or your interest rate on your debt is lower than the return you’ll get from investing.
The interest rate you’re paying on student loans is most likely going to be lower than the returns you’ll have from putting money into a Roth IRA account. If you can afford to pay off your loans and contribute to a Roth IRA, you should do so to take advantage of the additional years of compounding interest.
What if You Have a 401(k)?
If you have a 401(k), you ideally can also sign up for a Roth IRA. You should absolutely take advantage of an employer-sponsored plan, especially if your employer is contributing funds, because why would you turn down free money? Use both accounts to boost your retirement savings.
If your 401(k) plan isn’t that great and your employer isn’t contributing, consider rolling it into an IRA if you can afford the tax hit. It’ll likely be worth the change.
How To Get Started
When you look for a Roth IRA, you should be looking for these criteria:
– Zero or low account fees
– Low account minimum balances
– Commission-free exchange-traded funds
– Tools to make retirement planning easier
Work with a qualified financial professional, particularly one that works with your age group, and you can be well on your way to retirement.