Millennials (1981-1996) and Gen Z (1997-2012) are often mistaken for the other based on many similarities between both generations. Both of the generations are tech savvy, enjoy traveling, and are often underpaid in their 9-5 jobs. Many people in these generations feel that retiring is not even an option due to the increasing cost of living and minimal increases in wages and salaries depending on the industry. However, there is one thing we can take advantage of while our incomes are under a certain threshold that is extremely beneficial when we are older. The Roth IRA.
Saving for retirement in your 20s may seem unnecessary, but it is actually something that should be prioritized so that your money can grow over time. Honestly, I would have started saving in middle school if I knew the information I know now. Anyway, saving for retirement will allow you to live a more comfortable lifestyle in your elder years. For example, you would have roughly $529,771 at age 65 if you start saving $200 a month at 25 years old. If you start saving $200 per month at 30 years old, you would have roughly $363,530 at 65 years old. These estimates are based on a 7% rate of return. The earlier you start saving money, the more money you will have at the retirement age. Look into side hustles like DoorDash to boost your income to save more money outside of your 9-5 job.
What Is a Roth IRA?
A Roth IRA is an individual retirement account that provides a tax advantage in which retirement withdrawals are tax-free. The money you contribute to the account also grows tax-free. In 2021, you can contribute up to $6,000 in a Roth IRA if you make less than $140,000 per year for singles and less than $208,000 for married couples. As long as you are earning income and are below those income thresholds, you can open up a Roth IRA at a brokerage firm like Fidelity, Vanguard, Charles Schwab, or any other broker of your choosing. Keep in mind that you pay taxes on the money you put into the account. For example, you receive your direct deposit on pay day from your job and then place money from your check into your Roth IRA. Taxes have already been deducted from your pay check, so you are good to go.
Perks of Opening a Roth IRA
Roth IRAs are beneficial for Millennials and Gen Z because of a few factors which include:
- Tax Savings and Advantages
- No Mandatory Withdrawals
- Easy Access and Early Withdrawals
The Roth IRA offers potential tax savings for those who expect the tax rate to be higher when they are older. I am sure most of us can assume that the tax rate will be higher in the future, so open that Roth IRA today! All contributions made to your Roth IRA are after-tax contributions. You will NOT be taxed once you start withdrawing money from your account during retirement.
Another perk of the Roth IRA is that there are no mandatory withdrawals. This means that you do not have to start withdrawing money from your Roth IRA at a certain age. Traditional IRAs have a mandatory age of 72 years old in which you must start withdrawing money. With a Roth IRA, you have more freedom to choose when to withdraw your money during retirement. However, the heir to your Roth IRA must start making withdrawals if you pass away and no withdrawals have been made.
Lastly, the Roth IRA provides easy accessibility to your funds if you need to make an early withdrawal. There are no tax obligations or penalties for withdrawing money early from your Roth IRA as long as you withdraw contributions made to the account and not your earnings. I do not recommend withdrawing money from your Roth IRA early because you want ensure that you maximize on your contributions year over year. Do not withdraw money from your Roth IRA unless it is a last resort for an emergency.
What If I Already Have a 401(k)?
If you are already saving for retirement through your employer sponsored 401(k), continue those contributions each month. The 401(k) is one of the most popular retirement accounts and many employers offer a match based on your monthly contributions. You can contribute up to $19,500 in your 401(k) for 2021. These contributions are made pre-tax before you even receive your paycheck or direct deposit, so that means the money will be taxed when you begin to make withdrawals in retirement. You also face a 10% penalty if you withdraw money from your 401(k) before the age of 55 if you have not left your job. The Roth IRA is a good addition to have on top of your 401(k) for added diversification in your investing portfolio and more flexibility with your retirement savings.
What Stocks Should I Buy In My Roth IRA?
There are a variety of options available when investing in assets in your Roth IRA. I personally invest in ETFs (exchange traded funds), REITs, and Index Funds when it comes to my Roth because they are low risk and the returns have been consistent. You can also invest in single stocks if you want to increase your risk which usually translates to higher gains (or major losses). Large cap growth index funds are probably your safest investment for your Roth IRA due to sustainability and low risk. Always do your own research before buying stocks!
My stock picks: VOO, FXAIX, QQQ
To Conclude…
A Roth IRA gives Millennials and Gen Z tax advantages later on in life. To increase our net worths, we need to ensure that we are taking advantage of all tax advantaged accounts that have a high ROI ( Return on Investment) and the Roth IRA is one of those accounts. I will challenge anyone that reads this to open a Roth IRA today, max it out at $6,000 for this year, and enjoy the perks over time. Even if you are unable to max it out, continue to make contributions to ensure a more enjoyable retirement experience. Feel free to contact me to let me know how your wealth journey is going.
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