Millennials live in the here and now, but there are those who understand the importance of saving for the future. And for millennials, there is no better retirement account than a Roth IRA.
Roth IRA’s are the best retirement vehicle for millennials who want to make their money grow tax-free.
Let me explain why.
The money you contribute into a Roth IRA account will not be taxed when you withdraw it (source). Not only that, but even the interest you earn will never be taxed! It’s the only retirement account that will truly grow your money tax-free.
With a 401k retirement account, you will be taxed when you make a withdrawal. Do you really want to pay taxes on your savings when you’re retired? I thought so.
Opening a Roth IRA is super easy and can be done online. Another reason I like Roth IRA’s is that you can put money in your account up until April 15th and have it count for the previous year. With a 401k you only have until December 31st of the current year to make a deposit.
Don’t get me wrong here, it’s not that I hate 401k’s. I just think that if you have an employer sponsored 401k, don’t think you’re done. Millennials should consider opening up a Roth IRA in addition to their 401k.
I do like 401k’s because the money you put in is deductible on your tax return and I especially like it if your employer offers to match a percentage of your deposit.
I also like 401k’s because you can deposit up to $18,500 per year for 2018 while the max on a Roth IRA is $5,500 ($6,500 if over 60). But if I only had a limited amount to invest into retirement, I’d drop the first $5,500 into the Roth IRA and the rest in a 401k.
With that said, I believe Roth IRA’s are superior, and here are the 6 main reasons why I prefer Roth IRA’s for Millennials.
You Don’t Have a 401k Plan
If your employer offers a 401k plan with a match, definitely take advantage of it. That’s free money.
But a lot of companies either don’t offer it or many millennials don’t even work for a company, but rather are freelancers or working as independent contractors. For those millennials who don’t have access to a 401k plan, a Roth IRA is an ideal retirement vehicle.
Your 401k Plan Sucks
Just because your employer has a 401k plan doesn’t mean you should be pouring all your money into it. If your employer offers a 3% match, put in your 3% so you can get the full benefit of the match.
But if your 401k plan sucks, stop putting extra money in it and instead open and deposit money into a Roth IRA.
Some 401k plans have high fees associated with it and your employer might not have a wide variety of investment options. When you choose a Roth IRA the power is in your hands and the fees are often times lower.
A Roth IRA Offers Unique Tax Advantages
With a Roth IRA you can withdraw your money without any tax penalty after the age of 59. It will be completely tax free.
When you earn income as a millennial in your 20s or 30s, it will be taxed. You can’t escape that tax. But when you’re young you typically aren’t making that much money so your income is taxed at a low tax bracket.
When you are over 60 years old, odds are you are making more money and belong in a higher tax bracket.
This is a major benefit of a Roth IRA. You will be taxed when you are young at a lower tax rate compared to a 401k, where you will be taxed at a higher tax rate when you’re in your 60’s.
Use Your Retirement Money To Pay For College
If you want to withdraw your money from your Roth IRA before the age of 59, you will incur a 10% penalty. However, if you plan to withdraw money and use it to pay for college expenses, you will not incur any fees nor pay any taxes!
This is useful to millennials who have an interest in pursuing a masters degree or are considering going back to college to further their education.
You can also withdraw your money penalty-free and tax-free to pay for your future children’s college education.
Use Your Roth IRA As An Emergency Account
I would never recommend using a retirement account as your emergency savings account. You should really have a separate account for that.
With that said, you can use the contributions you’ve made into a Roth IRA without any penalty any time you want. The only thing you can’t withdraw penalty-free is the interest you’ve earned.
If you’re trying to build a nest egg for retirement however, you really shouldn’t be dipping into your Roth IRA funds though.
Contribute To A Roth IRA For As Long As You Want
With a traditional IRA or a 401k account, there are mandatory withdrawals that you must make when you turn 70½ years old. This is not the case with a Roth IRA.
You can keep your money earning interest for as long as you want. You can even continue to make contributions for as long as you want. This makes a Roth IRA ideal for those who don’t see themselves retiring at a young age because this let’s you grow your money longer.