Downs Law Firm, P.C.

Millennials and Roth IRA

Why Should I Start a Roth IRA Now?

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When it's several decades away, you might categorize saving for retirement as a back-burner concern.

When you’re younger, contributing to a Roth IRA sounds a bit crazy, making it that much easier to delay starting.

CNBC’s article, “The one thing no one tells you about investing in a Roth IRA,” says that what you almost never hear is the regret retirees have that they didn’t start saving sooner. It’s wise to start investing as early as possible, so your investments will have more time to grow.

Millennials seem to really like Roth IRAs, which have shown an across-the-board increase in all age groups.  This may be because millennials may experience frequent career moves and may see little hope of relying on Social Security or employer defined benefit plans.

In looking at investor data, Fidelity concluded that more than 50% of IRA contributions go into Roth IRAs, especially from people age 23 to 38. Millennials opened 41% of new Roth IRA accounts in 2018, and 74% of their contribution dollars are going into Roth’s. These accounts are especially valuable when they’re the sole source of retirement savings.

For younger people, 30 or 40 years seems like a super long time to not be able to use that money.  However, because Roth contributions are made with after-tax dollars, that’s not a big concern.

The benefit is that you can use the contributions you’ve made without taxes or a penalty. You have to forfeit the immediate tax break, but you’ll receive something better in return: the contributions and years of earnings that will be tax-free in retirement.

Fidelity estimates that this year millennials will be a larger population than boomers. Older millennials are in their 30s, stable in their careers, and saving money.

Since the IRS has upped IRA contribution limits, you can contribute $6,000 annually. If you are over age 50 and making catch-up contributions, you can add in an additional $1,000, for a total of $7,000 per year.

The income cutoff for contributing to a Roth IRA is $137,000 for single filers, up from $135,000 for single filers in 2018.

If you’re still unsure which type of IRA to choose, go with a traditional IRA, which has instant gratification because of the upfront tax refund. However, if you’re thinking long term and what will be better for you and your family many years from now, select a Roth IRA.

Reference: CNBC (March 31, 2019) “The one thing no one tells you about investing in a Roth IRA”