The Roth IRA has gone viral- and for good reason.
It seems every day there's a new article describing the financial benefits of the Roth IRA. But how can you tell that it makes sense for your own financial picture? And why should a Millennial consider investing in a Roth IRA vs its counterpart Traditional IRA?
This article will outline the 3 main reasons the Roth IRA makes perfect sense as an investment vehicle for Millennials.
Reason#1: Low Taxes Now
Generally speaking, Millennials are at the beginning stages of their careers. That means that, in most cases, they have not gained the experience and network necessary to move up to senior positions within their companies. It also means that they probably aren't paying ridiculously high tax rates. (If this describes your scenario, don't worry! Uncle Sam will be happy to take more of your hard-earned paycheck if given the chance)
What does this mean for Millennials?
The Roth IRA is a post-tax investment vehicle, meaning that any funds contributed have already been taxed. Since the typical Millennial saver will be in a low tax bracket, paying taxes now may be more beneficial in the long-term. Speaking of the long-term benefits, that leads us to our next point:
Reason #2: Tax-Advantaged Through Retirement
The Roth IRA allows for tax-free withdrawals once the saver has reached age 59 1/2. For our Millennial saver, this characteristic can end up saving her/him a boatload of money when it's time to retire. Keep in mind that the invested funds grow tax-free, protecting the account owner from taxable events.
The tax benefits of the Roth can be substantial, but the next benefit may be the most powerful one of all.
Reason #3: Flexibility
The flexibility of the Roth IRA is one of its best advantages vs other retirement accounts. Two specific characteristics of the Roth are huge for Millennial savers:
- Contributions can be withdrawn at any time (not earnings)
- There is no Required Minimum Distribution until the account owner passes
Having the ability to withdraw Roth IRA contributions at any time is a great feature. In contrast to other retirement accounts, this flexibility allows the saver some breathing room in case of emergency.
Millennials may not care much about the Required Minimum Distribution(RMD), since this doesn't start for retirement accounts until age 70 1/2. However, young savers will benefit greatly by understanding the importance of this rule for the Roth IRA. Individuals have added flexibility with the Roth because there are no RMD rules until the owner dies.
Should I open a Roth IRA?
The best answer to that question is.... it depends. Each individual's circumstances are different. One article that may help you determine this is below:
Are there any advantages about the Roth IRA that we missed? Add them in the comments below.
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The author of this article is not a licensed professional. This article and all information presented is for informational purposes only and should not be taken as financial or legal advice. We recommend our readers to consult with a licensed professional in the appropriate field prior to making any investment decisions.