December 11, 2022
If you're a millennial, chances are you've heard of a Roth IRA, but it can be confusing to understand what a Roth IRA actually is and what benefits it brings to millennials. Let's take a minutes to talk about what a Roth IRA is, then I'll talk you through some of the reasons a Roth IRA can be an incredible tool for millennials.
A Roth IRA is a type of individual retirement account (IRA) where you make contributions with after-tax dollars, which means you won't receive a tax deduction when you contribute. However, any earnings your investments make are tax-free, and you can withdraw your money tax-free in retirement.
Now, the first thing I want to remind you of is a Roth IRA is a retirement account and I encourage you to use it for funding your retirement. However, there is a lot of flexibility when it comes to getting your money out of a Roth IRA. I'm sure you've heard of penalties for taking money out of a retirement account, but with a Roth IRA, you can always take out the amount you've contributed without taxes or penalties. For example, if you've contributed $5,000 to a Roth IRA and, after some time, that money has grown to $7,000, you can always take that first $5,000 out of your Roth IRA with paying a tax or penalty. However, if you dip into the earnings above your contribution you will likely have taxes and/or penalties to deal with.
So, although this account is designed for retirement, you can use the funds to support some of your other financial goals, like buying a house, starting a business, or taking a sabbatical. I'd encourage you to speak with your financial planner about the long-term impacts of taking money from a Roth IRA for a goal outside of retirement.
You may have 401k where you've set up your contribution and the money comes out of your paycheck every pay. Although I encourage automatic regular contributions to my clients, a Roth IRA is more flexible than that. You contributions don't have to be made as frequently and making changes to your contribution is simple. If one month you have a little extra money, you can make a bigger contribution. Or maybe this month was a little more expensive than normal; you can lower (or stop) your contribution that month to give you some extra flexibility.
With a Roth IRA, your contributions are made with after-tax dollars, which means you've already paid taxes on your contributions. Even better—you don't have to pay taxes on the growth of that money either (as long as you follow a couple of rules)!
Remember when I mentioned there were a couple of rules to follow to get tax-free growth? Most of them revolve around time. So, opening a Roth IRA as a millennial will put you in a spot where you will be way ahead of those time requirements. Secondly, the eighth wonder of the world is compound interest! The sooner you get money working for you, the longer that money has to grow—and don't forget that growth will be tax-free in retirement. As a millennial, you may feel like you don't have much cash to spare, but I encourage you to get started. Even a small amount can have a big impact on your financial health.
A Roth IRA allows your money to continue to grow tax-free, even after you pass away. This means that your beneficiaries can inherit your Roth IRA and continue to enjoy tax-free growth on the funds, potentially providing them with a significant source of income in the future. For your heirs, a Roth IRA is one of the best accounts to inherit.
A Roth IRA offers a lot of great benefits for planning for retirement while also offering millennials added flexibility to explore the other financial goals that are important to us. If you're a millennial with long-term financial goals (hint: you should), a Roth IRA can be an amazing tool to have in your toolbox! If you're ready to open a Roth IRA, reach out for your free consultation!
You wouldn't wait until the morning of a flight to plan a trip.
Don't wait until retirement to make a financial plan.