5 Reasons Why Millennials Should Go with a Roth IRA | Ed Slott and Company, LLC

5 Reasons Why Millennials Should Go with a Roth IRA

By Sarah Brenner, IRA Analyst
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If you are a young worker, you, like many other members of the millennial generation, may be juggling student loans and expensive rent. Retirement? That is likely the last thing on your mind, although you may have a sneaking suspicion that the generous pensions that older generations enjoy probably will not be there for you. What can you do now to save for a more secure retirement? Well, for many millennials the Roth IRA is the way to go. Here are 5 reasons why:

  1. Access to Your Money. Are you concerned about contributing to a Roth IRA because you may need your money for unexpected expenses down the road? No worries with a Roth IRA. Your contributions are distributed from your Roth IRA first and they are always distributed tax-and penalty-free. It does not matter what you use the money for or how old you are.
     
  2. More Time to Build Tax-Free Earnings. As a young worker you have one huge asset on your side. Time. Years of smaller contributions can really add up; and remember, if you follow the rules, distributions from your Roth IRA will be qualified distributions. This means all your earnings can be tax-free in your golden years.
     
  3. 401(k) plan at Work? No Problem. If you are lucky enough to have a 401(k) or another retirement plan at work, you can still contribute to a Roth IRA, if you meet the income limits. Your participation in a company plan has no effect on your ability to contribute.
     
  4. Back-Door Roth IRA for Higher Earners. There are income limits on Roth IRA contributions. Does that mean the Roth IRA is not an option for you if you earn a good salary? No. Consider a “back-door” Roth IRA. Here is how it works. You contribute to a traditional IRA and then convert that traditional IRA to a Roth IRA. Your income level does not matter for either of these transactions. A pro-rata formula may apply to the taxation of the conversion if you have other traditional IRAs (including SEP and SIMPLE IRAs). However, younger workers are less likely to face this hurdle than older ones because they are less likely to have large tax-deferred IRAs.
     
  5. myRA Program Opens the Door. What if you want a Roth IRA but can only contribute very small amounts? Will you able to find a financial organization to open a Roth IRA with a very minimal investment? Don’t be discouraged. Consider the myRA program, which allows contributions as low as a few dollars a month. It is a great way to get started saving. A myRA is very similar to a Roth IRA but with a few twists. When your account grows you can roll it over to a Roth IRA.

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