Enjoy this guest post from our friend, Rick, who owns Self Directed Retirement Plans.
The golden rule for saving is to start early. The earlier you start, the more you can save for your later years. Millennials have this advantage of being able to start saving early.
In addition, they generally fall in the lower tax bracket when they start earning. On top of that, they have considerable time on their hands till they move into higher tax brackets. This is precisely the reason why a Roth IRA is their best option for retirement saving.
Tax-free earnings, no Required Minimum Distributions (or RMDs), and several other features of a Roth IRA are a boon when it comes to millennial retirement planning.
But why are Roth IRAs such a great thing for millennials?
Why Are Roth IRAs Best?
In order to answer why Roth IRAs are the best choice for millennials, we need to first understand the financial challenges faced by millennials:
- College Debt – The sky-high college tuition has doubled since the 1980s, and today the student loan debt is at an all-time high. And this truth is costing the students more than an arm and a leg. Here’s some tips for paying debt off faster.
- Rents – Majority of them cannot afford to buy a home. Hence they have to shell out a fortune on the ever-increasing rent amounts
- Parent-care – Most millennials shoulder the responsibility of caring for their aging parents. Often times they end up spending more of their own money in doing so
- Under-employment – The employment trends are changing drastically because of which there is a wide-spread mismatch of skills in a majority of workplaces. Hence, an increasing number of millennials are either unemployed or have to rely on temporary stints to survive.
- Inflation – $1 million nest for a comfortable retirement is a thing of the past. Thanks to inflation, this amount is around 40 years will come down to have the same spending power as about $270,000 only
Now, let’s look at how Roth IRAs work and what their advantages are.
How Do Roth IRAs Work?
Opening a Roth IRA is one of the ways you can create financial success for yourself. You can open a Roth IRA account online within a few minutes. The majority of online financial firms that offer this service have a streamlined and straightforward process, and you can ask for help through a live chat if required.
The contribution limit for a Roth IRA in 2020 is $6,000 maximum and an additional $7,000 for those who are 50 or above. You need not deposit this amount all at once.
You can divide your contributions across a span of 15 months, beginning from January 1st to the tax year’s filing deadline in mid-April of the next year to contribute the maximum permitted amount. There are two income requirements:
- It’s compulsory to have ‘earned income’ to contribute, and your contributions cannot exceed the amount of your earned income. For instance, if you earned $5,000, you cannot contribute more than this amount.
- As a single filer, if you earn anywhere between $124,000 and $138,999 or as a married joint filer between $196,000 and $205,999, your contribution limit is reduced. Also, if you earn more than the upper limit of your bracket, you are not eligible for contributing to a Roth IRA.
What are the Advantages of a Roth IRA?
Roth IRAs have some of the best withdrawal rules. These rules offer more flexibility as compared to a traditional IRA or even an employer-sponsored 401(k) plan. Here are some of its advantages:
- You are free to withdraw your contributions tax-free at any time and for any reason. Hence, you can treat your Roth IRA account as a secondary emergency fund. Your withdrawals during retirement are also tax-free.
- You don’t get a straight tax break, but your earnings and contributions grow tax-free.
- During your lifetime, you need not worry about Required Minimum Distributions (RMDs) with a Roth IRA.
- You can benefit from the first-time homebuyer exception rule. You are allowed to use $10,000 from your Roth IRA to build, rebuild or buy a home if you are a first-time homebuyer. Note that you are considered as a first-time homebuyer if you haven’t owned a house at least for the past two years as per the IRS.
- In addition, you may be eligible for the Saver’s Tax Credit if you contribute to either a Roth IRA or a traditional IRA. This can save you around $2,000 if you are a single filer or $4,000 if you are a married joint filer in your taxes.
If you, too, are a millennial looking for an excellent savings tool for your retirement, a Roth IRA can help you build a solid nest. Many of the students start investing in Roth IRA since Grand School.
You can even consult a professional investment advisor in case you have more queries about saving with a Roth IRA.
Author Bio:
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments.
Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at [email protected]