Gen Z is best known for their TikTok personal finance trends and gloomy feelings about retirement planning, but this younger generation also has some unique advantages. If you’re in your 20s and just starting your career, there’s one special retirement account you should consider opening. It’s a Roth IRA.
If you qualify for a 401(k) or other workplace retirement plan, you should take advantage of that as well. You must contribute at least enough to receive the full amount of your employer’s matching contribution. But whether or not your workplace has a retirement plan, Gen Z investors should strongly consider opening a Roth IRA as part of their investment strategy.
Let’s take a look at why opening a Roth IRA is a big financial move for Gen Z.
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What is a Roth IRA and how does it work?
A Roth IRA, a type of Individual Retirement Arrangement (IRA), is a tax-advantaged retirement savings account that you can use to save and invest for your future. Another type of IRA is the traditional IRA. A traditional IRA, like a 401(k), provides tax deductions for the funds you put into it. Your money grows tax-deferred and you pay taxes on the money you receive in retirement.
Roth IRAs are different. You don’t get a 401(k)-style tax break on the money you put in. Instead, funds in your Roth IRA grow tax-free and can be withdrawn tax-free in retirement. A Roth IRA provides a tax-free source of income in retirement. This tax-free benefit makes a Roth IRA a great option for those who want to save for their future.
In 2024, Gen Z can put up to $7,000 into all IRAs (traditional and Roth combined).
Why Roth IRAs are Gen Z’s best friend
Roth IRAs are a great retirement savings option for people who are young, single, and in the early stages of their careers. That’s because if you’re (say) 24 years old and working your first “real” job, you’re likely in the lowest tax bracket of your life. Your income is likely to increase during the remainder of your working life, and your marginal tax rate will also increase.
For example, as of 2023, Gen Zers ages 20 to 24 had a median salary of $38,325, according to research from McKinsey. Let’s say you’re single and your salary is a little above the median salary of $45,000. This will result in a 12% tax in 2024. But a salary increase of just a few thousand dollars puts you in the 22% tax bracket.
This means that early in your career, all the money you save for retirement will be taxed at the lowest rate of your life. So, rather than trying to maximize your tax savings by putting additional cash into a 401(k) or traditional IRA, it makes sense to pay a marginal tax rate of 12% and grow your cash tax-free in a Roth IRA .
(There are some income limits for who can take advantage of a Roth IRA, but you have to be single and a fairly high-income earner with an income of $146,000 or more.) Most Gen Zers have yet to reach that affluent income level. Is not.)
How to use Roth IRAs and 401(k)s
You don’t have to choose between a Roth IRA and a 401(k) or other workplace retirement plan. If you have enough room, you can and should use both. If your employer offers to match your girlfriend’s 401(k) contributions, make sure you contribute at least that amount.
For example, some companies may match 50% of the first 5% of your salary paid into your 401(k). So, if he makes $45,000 a year, he would invest $2,250 in his 401(k), receive $1,125 in employer matching money, and invest a total of $3,375 in his retirement savings. If possible, get that “free money” without leaving it on the table.
A Roth IRA can give you an additional retirement savings account beyond your 401(k). Continuing with the example above, if you invested $200 each month in a Roth IRA, you would have saved $2,400 by the end of the year, for a total of $5,775 invested in your retirement savings. The best Roth IRA accounts allow you to invest your money in a wide range of stocks, bonds, and ETFs. In some cases, Roth IRA accounts may offer better and more diverse investment options than 401(k) plans.
conclusion
If you’re young, just starting your career, and have low taxes, opening a Roth IRA can be a smart financial move to save for your future. For this reason, Roth IRAs are a good fit for Gen Zers who want to save money for retirement beyond a 401(k). If your taxes are in the 12% range, you’ll benefit greatly from decades of tax-free investment growth. than the 12% tax cut in 2024.
Be sure to understand the rules and limitations before putting cash into your retirement account. And if your emergency savings fund isn’t quite where you want it to be yet, there’s no need to rush into putting your money into a tax-advantaged account. Some Gen Zers may want to keep more cash in their savings accounts for the time being.
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