(NewsUSA) – When it comes to saving, a Roth IRA may be a Millennial’s best friend.
Unlike traditional IRAs or even workplace 401(k) plans, Roth money is tax-free in retirement. And even as the account ideally grows fatter over the years -helped in part by a wondrous thing called compound interest – the original contributions can be withdrawn at any time, for any reason, with no taxes or penalties assessed.
That’s right, any time. For any reason.
“Roth contributions are made with after-tax dollars, but those in their 20s or 30s are probably in a lower tax bracket now than they will be later in life when their salaries are higher,” explains Melissa Ridolfi, vice president for retirement and college leadership at Fidelity Investments. “So not only would they likely be minimizing their lifetime tax bill, but they’d also have tremendous flexibility.”
In fact, it’s the flexibility of Roth IRAs over the shorter term – and what that means for two of Millennials’ most pressing issues – that doesn’t always get the attention it deserves:
* Buying a home. The homeownership rate among Millennials, age 25 to 34, is about 8 percent lower than that of Gen Xers and Baby Boomers at the same point in their lives, according to CNBC. And you know what being stuck renting an often exorbitantly priced apartment does for wealth accrual: bupkis. Or, as Tamara Sims, a research scientist at the Stanford Center on Longevity, more delicately told the network: “Buying a home at age 50 or 60 isn’t going to do you much good in funding a 30-year retirement.”
Now, remember what we said about original Roth contributions being tax- and penalty-free? With rare exceptions – and this is one of them – that doesn’t apply to any investment gains withdrawn before age 59?. Yes, thanks to this carve-out, first-time homebuyers (as well as those who haven’t owned a home for at least two years) may also be able to withdraw up to $10,000 of those gains and still not pay any tax or penalty as long as they’ve held the account for at least five years.
* Education. And why aren’t as many Millennials buying homes? One of the biggest reasons: crushing student-loan debt.
In another of those Millennial-friendly exceptions, Roth money can be tapped to pay for qualified educational expenses like college or graduate school for yourself, your spouse, or your children. Unlike with homes, though, you’ll only beat the penalty – not the tax – on any earnings you withdraw when following the same five-year rule.
There’s evidence that Millennials are getting the message about Roths.
Fidelity, which has tools and scenarios to help pick which IRA is right for you – as well as advice on specifically saving in a Roth during your 20s and 30s – says 80 percent of Millennials’ contribution dollars at the firm are going into Roths.
As for 2019, know that the income cutoff for Roth eligibility (based on your modified adjusted gross income, or MAGI) has been increased over last year to $137,000 from $135,000 for single filers and $203,000 from $199,000 for joint filers. Also raised: the annual contribution limit for both Roth and traditional IRAs (to $6,000 from $5,500, with an additional catch-up of $1,000 for those 50 and older).
“One of the great things about being a Millennial,” says Ridolfi, “is that they have time and the power of compound interest on their side.”