When looking at saving some of their hard-earned money, Millennials may want to consider Roth IRAs as their new BFF.The difference between Roth and traditional IRAs or workplace 401(k) plans is that Roth money is tax-free in retirement.
Even as the account grows over the years, helped in large part by compound interest, the original contributions can be withdrawn at any time, for any reason, with no taxes or penalties assessed.“Roth contributions are made with after-tax dollars, but those in their 20s or 30s are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 can mean 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.
As Tamara Sims, a research scientist at the Stanford Center on Longevity, 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With rare exceptions – and this is one of them – that doesn’t apply to any investment gains withdrawn before age 59½.