8 Biggest Advantages of Roth IRAs If You’re Gen Z or Younger, According to Experts
Written by
Jennifer Taylor
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Amber Barkley
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Retirement might seem like a lifetime away, but now is the time to start saving. There are several different types of retirement savings plans to choose from, but opening a Roth IRA can pay off.
A retirement account that allows you to contribute your after-tax dollars toward retirement, a Roth IRA offers several benefits over a 401(k). Here’s a look at eight of the biggest advantages members of Gen Z and younger people can enjoy by investing in a Roth IRA.
Unmatched Withdrawal Flexibility
“Roth IRAs offer unique flexibility that’s particularly valuable for Gen Z,” said Peter Ankeny, CFP, founder of Wolf Pine Capital, LLC. “You can withdraw your contributions at any time without penalties, providing an emergency backstop while building wealth.”
He said you’re also able to make penalty-free withdrawals for qualified educational expenses.
First-Time Home Purchase Benefits
More than just saving for a decades-away retirement, a Roth IRA can prove beneficial for more short-term goals.
“Roth IRAs permit penalty-free withdrawals of up to $10,000 in earnings — in addition to contributions — for first-time home purchases,” Ankeny said. “This feature can help Gen Z save simultaneously for retirement and a future down payment, maximizing the utility of their savings during these crucial wealth-building years.”
Backdoor Roth IRA Potential
“Starting with a Roth IRA early in their careers gives Gen Z a significant tax planning advantage,” Ankeny said. “As their income grows and potentially exceeds Roth IRA limits, they can implement backdoor Roth conversion strategies without the complications of existing traditional IRA balances.”
He said this is important, as traditional IRA balances trigger the IRS pro-rata rule during conversions that can create unexpected tax consequences.
“By starting with a Roth early, Gen Z can maintain a cleaner tax picture and more efficient backdoor Roth conversions in their higher-earning years,” he said.
Protection Against Future Tax Rate Increases
Paying taxes on withdrawals in retirement can make a serious dent in your savings — but this is a non-issue with a Roth IRA.
“With growing national debt and changing tax policies, tax rates could be higher when Gen Z reaches retirement age,” Ankeny said. “Roth IRAs provide valuable insurance against future tax increases, since qualified withdrawals remain tax-free regardless of tax rate changes.”
Tax-Free Growth and Withdrawals
“Because contributions to a Roth IRA account are made with after-tax dollars, money invested inside a Roth IRA grows tax free,” said Heather Comella, CFP, founder and lead planner at Folsom Wealth Advisors. “With the power of compounding returns, this tax-free investment growth can be significant over a young saver’s lifetime.”
She also highlighted the benefits of tax-free qualified withdrawals during retirement — typically after age 59 and a half and after the account has been open for at least five years.
“This means tax-free investment earnings forever,” she said. “We don’t often get tax-free income under the current tax code.”
Diversification of Retirement Income Sources
“Having a mix of savings that is taxed at withdrawal, like a pre-tax retirement savings, and tax-free at withdrawal, like Roth retirement savings, provides opportunity for lifetime tax planning and can ultimately reduce the total tax you pay on your income over your lifetime,” Comella said. “Because our tax system is tiered, the more income you pull into a given year, the higher tax rate you’ll pay, as you’re pushed up through the tax tiers.”
If you have tax-free savings, she said you can use a mix of taxable and tax-free withdrawals to live on during retirement and strategically stay in the lowest tax bracket during your golden years.
No Required Minimum Distributions Later in Life
As a member of Gen Z or younger, it might be hard to envision retirement. However, Comella said the advantage of not having to take a required minimum distribution (RMD) is relevant to your lifetime tax planning.
“Unlike pre-tax — traditional — retirement accounts, Roth accounts are not subject to RMD requirements after the designated age — currently age 73 for most,” she said. “The downside to RMDs is that, because they are from pre-tax accounts, they are taxable.”
She said large RMDs can push you into a higher tax bracket each year, thus requiring you to pay more in taxes.
“Therefore, by saving into a Roth IRA account instead of a traditional IRA account, you are reducing the amount of required taxable distributions you’ll have to take later in life,” she said. “Also, because of the power of compounding, pre-tax assets can grow significantly over the lifetime of young savers, leading to very large RMD amounts.”
Roth IRAs Are Relatively More Flexible Than Pre-Tax Accounts
“While we generally advise clients not to touch Roth assets early because of the tax-free growth potential, it is possible to withdraw money from a Roth IRA account prior to age 59.5 without paying taxes or penalties, but restrictions apply,” Comella said.
She said this varies according to a number of factors, but generally, there is relatively more flexibility to withdraw funds from a Roth IRA than other types of retirement accounts.
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