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Whether you’re just kicking off your career or have been working for a decade, investing in a Roth IRA is one of the best ways to save for your future. But before you do, we will first tell you to always understand what you are investing in. Roth IRAs can be a slam dunk for many young investors – are you one of them?
Generation Z and millennials range in age from 10 to 41. Among those working, reports from Fidelity show a high adoption rate of individual retirement accounts among them.
- According to the investment firm, IRAs owned by Gen Zers increased by 87% in the second quarter of 2021
- They saw a 24% increase in the number of IRA accounts for the same time period for millennials ranging from 26 to 41
- IRA acquisition was strong among young females
- Among Gen Zers there was a 92% year-over-year increase of IRA adoption
- Among millennials, there was a 24% increase of IRA adoption
As an affordable financial advisor in San Ramon and Newark, I will tell you that opening an IRA is wise, but what kind of IRA you pick matters too.
A huge perk of investing in a Roth IRA for Gen Z And Millennials
The benefit of putting money into any IRA, sooner than later, can be summed up in one word: compound interest. When your money grows over time, it can grow exponentially if given enough time and investment options. While IRAs are great investments, they’re not right for everyone; before jumping into the stock market with both feet, consider how much risk you want to take on and what sort of investment strategy fits with your goals.
How a Roth IRA Works – Tips and tricks
Some things you will benefit to know about a Roth IRA:
- Roth IRAs are funded with after-tax income, meaning you pay taxes on the money you contribute.
- When you withdraw your funds in retirement, you can withdraw them tax-free (as long as you’re at least 59½).
- Traditional and Roth IRA contribution limits will raise from $6,000 in 2022 to $6,500 in 2023.
- If your spouse has a high income, but his or her IRA contributions have been maxed out this year, it could make sense for both of you to fund your own IRAs and then combine them into one large account later.
- If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $140,000 for the tax year 2021 and under $144,000 for the tax year 2022 to contribute to a Roth IRA, and if you’re married and file jointly, your MAGI must be under $208,000 for the tax year 2021 and 214,000 for the tax year. The other spouse can contribute more towards HSAs/FSAs, which can lower taxable income so he/she qualifies instead of waiting until reaching the threshold later in the year when they might get bumped up due to inflation adjustments.
- You can make contributions up until April 15th of each new tax year.
Roth IRA eligibility
Remember the tips above about spousal teamwork. At Humanity Wealth, we love supporting couples and families to get on the same page. Financial intimacy can make or break relationships, so we encourage you to have these open discussions with care and compassion. We can help facilitate those too!
How to start investing in a Roth IRA
A Roth IRA is a great investment vehicle, but it can be overwhelming to figure out how to begin. Here are the steps:
- Open a Roth IRA account with a financial advisor at a firm like Humanity Wealth
- Choose investments with your advisor that are most appropriate for you and open an account (this will become your “investment portfolio”)
- Add money from your bank account into one of these accounts so that you’re ready to start investing
Who should invest in a Roth IRA?
Whether you’re just starting out or have been working for a decade, investing in a Roth IRA is one of the best ways to save for the future. Young investors like Gen Zers and millennials can shoot for the stars by doing this sooner than later.
These are especially valuable for young investors like you who can use the time needed before reaching their ideal retirement age to grow their investments. The power of compound interest means that even smaller contributions over longer periods of time will leave plenty of opportunities for growth… and tax-free returns!
The sooner you open a Roth IRA, the better. There is no age limit to start contributing funds, but there is an age limit to start making withdrawals. You need to be 59½ to withdraw any earnings on contributions, or you must pay taxes and penalties.
The funds need to be in the account for five years to avoid taxes. When you put money in, you will be paying taxes on income prior to the money going into the fund. When you remove money, it will be tax-free if it has been there for at least five years and you are 59½ years old.
Who should not invest in a Roth IRA?
If you aren’t able to leave the earnings on your contributions in a Roth IRA for a sufficient period, you will incur early withdrawal penalties. Pulling out funds when times are tough can be tempting since contributions can be pulled without restraint or warning. An affordable financial advisor in the Bay Area is here to ensure you know these vital aspects.
A few income limit loopholes to be mindful of:
- If your 2021 income was over $140,000, Roth IRA contributions from a single filer aren’t allowed.
- For those married and filing jointly, your limit as a couple is $208,000.
- If you earn more than $144,000 in 2022, you won’t be able to contribute to a Roth IRA.
- If you earn between $129,000 and $144,000 in 2022 your contribution will be reduced.
Subscription-based financial planning is the easy answer for investors with lower income, financial newbies, or DIYers.
The search for a brighter future starts here!
A Roth IRA might be the best option if you’re looking to kickstart your retirement planning on the right foot. With so many options out there, it can be hard to pinpoint which one is perfect for your needs. If this sounds like a viable option for you, ask for help from Humanity Wealth!
As an independent firm providing financial planning in San Ramon and Newark, we are here to level the financial playing field. Serving as a financial advisor in the Bay Area with your best interest in mind, we honestly do not care how much money you have. What matters is that you trust us enough to help you and your loved ones get ahead in life.
As a family man myself with humble beginnings
, it’s my pride and joy to see people rise to the occasion of making a better life for themselves. Invest in affordable financial planning via subscription for only $50 a month. Our pricing is super transparent and right here for you to see.
Bottom line: It’s ideal for young investors to start with larger contributions than those required by traditional IRAs because of how much more tax savings can be achieved over time through compound growth. If you’re saving for retirement or another goal and want to take advantage of tax-free withdrawals later on, then ask us about investing regularly into a Roth IRA.
