With online banking, one-day delivery and Uber, it’s easy to see how Millennials can be perceived as the “Instant Gratification” generation. Our dependency on Netflix and Amazon Prime aside, one area where Millennials—and everyone for that matter—could improve, is saving for retirement. And one of the best ways is through a Roth IRA.
Time to eat your vegetables
While no one likes paying taxes or putting money away for retirement, it’s time to stop the constant “treat yo’ self” feedback loop and get our Millennial act together. Don’t let the overpriced degree or the debt monkey on your back fool you; it is totally feasible to stash money in your savings account while also paying your bills on time.
There are different schools of thought when it comes to saving money, but one neat option that Millennials might not know about is the Roth IRA. (By the way: “IRA” stands for “Individual Retirement Account,” and there are a few different types of them!) A Roth IRA is a specific retirement account that gets taxed when making a deposit instead of on the withdrawal end.
When most people think of retirement, they automatically think 401(k). The major difference between an IRA and a 401(k) is that your employer opens the account for the 401(k), but you are in charge of opening and handling all deposits and withdrawals from your IRA.
The benefits of a Roth IRA
Even though you don’t get an initial tax break on your deposits, putting money into a Roth IRA can pay off big time later on. By eating your peas and paying the taxes on your deposit, it ensures you won’t have to pay taxes on your withdrawals. Essentially, you know exactly how much money you’re going to have come retirement because there aren’t any delayed taxes to take into consideration.
There is also much more flexibility with a Roth IRA compared to a traditional IRA. A Roth IRA will allow you to keep your money in the bank for as long as you want, whereas with a traditional IRA you’re required to start making “required minimum distribution” withdrawals after you reach age 70 ½. COOL. THANKS, UNCLE SAM.
If you want to use some of your cash before you need dentures, that’s totally cool with a Roth IRA—as long as it’s for a qualifying reason—and as long as you’re 59½ or older. Most withdrawals before age 59 ½ are no bueno, and there’s a good chance you’ll get hit with a 10% penalty tax.
The drawback
While this might sound too good to be true, there is one tiny caveat with a Roth IRA: You need to be eligible. So, what does that mean?
Well, if you make “too much money” (What a great problem to have.), you can’t contribute to a Roth IRA. But the good news is that most people qualify. For a single person household, anything greater than $124,000 makes you ineligible to contribute. If you earn less than the maximum contribution limit, then you can only contribute a maximum of as much as you earned.
Be aggressive, and start early.
The best advice for how to ball hard as a senior citizen is to save as much money as you can when you have the least amount of responsibilities. Not saying that your daily double-shot espresso from Starbucks isn’t important, but it’s much easier to cut back on your spending when you don’t have to front money for your spouses’ or kids’ needs, too.
By starting early and stashing a little cash each year in your Roth IRA, you can get a head start on saving for your retirement. Because of the Roth IRA’s “pay now, use later” setup, you can get the most bang for your buck by saving now, instead of using a traditional IRA and paying taxes later.
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