When young professionals ask me how to get ahead financially, as a financial planning professional, I have a laundry list: create a budget, start investing now, be smart about taxes, and so on. If I had to narrow it down to one thing, I'd open up a Roth individual retirement account.
A Roth IRA is the investment account I love almost as much as a good burrito. Most younger folks don't know what types of retirement accounts to start with. If your employer offers a 401(k) plan, go for it. This is especially true if your employer matches your contributions – it's free money. But you can and should still own a Roth IRA.
Before I get into the Roth IRA love fest, let's talk about some basic history and what this vehicle actually is. The Taxpayer Relief Act of 1997 created the Roth IRA. The man who helped push the concept through legislation was Senator William Roth – hence the name Roth IRA. Pretty cool to have a retirement account named after you, in my opinion.
A Roth IRA is, as the name implies, an account an individual opens to save for retirement. In most circumstances, you cannot take out the earnings until you reach 59½ without penalty.
A Roth IRA is similar to a traditional IRA, but one main difference is the tax benefits. With a traditional IRA, you typically get a tax deduction in the tax year of contribution. You pay taxes when you take the money out at retirement. With a Roth IRA, you do not receive an upfront tax deduction for your contributions, meaning you pay your tax now. But when you take money out after 59½, the withdrawals are tax-free.
For many reasons, a Roth IRA is the Millennials and Gen Zers' ultimate investment account. I outline five:
Millennials and Gen Zers both have a significant advantage in time. Today's small contribution to a Roth IRA can grow to a nice tax-free nest egg.
Start investing in your future now.