Rising Popularity of Roth IRAs Among the Young
Roth IRAs are becoming highly popular with younger savers. More individuals are adopting these tax-advantaged accounts, with many planning contributions right up to tax day.
Young savers are increasingly drawn to Roth IRAs. They follow guidance from parents, workplace financial coaches, and tax advisers who emphasize using these accounts for retirement and major purchases.
The strategy involves investing early to allow funds to grow tax-free. As tax day approaches, more savers are making last-minute contributions to maximize their individual retirement accounts.
Personal Stories of Young Savers
Savers like Maria Kyriakopoulos are opening Roth IRAs alongside their workplace retirement plans. After starting her first full-time job as an analyst at J.P. Morgan Private Bank last July, she began saving in her 401(k).
She also opened a Roth IRA and recently completed contributions to reach the $7,000 maximum for 2024, plus $700 to start for 2025.
You have to save a little money on the side. She contributes anywhere from $250 to $800 a month, depending on how much she has left after paying rent, her student loan bills and other expenses.
Trends and Data on Young Contributors
Of those contributing to an IRA or Roth IRA, 41% were under 40 in 2022, up from 28% in 2016, according to the latest data from the Center for Retirement Research at Boston College. Most young contributors choose the Roth option, per the Investment Company Institute.
Many opening accounts are customers of financial technology firms, including those offering incentives similar to 401(k) matches. For instance, Robinhood provides up to a 3% match on users’ IRA contributions.
It is the young, hip and cool with their cellphones.
Advice from Financial Experts
Kelli Send, co-founder of Francis, which offers financial planning advice to employees at workplaces, recommends first contributing to a workplace plan to capture any employer match, then opening a Roth IRA.
It’s an escape valve, if you need it. Taxpayers can always access amounts up to their Roth IRA contributions with no tax hit or early-distribution penalties. Earnings generally can’t come out tax- and penalty-free until age 59½.
Contribution Rules and Timing
IRA contributions for a given year can be made between January 1 and tax day of the following year. Taxpayers can still contribute for 2024 through April 15.
Boris Wong, a 36-year-old researcher at Vanguard, makes his full Roth IRA contribution in January to gain extra months of compounding.
Why do I have this ritual? If you invest on Jan. 1, you have 15 months extra of compounding.
Eligibility and Benefits
Taxpayers must have at least as much earned income as their IRA contributions, with an exception for spouses. For Roth IRAs, direct contributions depend on modified adjusted gross income. Those above limits can contribute to a traditional IRA and convert to Roth, though pitfalls exist.
Contributions use after-tax dollars, but withdrawals can be tax-free. Roth accounts suit savers expecting their tax rate to be higher or the same at withdrawal compared to contribution time.
Traditional IRAs offer tax-deductible contributions and tax-deferred growth, making them suitable for those wanting to lower current taxable income and expecting a lower bracket at withdrawal.
I wish I had put more money into Roths. Early diversification is a good idea. Still working in her early 80s, she has found that she has to take more withdrawals from her traditional IRA than she needs and pay taxes.
Distribution Rules and Flexibility
Traditional IRAs require annual payouts starting at age 73, taxed as ordinary income. Roth IRAs have no lifetime distribution requirements.
At work, Kyriakopoulos observed young wealthy clients inheriting money and moving funds to Roth IRAs despite modest salaries.
John Longoria II rolled leftover funds from a 529 college savings plan into his Roth IRA. The 24-year-old digital marketing intern in Chicago, earning just over $40,000, draws from a taxable account set up in childhood, rolls over 529 funds, and adds from his paycheck.
I try to save money any which way I can, noting that he has four roommates.
Drawbacks and Management
One drawback of Roth IRAs is the need to set up accounts, make contributions, and stay diligent, unlike 401(k)s with automatic enrollment and deductions. Most custodians allow direct deposits.
Savers must select investments and monitor changing contribution limits. Mel Meagher, a 37-year-old human resources manager in Brownsville, Wis., opened a Roth IRA at Vanguard in 2023 with a $6,500 limit and did not adjust when it rose to $7,000 for 2024.
Now, she must cover the $500 difference for 2024 while starting 2025 contributions. She also contributes 5% to her 401(k) with a 5% employer match.
I don’t want to pull it out early, but I like that there is that flexibility if something happens down the road.
