Why Gen Z Could Be Way Ahead In Retirement Savings With This 'Golden Egg' Account

Gen Z, those aged between 12 and 27, might be sitting on a retirement savings gold mine without even realizing it.

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Despite Bank of America data showing that only one in five Gen Z adults is currently contributing to a retirement account, experts argue that the young generation has an opportunity to get ahead in the retirement savings game through a particular type of account – the Roth IRA.

Winnie Sun, co-founder of Sun Group Wealth Partners, told CNBC that many young adults are hesitant to start investing, often due to limited income and a lack of financial education. “They probably don’t have as much income just yet, and they still have a lot of expenses,” Sun said. 

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That hesitation could be costing them valuable time. Kamila Elliott, co-founder of Collective Wealth Partners, told CNBC how important it is for young people to gain exposure to the market. “You have to think long term,” Elliott said.

Enter the Roth IRA, which Sun calls the “golden egg” of retirement accounts for young professionals.

Unlike traditional retirement accounts, Roth IRAs are funded with post-tax dollars. That means that while contributions don’t provide an immediate tax break, the money grows tax-free and can be withdrawn tax-free in retirement.

The Roth IRA’s structure is great for younger workers in a lower tax bracket now than they will be later in their careers. By paying taxes on their contributions now, they potentially avoid higher tax rates on their withdrawals in retirement.

For 2024, CNBC noted that the IRS set the contribution limit for Roth IRAs at $7,000 for those under 50, allowing room for savings growth. More than that, the income limit for Roth IRA eligibility is $161,000 for single filers, a threshold that most early-career professionals are under.

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One of Roth IRAs’ most appealing features for young savers is its flexibility. Unlike traditional retirement accounts, Roth IRAs allow for penalty-free withdrawals of contributions (but not earnings) at any time. This feature can provide a safety net for Gen Z savers who might be wary of locking away their money until retirement.

“When you have a Roth, you tend to set it and forget it, and you should treat it as money that you’re not going to touch for a long time,” Sun said to CNBC. “But in case you do have an emergency, know that a big portion of that money you can take out just as easily as you could in a savings account.”

Many companies now offer Roth 401(k) options for those with access to employer-sponsored retirement plans. These accounts combine the tax advantages of a Roth IRA with the higher contribution limits and potential employer match of a traditional 401(k).

The power of compound interest makes starting early particularly crucial. Even small, regular contributions can grow over the decades until retirement for Gen Z.

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While retirement might seem a distant concern for Gen Z, they face an uncertain landscape, namely, the future of Social Security.

By taking advantage of Roth accounts now, Gen Z savers could set themselves up for a more secure financial future, turning today’s “golden egg” into tomorrow’s nest egg. 

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