BAM Intelligence

Why Every Millennial Should Consider Funding a Roth IRA

Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.

I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:

1) Life is liquid, but most retirement savings isn’t.

Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.

The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.

2) There are too many competing priorities.

Millennials are dropped into the middle of a financial should-fest. You should pay down school loans, save up for a home down-payment, drive a cheap ride, purchase the proper level of insurance, enhance your credit and save three months’ worth of cash in emergency reserves. All while having a life? No chance.

Most personal finance instruction tells you what your priorities should be, and if you’re looking for that kind of direction, I’m happy to help in that regard as well. But it’s also not a mortal money sin to employ some Solomonic wisdom and compromise between, say, two worthy savings initiatives—like short-term emergency reserves and long-term retirement savings. Therefore, while I can’t go so far as to suggest that you bag the idea of building up cash savings in lieu of a Roth, I’m comfortable with you splitting your forces and dipping into your Roth IRA in the case of a true emergency. The challenge we all face is to define “true emergency” without self-deception.  (And no, splurging on concert tickets or a last minute vacation with friends don’t qualify.)

3) Roth contributions cost you less today than they will in the future.

Despite my sincerest attempt, I couldn’t avoid the more technical topic of taxes—and nor should I, in this case. That’s because it only stands to reason that you’re making less money—and therefore paying less in taxes—at the front end of your career than you will be in the future.

Therefore, in addition to beginning tax-free compounding sooner, Roth IRA contributions—which are not tax-deductible—will likely “cost you” less as a career newbie than they will as a seasoned executive. At SpaceX. On the first Mars colony. Furthermore, you can also make too much to contribute to a Roth IRA, progressively phasing out of eligibility at income of $118,000 for an individual and $186,000 for a household.

Like Coachella tickets, the opportunity to invest in a Roth IRA may not be around forever. Tax laws and retirement regulations are constantly evolving, and who knows what the future may hold. This increases their value for everyone, but especially for those who could benefit from them the most—Millennials.

This commentary originally appeared February 22 on Forbes.com

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photos courtesy of InvestmentZen
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Tim Maurer, Director of Personal Finance

The BAM ALLIANCE

Tim Maurer is the director of personal finance for the BAM ALLIANCE. A Certified Financial Planner™ practitioner working with individuals, families and organizations, he also educates at private events and via TV, radio, print and online media.

Tim is a regular CNBC contributor and writes for Forbes.com. A central theme, that “personal finance is more personal than it is finance,” drives his writing and speaking.

Maurer graduated from Towson University, where he taught financial planning for seven years. His second book, co-authored with Jim Stovall, is published by John Wiley and Sons under the title “The Ultimate Financial Plan: Balancing Your Life and Money.”

Tim and his wife, Andrea, live in Charleston, SC with their two boys, Kieran and Connor, and their dog, Raven. A musician, Tim plays at his church and occasional local gigs. He also participates in a group dedicated to serving the people of Nicaragua through microfinance and entrepreneurial ventures.

You can follow Tim on Twitter at @TimMaurer.

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