How Millennials Can Retire Tax Free

By August 26, 2014Credit Repair, Save Money

retire-tax-freeIf you’re a millennial, the idea of retirement is far away and it doesn’t consume your time or energy thinking about or planning for it. However, with President Obama’s newest myRA account, there is now an easy savings option that may appeal to the millennial.

Roth IRA Lite

In many respects, the myRA is like a Roth IRA account. You can contribute up to $5,500 a year and you can only participate if your income is less than $191,000 (married) or $129,000 (single). In addition, the minimum opening balance for the account is $25. Like a Roth IRA, contributions don’t reduce your taxable income. However, the truth is that a myRA is more like a Roth IRA with training wheels because it has limited investment options. The ideal savings plan for a millennial that is comfortable exploring different investment options is a true Roth IRA, which will help you retire tax-free and give you more choices to grow your contributions.

Better than myRA?

The Roth IRA has two significant advantages for young people. First, unlike a traditional, pre-tax IRA or 401k, withdrawals in retirement aren’t taxed at high-income rates. As a matter of fact, with Roth IRAs, although you get no tax breaks for your contribution, withdrawals are tax-free.

When you do withdraw your funds from your Roth IRA, your income is likely going to be higher, and therefore your tax rate will likely be higher too. This makes waiting until retirement for your tax break more valuable than receiving one now, as with a 401k. The Roth option also provides a shield from tax and benefit penalties for higher-income retirees.

The second advantage of a Roth IRA for millennials is flexibility. As young adults, you might have unexpected expenses, such as graduate school, starting a business, or just making ends meet. If you withdraw funds from a traditional IRA, you will get hit with a 10 percent early-withdrawal fee. With a Roth IRA, meanwhile, you can get your money back without paying a stringent penalty.

What about 401k’s?

Most individuals believe that a 401k is the best instrument for creating retirement savings, and yes, it is a good place to start — but it is most beneficial when used in tandem with a Roth IRA. A 401k allows you to save generally up to 6 percent of your salary with an employer’s match. However, if you’re planning a decent retirement and have other savings goals, it’s important to save more than 6 percent a year. That’s where a Roth IRA can make up the difference.

Get Going!

If you are ready to start your Roth IRA, remember that in 2014 you are able to contribute $5,500 per person, provided that your adjusted gross income isn’t more than $114,000 for a single person or $181,000 for a couple.

If you’re already saving in a 401k and fully funding a Roth IRA and can still save more, then it’s important to build an emergency account of three to six months’ worth of expenses outside the Roth IRA, so you can leave the Roth account untouched and growing tax-free. Once your emergency account is established, consider maxing out your 401k to maximize your finances and set yourself up for the most success upon retirement.

Help is Available

If planning for retirement scares you, you aren’t alone. For most millennials, it seems so far off that it isn’t worth planning now. But the truth is, the earlier you start, the better and easier it will be for you in the future. If you’re struggling to save or to make ends meet, it’s likely your credit is also suffering. Let us at Ovation help you. We offer a wide range of credit repair solutions customized to meet your unique needs.

Contact us today to see how we can help.

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