If you’re a member of Gen Z, you have probably heard at least one older person in your life tell you to open a Roth IRA. If you didn’t take this advice to heart, we’re here to repeat the message: This retirement account can be a game-changer later in life by providing you with hundreds of thousands—or even millions—of dollars in tax-free retirement funds.
The popularity of Roth IRAs is growing, especially among young people. The percentage of households headed by someone in their 20s with a Roth IRA nearly tripled from 6.6% in 2016 to 19.2% in 2022, according to data from the U.S. Federal Reserve analyzed by Boston College’s Center for Retirement Research (CRR).
The Roth IRA is one of the most powerful retirement savings tools available, says Surya Kolluri, head of the TIAA Institute. “The ability to let your money grow tax-free for decades can make a huge difference in your long-term wealth,” Kolluri says.
However, no matter whether you are a high schooler, college student, or recent graduate, the lack of financial literacy across generations may have left you, as a member of Gen Z, unsure of what a Roth IRA is or how to get started. Here’s everything you need to know.
What is a Roth IRA?
A Roth Individual Retirement Account (IRA) is a savings account designed for you to contribute after-tax money. Taxes are paid upfront, and investments will grow tax-free and can be withdrawn without fees once you turn 59 ½ years old—as long as you’ve had your account for at least five years.
Roth IRAs are only available to those with modified adjusted gross incomes (MAGI) of less than $165,000 for single-filers. The maximum annual contribution is $7,000, or $8,000 for those 50 or older. For those who make over $150,000, there are phase-out restrictions.
You have until tax day next year—April 15—to make contributions for this year. Contributions can be withdrawn for any reason at any time. Five years after you made your first contribution, you can withdraw earnings without penalty, but before then the withdrawal of earnings is subject to a 10% IRS penalty.
Why a Roth IRA is considered a financial slam-dunk
Since you fund a Roth IRA with money that’s already been taxed, your earnings grow tax-free. This is the key feature that makes this type of account so beneficial for those seeking a way to plan for retirement without having to worry about the implications later in life.
You can also easily set up automatic investment contributions—enabling an easy “set it and forget it” plan. Thanks to the magic of compounding, a Roth IRA’s benefits are greater the earlier you begin—giving you more time to invest more funds in the account.
If you invest $3,000 annually, starting at age 20, by the time you retire at age 65 you could have over $850,000. Starting at age 30 could leave you with less than half that—around $414,000. Those who just invest $1,000 a year starting when they’re 20 could have a six-figure leg-up versus starting a decade later ($285,000 vs. $138,000).
How to open a Roth IRA in 3 easy steps
- Open a brokerage account
The first step to obtaining a Roth IRA is to open a brokerage account online. Any big-name firm, like Fidelity, Charles Schwab, or Vanguard, would be a good choice for your Roth IRA. Robo-advisors like Betterment and Wealthfront are also great choices for a Roth IRA.
Brokerage accounts work very similarly across all of these platforms. One distinction is that online brokers are more self directed options, while the robos manage your investments for you and charge annual management fees.
To make a pick, explore the websites and see which has a better user experience for you. Younger investors may already have an account with platforms like Robinhood, but there may be fewer research materials or index funds available on this platform.
- Deposit and invest funds
After linking your bank account and depositing funds, it’s time to begin investing. One mistake some investors make is that they open a Roth IRA, put money into their account, and then take no further action. Without purchasing investment assets with the funds in an IRA, your money will never grow.
The two simplest investment options are to buy shares in an S&P 500 index fund or a target-date fund. These special mutual funds are long-term investing vehicles that own stock investments earlier in their lifespan to maximize gains and slowly adjust to less risky fixed-income investments over time to lock in those gains.
Sherron Permashwar, CPA and financial education expert, recommends investors start off with slow and easy funds inside their Roth IRA—like index funds—and then work their way toward a more involved, diversified portfolio if they so choose.
- Reap the long-term benefits
Currently, only 20% of Gen Zers are saving for retirement, according to TIAA—and their inaction centers around not knowing where to start. Setting up a Roth IRA is relatively easy, and the only virtual downside to a Roth IRA is that it involves decades of waiting.
In the end, you will be hundreds of thousands of dollars richer at age 60 than others who ignored the suggestions—or started saving later in life.
What’s the difference between a Roth and a traditional IRA?
When starting an IRA with a broker, one of the first questions you’ll encounter is whether you want to open a Roth or traditional IRA. The differences are in the tax benefits.
Traditional contributions can be deducted from your tax return, but taxes on earnings are deferred, meaning they have to be paid upon withdrawal. Roth earnings, on the other hand, grow tax-free. Both allow penalty-free withdrawal after the age of 59 and a half.
For those younger, a Roth IRA is generally considered a better financial move since the tax implications are simpler, and it will leave you with fewer headaches during your retirement years.
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How much should I invest in a Roth IRA each year?
The ideal Roth IRA contribution amount depends on multiple factors, including your salary, existing debt like student loans and credit cards, and retirement goals.
If you have a full-time job, and your company has a 401(k) contribution match program, that should generally be your top priority.
“There are so many Gen Zers and millennials that think retirement is so far away, they don't even contribute to a 401(k) when the company is matching it,” says Permashwar. “It's free money on the table.”
Experts generally advise investing at least 15% of your pre-taxed income (including your employer’s contribution) into your 401(k). Only after hitting your employee’s maximum match should you consider putting money into your Roth IRA. Even putting a few hundred into the account early in life can lead to a larger compound.
The takeaway: A Roth IRA is a no-brainer for those with the cash
I opened a Fidelity Roth IRA while I was in college, which happened to be during the pandemic. The government’s economic stimulus checks became great starting investments for my portfolio. And because I was not a full-time worker yet, the Roth IRA was my only retirement account to worry about.
I have kept it simple and exclusively purchased the Fidelity Freedom Index 2060 Fund (FDKLX). After investing close to $2,500 every year, my total gain has been about 23%. However, in 2024, the S&P 500 Index outperformed my target-data index fund in 2024.
For those on a tight budget and underlying bills like student loans, there is no need to maximize Roth IRA contributions. Matching your employer’s 401(k) contribution should be a higher priority for retirement planning. However, if you have extra cash, it would be remiss to not consider opening a Roth IRA. A 25-year-old who invests $1,000 a year—$83 a month—into their account could have $200,000 in tax-free money by the time they are 65.
“Contributing to a Roth IRA, even if it's just a small amount, is one of the best financial decisions you can make for your future self,” Kolluri says.
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