NEW YORK (MainStreet) More than half of Millennials plan to self-fund their retirement through plans, such as IRAs and 401(k)s, according to a new study.
"Millennials are a digital do-it-yourself generation of super savers," said Catherine Collinson, president of the Transamerica Center for Retirement Studies (TCRS) "They've heard and responded to the message that they need to start early and save as much as possible."
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The 15th Annual Transamerica Retirement Survey found that 71% of Millennials who are offered a retirement plan participate in it and contribute an average of 8%.
"When you are younger, a Roth IRA is better because you have many more years to watch it grow and when you withdraw from it at retirement, it's tax free," said Ben Barzideh, financial advisor with the Piershale Financial Group in Crystal Lake, Ill.
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Yet many workers, both young and old confuse, the Roth IRA with a traditional IRA.
"Most of my clients require a few meetings in order to make sense of some of the intricacies of investing in a Roth," said Mike Piershale, president of Piershale Financial Group.
A clear benefit of the Roth IRA for Millennials is the fact that they are still working towards their maximum earning potential.
"The average Millennial is still in a lower tax bracket," Barzideh said. "The yearly and immediate tax deduction of a traditional IRA doesn't benefit you as much if you're not in a high tax bracket, so for younger people, a Roth IRA makes a lot of sense."
Another Roth IRA perk for Millennials eyeing down payment money for a home is the five-year rule, which the traditional IRA doesn't offer.
For first-time homebuyers, it allows withdrawal of principal and earnings from a Roth IRA after five years without penalty or taxes with a $10,000 limit, whereas with a traditional IRA, withdrawals from principal before 59.5 years old are subject to a 10% penalty.
"Outside of the first time home buyer exemption, what's not tax free after five years is the earnings or return on the investment but the principal or money you contributed can be withdrawn and you won't pay taxes or a penalty," said Barzideh told MainStreet.
However as Millennials age and prosper, higher earnings could disqualify their participation in Roth IRAs.
"After earning a certain amount per year, you won't be able to invest in a Roth IRA, so it's beneficial for those married filing joint who earn less than $181,000 or for single people earning $114,000 or less," said Barzideh.
Upon entering their golden years, Millennials invested in a Roth won't be limited by rules around Required Minimum Distributions (RMD) that plague the traditional IRA.
"There is no RMD on a Roth when you reach 70.5 years old but there is on a traditional IRA," said Piershale.
The IRS also requires investors in a traditional IRA to stop contributing after age 70.5.
"With a traditional IRA you not only have to stop contributing but you must also take the minimum distribution of the IRA value, which is 3.65% in the first year starting from December 31 of the prior year," said Barzideh. "The Roth IRA doesn't have any RMD and if you are working after 70.5 years old you are permitted to continue contributing to it."
--Written by Juliette Fairley for MainStreet