This type of retirement account is a ‘golden egg’ for young people, says CFP—here’s why

Few Gen Z adults are saving for retirement.

Just in 1 in 5 members of Gen Z, those born between 1997 and 2012, are contributing to a retirement account, according to a recent Bank of America survey.

That hesitancy to invest might be driven by fear, as “a lot of people feel very financially vulnerable,” Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, previously told CNBC Make It.

“It’s really necessary to be participating in the market to be able to achieve your investment or asset goals,” Elliot said. “That’s one thing we talk about with young people: You have to think long term.”

But that kind of thinking might be hard to do if your career is just starting or you don’t have a robust financial education, says Winnie Sun, co-founder of Sun Group Wealth Partners.

“They probably don’t have as much income just yet, and they still have a lot of expenses,” Sun says. On top of that, Gen Zers likely “aren’t as familiar with the best ways to save. So when you don’t know the best plan of action, you tend not to do it right.”

But it’s never too early to begin investing. Here’s what Sun recommends for young adults just getting started.

For young professionals looking to plan for long-term goals like retirement, a Roth account is a smart option, Sun says.

You contribute post-tax dollars to Roth 401(k)s and Roth individual retirement accounts, which means you don’t owe any additional taxes when you withdraw the money in retirement. A traditional IRA or 401(k), on the other hand, is funded with pre-tax dollars, so you don’t owe any taxes the year you contribute, but do have to pay when you make withdrawals.

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A Roth account is generally considered a good option for anyone who expects to be in a higher tax bracket in retirement than they are currently, such as a young person who is still early in their career.

If your company offers a Roth 401(k), be sure to take advantage of any matching contributions offered by your employer, which experts often refer to as “free money.”

If your company doesn’t offer a Roth 401(k), consider a Roth IRA instead. While it does come with an income limit of $161,000 for single people in 2024, it’s perfect for young professionals because most people starting their careers are earning well below that, giving them plenty of time to build up those savings, Sun says.

Additionally, your Roth IRA can double as short-term and long-term savings accounts, Sun adds. You’re able to withdraw any contribution you’ve deposited without penalty, which might come in handy in an emergency. However, you cannot withdraw your earnings without penalty before age 59½.

“When you have a Roth, you tend to set it and forget it, and you should treat it as money that you’re just not going to touch for a really long time,” Sun says. “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.”

“The Roth IRA is definitely the golden egg of your financial picture.”

Once you’ve set up a Roth IRA, it’s time to fund it. In 2024, you can contribute up to $7,000 if you’re under 50 and up to $8,000 if you’re 50 and older.

And make sure you remember to actually invest the money.

But don’t just choose the investments your colleagues choose, Sun says. Seek out a financial advisor or online resources to help you make the most informed choices for yourself and your future.

Sun compares this process to eating in a college dining hall for the first time.

“You have unlimited soda, unlimited nachos and all this stuff,” she says. “Imagine if you got a chance to sit with a nutritionist for 30 minutes before you walked into that dorm. You would probably make much better decisions on your health for the next few years in college. The same thing would be like meeting with a financial advisor.”

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