Why a Roth IRA is great for young people

For some young adults, retirement is so far away that it can seem absurd to put a portion of their income into an account they haven’t been able to tap into for decades.

“They want to invest, but they can’t imagine not getting into it until they’re 59.5 years old,” said Winnie Sun, co-founder and chief executive officer of Sun Group Wealth Partners in Irvine, California. That’s usually the age at which you can start receiving distributions from various retirement accounts without potentially facing a 10% prepayment penalty.

However, a Roth account is a little different. Because contributions are made after tax—as opposed to pretax like with traditional individual retirement accounts or 401(k) plans—no matter your age, you can always access the money you put in without penalty. (However, any winnings in the account may be subject to taxes and penalties if withdrawn before the age of 59, unless you meet an exception.)

Sun, who is a member of CNBC’s Financial Advisor Council, considers a Roth IRA a dual purpose account as it allows the investor to also have an emergency fund.

“You can use the Roth IRA to save for retirement, but even in an emergency, they could take the money out,” she said.

“The fact that a Roth gives you liquidity on your contribution level [access] no problem,” Sun said. “And I would say 99% of my clients have never had to borrow from their Roth IRA…they are very proud to have it.”

As long as your income qualifies you, you can contribute up to $6,500 to your Roth IRA that year (with anyone age 50 and older being able to make an additional $1,000 “catchup” contribution).

The income cap – based on your modified adjusted gross income – for the full contribution In 2023, the allowable limit is $138,000 for single taxpayers and $218,000 for couples filing joint tax returns. Above these amounts, the contribution amount is reduced and is completely waived with an income of USD 153,000 or USD 228,000.

And once you turn 59, you can withdraw as much as you like from the account, including accumulated winnings, free of taxes and fees, as long as you’ve had the account for at least five years.

It’s also worth noting that Roth IRAs do not come with required minimum distributions, or RMDs, which are withdrawals that must be made at age 73 from qualifying retirement accounts. And if you pass on a Roth IRA on death, your beneficiary can continue making those tax-free withdrawals (although they may only have 10 years to empty the account).