For years, financial advisors and experts have considered Roth IRAs to be an ideal investment option for younger employees. If they are such great options, why would savvy youngsters stay away? Having two products with nearly opposite rules but similar names puts many potential investors in the TDLR category – its just too much information to parse through so they opt for something else entirely, or nothing at all
Before we get too passionate, let’s be clear that we aren’t giving up on the 401(k) (or similar) investment product. 401(k)s are still the best option for most employees, and the sooner they get starting saving through these plans, the higher the chance that they’ll be ready for retirement. But there’s plenty to love about IRAs and employees may benefit from hearing about them and adding them to their portfolio. For some, looking at an IRA may be the first step towards a larger, more robust retirement plan. For that reason, there’s plenty to cheer about when it comes to IRAs.
Most employees shy away from the IRA option based on confusion. For years, financial advisors and experts have considered Roth IRAs to be an ideal investment option for younger employees. If they are such great, easy options, why would savvy youngsters stay away? Roth IRAs are the mirror image of traditional ones. In a Roth IRA, the money you put into the investment has been taxed, but the interest is tax free (it isn’t taxed as income), provided you abide by the required rules and regulations. Even better, the tax rate is established when you contribute, not later when you withdraw as with other investment products. Having two products with nearly opposite rules but similar names puts many potential investors in the TDLR category – its just too much information to parse through so they opt for something else entirely, or nothing at all.
But that’s where a little passion and interest on your behalf can help those younger workers. Explaining the complexity of IRAs to younger workers and those who need to catch up can be done without causing more confusion. And there is plenty to be excited about when it comes to IRAs. As wages stay stagnant and employees no longer see longevity in career paths, they may be opting to focus on emergency funds rather than putting money into retirement. Roth IRAs can help those employees, in some circumstances. While emergency funds should be the first savings bucket to fill, losing the impact of compounding interest by focusing solely on emergency funds can harm employees in the long term. Roth IRAs, based on their ability to grow tax free, can be used in an emergency without paying a penalty for withdrawal, so long as all rules are met, unlike traditional IRAs or 401(ks). This makes a Roth IRA exciting! It’s like a superhero, by day like Clark Kent, a traditional retirement vehicle and when crisis strikes it can save the day! Roth IRAs to the rescue! A Roth IRA could even be used to help purchase a home for first time buyers.
By adopting that attitude of excitement about IRAs, a sponsor or employer can change a normally confusing topic into one that may seem more solution-oriented. By focusing on what the IRA can do, rather than the unique and quirky rules around them, may help employees add IRAs to their retirement plan. That isn’t to say those rules aren’t important, just that the function of an IRA can be more helpful as the focus.
It’s also worth getting excited about contribution limits to IRAs for those needing to catch up on retirement going up. For the first time in six years, the limit was raised by $500 to $6,000 for all investors, with the catch up amount staying stable at $1000 that now means those working to catch up can put aside $7000.
Finally, excitement and superhero similarities aside, many employees may not know that IRAs have different risk treatment than other investments. For those employees who worry about banks that were too big to fail, who then failed, and that worry prevents them from investing, they may take comfort in the insurance coverage through SIPC and FDIC. Unlike other investments, FDIC covers up to $500,000 on all investments. Some may also feel more comfortable getting their feet wet in self-directed IRAs, which allow investors to opt for non-stock market investments.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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