WSJ Your Money Briefing - How Roth IRAs Became the Go-To Account for Young Investors

Episode Date: March 28, 2025

More 20- and 30-somethings are choosing Roth IRAs. WSJ reporter Ashlea Ebeling joins host Dalvin Brown to break down why these tax-friendly accounts are seeing a surge in popularity among younger savers—and what to know if you’re thinking about opening one before tax day. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices. What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust Institute, where host Eric Schapea dives deeper with leading entrepreneurs on these topics and more. Find the road to why where you listen to your favorite podcasts. Here's your money briefing for Friday, March 28th. I'm Dalvin Brown for The Wall Street

Journal. More young Americans are opening Roth IRAs, some before they've even tossed their graduation caps. For twenty-somethings, retirement savings have become something you might actually talk to your friends about. The way I got the idea for this story, I was on a college campus at a theater production, and one of my daughter's friends literally pulled out his phone and was showing off his Robinhood account. So what's fueling this trend? And what should savers know before jumping in? We'll talk to Wall Street Journal reporter, Ashley Ebeling, after the break.

This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices. What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust Institute, where host Eric Shopea dives deeper with leading entrepreneurs on these topics and more.

Find the Road to Why where you listen to your favorite podcasts. More young Americans are choosing Roth IRAs to stash their savings, but these accounts also come with some rules, income limits, and potential pitfalls. Wall Street Journal reporter, Ashlea Ebeling joins me to talk about it.

Ashlea, before we dive into why Roths are trending with young savers, help us understand what sets a Roth IRA apart in the retirement planning world. Roth IRAs are great for retirement savings, especially for younger savers. The point is you put money in after tax and it grows tax-free. There's this added plus, they also have an escape valve

that other retirement accounts don't have. Basically, you can withdraw the amount you contributed tax-free and penalty-free at any time. Got it, and are they becoming cool? Sure, you could say that. Way more young people under 40 are opening Roth IRAs and contributing. Some are enticed by fintech firms like Robinhood, which offers a match for IRA savers. And they're talking to their friends about it?

I think that was one of the things that you had mentioned, right? The way I got the idea for this story, I was on a college campus at a theater production, and one of my daughter's friends literally pulled out his phone and was showing off his Robinhood account. Love that. You spoke with people who are contributing to a Roth IRA in addition to saving in their 401k. How should people think about balancing the two? So if you have a 401k retirement account at work, financial wellness coaches say the first thing you should do is contribute there at least up to the level your employer matches. Most employers do provide this free matching money. So one worker I talked to, for example, she contributes 5% of her salary to her 401k, her employer matches 5%. And then after that, she separately opened

up a Roth IRA at Vanguard and she contributes the $7,000 maximum for age to that account each year too. You also spoke to people who are funding their Roth IRAs in different ways. Can you walk us through those strategies? The tax refund strategy is a good one because that's found money too. You can put the Roth account number on your tax return and your tax refund would go into it directly. Also, if you just get a direct deposit of your tax refund in your savings account, you can move it over to the Roth.

Does the timing of your contributions matter? Mike, what should our listeners know about putting all your money in at once versus spreading it out over the year? So the idea of putting like the full $7,000 in all at once in January is so you get an additional 15 months of compounding. On the other hand, some people don't have the $7,000 in January, so it's more practical to put money in as the year goes on when they know they have the extra money to do so. I talked to a 23-year-old banking analyst in New York

who just opened her first Roth IRA with her first job. And she said she puts anywhere from $250 to $800 a month in basically what she has after paying rent and student loans. And it's still not too late to contribute for 2024, right? That's another big advantage. So once you figure out your tax picture, you can make IRA contributions for a given year any time between January 1st and then tax day of the following year. So basically, taxpayers can still be contributing for the 2024 tax year through April 15th.

For anyone who's thinking of opening a Roth IRA, what are some key things to keep in mind? And are there common mistakes people make? Two big things. One, you have to have earnings to contribute. There is an exception though for spouses who don't work. They can open accounts based on their working spouses' earnings. The other big thing with Roth IRAs is the ability

to contribute directly depends on savers modified adjusted gross income. And those above the income limits can still put money into a traditional IRA and then move it into a Roth. That's another more complicated strategy called a backdoor Roth. And there are pitfalls to watch out for that, but that shows how much people really want to get money into these accounts that they'll go to that effort. Yeah. How often should you contribute?

Annual contributions are great if you have the wherewithal to do it. The things you should stay on top of, the contribution limits are adjusted for inflation each year. So one woman I talked to, she had started in 2023 when it was $6,500. So she just realized that this spring and is adding that extra $500 to get up to that 7,000. So every year you can look for those inflation adjustments. Once you put the money in, it's up to you to choose how to invest it. It doesn't go on automatically into a target date fund

like a 401k. A lot of savers leave their money in cash, which doesn't make sense for a retirement account. So at least get into a money market fund. And with it being for the long haul, a diversified portfolio would really make the most sense. And for people just starting out, where do you even go to open a Roth IRA? At the workplace, you have the 401k. Typically there's some auto Roth IRAs in some states for small employers that don't have 401k plans. But generally, it's up to the saver to go to a Fidelity, a Vanguard, a Robinhood, and

they open it up on their own. One thing you might want to consider if you have a workplace plan at Fidelity or T. Rowe Price, if you open it up at the same place, then everything's on the same dashboard. But on the other hand, some of the people I talk to, they just, they like having it separate and they feel like that makes it more fun. That's WSJ reporter, Ashleyia Ebling, and that's it for your Money Briefing. Tomorrow we'll have our weekly markets wrap up, what's news in markets. And then we'll be back on Sunday with the first installment

of our three-part series, buying a home in 2025, navigating the crunch. This episode was produced by Ariana Asparu. I'm Dalvin Brown for The Wall Street Journal. Jessica Fenton and Michael Laval wrote our theme music. Our supervising producer is Melanie Roy. Aisha Amoosleem is our development producer. Scott Salloway and Chris Sensley are our deputy editors. And Philana Patterson is the Wall Street Journal's

head of news audio. Thanks for listening. This episode is sponsored by Northern Trust Wealth Management. There is more to being a successful entrepreneur than just good business practices. What is it about an entrepreneur's childhood that helped fuel their entrepreneurial spirit? What are entrepreneurs doing to cultivate this spirit in their own children and build a legacy beyond their business? Tune in each month to the Road to Why podcast by the Northern Trust Institute, where host Eric Schapea dives deeper with leading entrepreneurs on these topics and more. Find the Road to Why where you listen to your favorite podcasts.