Top 3 Reasons For Millennials To Choose A Roth IRA

Originally in ForbesMuch—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.

I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:

1) Life is liquid, but most retirement savings isn’t.

Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.

The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.

The Three Guarantees In Financial Planning

Not much in the realm of financial planning can be guaranteed.  Even the best projections and technical analyses are filled with disclaimers noting, among other things, that “Past performance is no indicator of future results.”  You can lose money.  The company you’re counting on could go out of business.  But of this you can be sure:  Three sure-fire guarantees in financial planning are SURPRISES, CHANGE and FAILURE.

Reassured?  I was afraid not.

But fear not, these three guarantees do come with counter-agents that we can systematize in our financial planning to minimize any negative impact:

Surprises require MARGIN.  Change requires FLEXIBILITY.  And failure requires GRACE.

Margin is a lost art and missing in nearly all phases of life in our all-too-hurried, uber-productive, stressed-out lives.  We don’t leave enough empty space on our calendars, so if we get stuck in traffic or stop to help a stranded motorist, we’re likely to be late for something else.  We can’t do anything spontaneous because every minute is already filled.  And because all of our time is spoken for, we also don’t have much in the way of blank canvas in our, and all too often our hearts.  And this is especially true of our finances—because every dollar is already spent or pledged, often even small emergencies or organic opportunities can’t be absorbed or funded.  There’s no margin for error.

Our lack of margin feeds our inflexibility.  We often don’t even consider the possibility of change because we don’t have the time.  Change, therefore, is inevitably also a surprise, compounding the discomfort.  But we often struggle to accommodate even predictable change.   Can your finances adapt to another child—even if the pregnancy was planned—or the reduction of income in an industry-wide change that was anticipated?  That which doesn’t bend, breaks.

For most of us, so much of our life is spent protecting ourselves from failure that it can be devastating when it arrives.  And it will.  Failure is simply a natural byproduct of our human imperfection.  And if you’re unable to view it as the most successful people often do—as an opportunity for invaluable education and personal growth—please consider diminishing failure’s grip, if only for pragmatic purposes.  Remember the major-leaguer who qualifies for the all-star team when he only succeeds a third of the time (a .333 average in Major League Baseball isn’t bad).  That’s where grace comes in.  Grace isn’t for the guiltless; that’s called vindication or acquittal.  Grace is being forgiven—or forgiving ourselves—when we’ve screwed up, slouched, squandered or slandered.  You don’t have to deserve it to receive it.

So what on Earth could this possibly have to do with Roth IRAs?

I love the tax-free growth and retirement distributions available with Roth IRAs.  I love that you’re not forced to take Required Minimum Distributions after age 70 ½, and I think there’s no better gift you could give your heirs than a Roth.  But my very favorite element of the Roth IRA is its LIQUIDITY, and liquidity is the key to navigating the three guarantees of financial planning.

In case you’re not following me, Roth IRAs are unlike any other retirement investment bucket, for lack of a better term, as you’re allowed to back money out of the account for any reason at any time at any age and without any tax consequences or penalties.  There’s only one caveat: you can only take back your principal—what you contributed to the account—unconditionally.  Your growth is subject to all those typical conditions (taxes and penalties) you’re accustomed to in the realm of retirement accounts.  But if you put $10,000 into a Roth and it grows to $12,000, you can take back your $10,000 whenever you please and for whatever reason.

I’m not encouraging you to take the money out, forfeiting a lifetime (and maybe multiple lifetimes if you pass it to heirs) of tax-free growth and distributions.  But hey, “stuff” happens.  LIFE HAPPENS.

So allow a Roth IRA to become part of your strategy.  Use it as an extension (not the primary source) of your MARGIN, the foundation of which should be pure cash reserves in a bank savings account.  Allow it to facilitate your FLEXIBILITY to change, if and when it’s necessary.  And if you have to dip into it, give yourself GRACE.  Learn from the experience so that you’re better prepared for the next surprise and the inevitable change to come.