Generation Roth: How millennials can retire tax-free

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Business Week | By Ashlea Ebeling, Forbes

Roth IRAs offer two huge advantages to young savers: lots of flexibility and tax-free withdrawals in retirement.

During a recent visit to a Pennsylvania steel plant, President Obama touted the flexibility that his new myRA account provides young workers just starting to save. "In an emergency you can withdraw contributions without paying a penalty. So it's a pretty good deal."

Fact is, myRA is just a Roth individual retirement account with training wheels; the full, grown-up version is an ideal savings vehicle for millennials, including well-paid ones who also have a 401k.

A Roth IRA has two main advantages for younger folks. Money you contribute to an old-fashioned, pretax IRA or 401k isn't taxed now, but all withdrawals in retirement are taxed at high ordinary income rates. Roth IRAs work in reverse: You get no tax deduction for your contribution, but withdrawals after age 59 are tax free.

By then your income should be higher, in real dollars, than at, say, 25, so your tax rate is likely to be higher, too, making the back-end tax break more valuable than the front-end one. A Roth could also shield you from a growing list of tax and benefit penalties on higher income retirees.

The second big selling point for a Roth IRA is flexibility. Retirement is decades away and you might need cash sooner -- to start a business, pay the rent while you return to school or, as Obama suggested, for an emergency. Take money out of a pretax IRA or 401k before retirement and you can get hit with a 10 percent early withdrawal penalty, as well as ordinary income taxes. (There are ways you might be able to avoid the penalty, but an estimated 5.7 million folks still got stuck paying it in 2011.)

By contrast, you can withdraw your original contributions from a Roth IRA without taxes, penalty or jumping through hoops. "Life is unpredictable," says Dan Keady, a financial planner in TIAA-CREF's advice strategy group. "The idea of having that money there in a Roth IRA that you can just pull is a big advantage for people."

Wait a minute, isn't a 401k the best place to start saving? Yes, usually, provided you're offered an employer match -- in the most common matches, your employer kicks in 50 cents or $1 for each $1 you save, up to maybe 6 percent of your salary.

But if you're planning a decent retirement and saving for other goals, too, you'll need to sock away a lot more than 6 percent a year. So put enough into your 401k to snag the full match and then fund a Roth IRA.

For 2014 you can contribute $5,500 per person to a Roth IRA, provided your adjusted gross income isn't more than $114,000 for a single or $181,000 for a couple. Above that, the allowed Roth contribution shrinks and then disappears.

Not to worry: If you earn too much, you can get around the restriction with a little fancy footwork (and paperwork). Put $5,500 in a nondeductible IRA and then convert it to a Roth IRA.

Fortunately, you have until Apr. 15 to fund an IRA for calendar 2013. If you don't have the cash but expect to soon -- say you've just started a high-paying job -- hit your parents up for a short-term loan to make the contribution. Another option: If you file your 1040 early enough, you can ask the Internal Revenue Service to deposit your refund into a 2013 IRA.

What if you are already snagging the match in your 401k and fully funding a Roth IRA, and can save still more? Build an emergency account (three to six months of expenses) outside the Roth IRA, so you can leave the Roth untouched, growing tax free.

Once you have an emergency cache, consider maxing out your 401k -- you can contribute up to $17,500 for 2014. Keep in mind, however, that your pre-retirement access to 401k funds is limited, particularly if you stay with the same employer.

A growing number of 401k plans give workers the option of directing some or all of their contributions into a Roth 401k subaccount. If yours does, consider using it, particularly if you expect your income and tax rate to rise. By law all employer contributions are made pretax, so by using the Roth you're spreading your tax bets.

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Millennials see tech's dark side, and its benefits

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A young woman uses a cell phone in San Francisco.
The generation that has come of age surrounded by technology is keenly aware of the advantages that technology gives them but also sees the potential pitfalls, a new global survey of Millennials finds.

The survey, conducted on behalf of the Spanish telecommunications company Telefonica and the Financial Times, found that overall, many Millennials see technology as helping their future career and economic prospects. Globally, 83 percent said technology makes it easier to get a job, and 69 percent said technology creates more opportunities for all.

But many also saw a darker side to technology’s march forward, with 62 percent saying that the advent of technology has widened the gap between rich and poor.

Millennials often get a bad rap for being self-involved or unaware. But Frederic Michel, global director of public engagement for Telefonica, said he thinks the findings show that many young adults in North America and around the world are quite mature, and already see that things are not one-dimensional.

“They basically are very, very aware of how technology can help them improve their career path,” Michel said. “And at the same time, they are also conscious that technology can’t solve everything.”

That could be because many Millennials have come of age in a time of great technological change, but also great economic uncertainty. Only about half of the Millennials surveyed said the economy was on track, either globally or in their own region, and many said they worry about things like progressing from school into the workplace. That’s the type of worry previous generations may not have had because the jobs were much more plentiful.

They survey of more than 12,000 Millennials ages 18 to 30 was conducted across 27 countries and has a margin of error of less than 1 percent.

Neil Howe, president of LifeCourse Associates, a consulting firm that focuses on generations, said he’s not surprised to find that Millennials have more nuanced feelings about how technology can both create opportunity and widen the wealth gap.

He noted that while when most people think of the term Millennials, they think of affluent, educated young people. But there is also a big pool of less wealthy, less educated young adults who are struggling to find their path in a world that is increasingly reliant on technology.

That world has fewer well-paying, low-skill jobs their parents and grandparents held, and Millennials may well have seen people in their family lose a job to technological change.

At the same time, they have seen that some of the world’s wealthiest and most successful people, such as Bill Gates and Steve Jobs, got there by being at the forefront of technology.

Howe said some of the youngest people also may not be getting access to the right kind of technology to help them get ahead. He said some experts have now started talking about a “reverse digital divide,” in which kids from less educated and affluent families spend more time doing things like playing video games, while kids from more educated and wealthy families are being exposed to more educational technology and other developmentally appropriate activities.

Kristen Purcell, director of research for the Pew Internet and American Life Project, found a similar disparity by income when she surveyed advanced placement and National Writing Project teachers about access to technology and learning.

The survey found that teachers in the lowest income schools were least likely to say that their students had access to necessary technology, either in the classroom or at home.

In addition, more than 8 in 10 of the teachers said they thought technology was leading to greater disparity between affluent and disadvantaged schools.

Purcell said it stands to reason that such a disparity would persist as those students got older, and entered the working world.

“We’ve consistently found in our research on technology use, just in general among adults, that yes Millennials are heavy tech users. They lead the way. They’ve always lead the way,” Purcell said. “But there are still income differences. … Usually (it’s) the most educated, most affluent adults who are leading the way in technology adoption.”

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Millennials leading the way on work-life balance

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David Lees / Getty Images

Millennials surveyed said they seek work-life balance and value feeling appreciated at work.

By Amy Langfield, TODAY contributor
College-educated millennials have a slightly different set of expectations about the workplace, and employers need to make changes or risk losing the best new workers, according to a new study conducted by PwC, the University of Southern California and the London Business School.

Primary among their concerns is a better work-life balance.

Among millennials, 71 percent said work demands interfere with their personal lives. By contrast, 63 percent of their older colleagues made that complaint.

“Every generation would like a better work/life balance and I think the millennials are helping us see that, and maybe pulling us along,” said Terri McClements, PwC’s U.S. Human Capital Leader.

PwC initiated the study after it noticed an increasing number of its new hires were jumping ship after a short time. Since two-thirds of its workforce was born in the millennial bracket, (1980 to 1995 for this study), the professional services firm realized it might have a problem.

Chief among the complaints was the long-accepted practice of working like a dog right out of college in the hopes that one day translates into making partner at the firm. Millennials aren't convinced such a sacrifice would be worth the potential payoff later, the survey found.

That does not mean they are a new slacker generation.

“That perception is not correct,” McClements said. “They are equally committed.”

What the millennials want at work is to be judged on their impact, have fun, have a flexible schedule and get rewards for a job well done. They want an emotional connection to their work and to be part of a team focused on a goal. And while they are a wired generation, they want face-to-face contact when it comes to personal topics.

“Their experience is different,” McClements said.

The survey, PwC’s NextGen: A global generational study, included responses from 44,000 PwC employees globally, with nearly a quarter of responses coming from millennials.

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Economy stinks for many, but it's crushing millennials

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While the continued economic slump hobbles many Americans, the downturn is crushing young people.

Almost half of millennials—those between 18 and 34—think they'll be worse off than their parents, according to research from Demos, a non-partisan policy and research center.

And voters under age 30 in Tuesday's presidential election identified unemployment (49 percent) and rising prices (37 percent) as the most pressing economic issues they face, according to the Pew Research Center .

All this is forcing some young people to skip one of their favorite past times—eating out.

Among the heaviest restaurant users, new research shows in the year ending July 2012, millennials ate out 203 times annually — 49 times or 19 percent less than they did in the year ending July 2007, according to the NPD Group, a consumer market research firm.

"I've been doing this for 35 years and that has always been the case (millennials eating out). But not the last few years," said Harry Balzer, NPD's chief industry analyst. "This is all about how the economic downturn is affecting this group more than anybody else," he said.

(NPD defines dining out as everything from a Starbucks latte to a full sit-down meal at a restaurant.) Dining out costs roughly three times more than packing a sandwich or eating at home.

"I always bring my own lunch to save money," said Andrew Welsch, 28, of Long Island, N.Y. "My friends do the same thing. I still have to pay back my student loans," he said.

A generation defined by debt
Young people are cutting back on daily expenses such as dining out because personal debt levels are rising. Among college graduates, two-thirds owe an average of $28,500 in student loans, according to the Census Bureau and the Institute of Education Science. Average.

Many millennials are accumulating personal debt that spans unpaid student loans, credit card bills and medical expenses, according to the Demos report released last year.

With money tight, millennials voted this week with the economy on their minds. Voters under 30 also cited taxes and housing as important issues they face, said Scott Keeter, director of survey research for the Pew Research Center. He's also an exit-poll consultant for NBC News.

Weak job prospects
Weak job prospects are also hurting millennials. The unemployment rate for 18- to 34-year-olds for October was 10.8 percent, higher than the national unemployment rate of 7.9 percent, according to the U.S. Bureau of Labor Statistics.

Underemployment and low wages are problems too. More than half (57 percent) of young people would like to be working and earning more, and just half (53 percent) are working in their chosen fields, according to Demos research. Among millennials, more than half (56 percent) reported annual pretax incomes below $30,000.

With small incomes and little to no personal savings, many young people have delayed big life decisions.

Almost half (46 percent) have delayed buying a home, and nearly one third of millennials (33 percent) have postponed moving out on their own, according to Demos research. Welsch is holding off on getting an apartment with his girlfriend until after he completes his masters degree at the City University of New York.

Millennials have put off starting a family (30 percent), and a quarter has pushed back getting married.

Real happy hours
Welsch and others like him are riding out the economic downturn by reducing expenses such as dining out to celebrate birthdays. The gang used to gather at "a nice, mid-range restaurant — not McDonald's," he said.

But with the group unemployed or hours cut back, that tradition has been scrapped too. "We have to skip out on nonessentials like eating out, which is fun," he said.

With so many young people struggling, there could be a ripple effect for the restaurant industry. Younger diners traditionally have helped define eating trends as early adopters. "This group has been influential in their choices," said NPD analyst Balzer.

As a comparison, those aged 50 and older are eating out more since the depths of the 2008 financial crisis — 209 times annually this year compared to 197 outings for the year ending July 2007, according to the NPD Group's research.

So while older Americans fill sit-down restaurants, you'll likely find young people at bars, and enjoying a cheaper beer and snack.

"We’re a big fan of happy hour," said Welsch. "If we’re going out for drinks, it has to be happy hour — or we wouldn't do it."

With additional reporting by Erin Horan.

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