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Despite a gloomy financial picture that includes student loan debt and soaring inflation, many younger people have still managed to make remarkable strides when it comes to growing their wealth. The latest evidence: Significantly more Gen Zers and millennials are investing outside the workplace.<\/p>\n
The percentage of households headed by a twentysomething investing in a Roth IRA almost tripled from 2016 to 2022\u20146.6% to 19.2%\u2014according to data from the U.S. Federal Reserve<\/a> analyzed by Boston College\u2019s Center for Retirement Research (CRR). No similar growth was seen in households headed by older age groups or in 401(k) participation.<\/p>\n The growth in Roth IRA usage was concentrated among the top-third-highest earners, according to CRR analysis, which the organization credits to fintech platforms like Robinhood making it easier in recent years to access financial instruments.<\/p>\n Also at play: Many young households, particularly wealthy ones, were able to invest a lot of money during the pandemic, at least relative to what they had before. Previous research from the Federal Reserve<\/a> found the inflation-adjusted wealth for Americans under age 40 grew by an astounding 80% between Q1 2019 and Q3 2023, primarily the result of stock investments.<\/p>\n \u201cDuring the pandemic, people had more time on their hands, stimulus checks, and took an opportunity on the market decline,\u201d says Evan Potash, executive wealth management advisor at TIAA<\/a>. \u201cThis is complemented by the fact that younger people starting out in their careers, who tend to make less than those further on in their career cycle, haven\u2019t phased out yet for Roth IRA contributions.\u201d<\/p>\n While this is good news for higher earners, those at the other end of the income spectrum aren\u2019t faring quite as well. CRR research found just 4% of households headed by a twentysomething in the bottom third of income distribution to be investing in a Roth in 2022. That\u2019s still up from 2% in 2016, but it\u2019s significantly less than the 41% of those in the top third.<\/p>\n \u201cThe bottom line seems to be that if technology makes it really easy to save in tax-advantaged accounts, the tech-savvy with money will take advantage of the opportunity,\u201d Alicia Munnell, director of CRR, wrote<\/a>.<\/p>\n Other studies have also found that the wealth gap between the poorest and richest young people is growing. According to research<\/a> published by the University of Chicago Press, the richest 10% of millennials have 20% more wealth than the richest boomers did. Meanwhile, those on the other end of the income spectrum have seen their wealth stagnate, at best, or decline at worst<\/a>.<\/p>\n Though 401(k)s get a lot of the love from the financial press and advisors, Americans hold far more of their total retirement assets in individual accounts. More younger investors getting in the game earlier could help them grow their wealth significantly over time because of compounding returns.<\/p>\n And a Roth IRA is one of the best ways for young people<\/a> especially to start investing, experts say. Because of the way it\u2019s structured\u2014investors contribute money that\u2019s already been taxed, and the investments then grow tax-free until retirement; it\u2019s a good deal for those in lower tax brackets who don\u2019t need the tax break provided by a traditional IRA or 401(k) now. Generally speaking, employees earn less when they\u2019re young compared with when they\u2019re older.<\/p>\n Additionally, Roth IRAs are an especially good deal now given how low federal income taxes are, although that may change in the next few years<\/a>.<\/p>\n \u201cThe sooner you start saving in a Roth IRA, the more time you have for growth,\u201d adds Potash of TIAA.<\/p>\n Although the growth in IRA investments is concentrated among top earners, it\u2019s yet another indicator that young people are serious about investing\u2014and are doing so earlier than previous generations. Prior research has found the average Gen Zer started putting money away for retirement at age 22<\/a>\u201415 years earlier than the average baby boomer.<\/p>\n<\/div>\n401(k)s vs. Roths<\/h2>\n
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