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Gen Zers are often known for their TikTok personal finance trends and their gloomy feelings about retirement planning, but this young generation also has a few unique advantages. If you're in your 20s, if you're just starting your career, there's one special retirement account that you should consider opening: a Roth IRA.

If you qualify for a 401(k) or other workplace retirement plan, you should use that, too -- at least contribute enough to get the full amount of your employer's matching contributions. But whether you have a workplace retirement plan or not, Gen Z investors should strongly consider opening a Roth IRA as part of your investment strategy.

Let's look at why opening a Roth IRA is such a great financial move for Gen Z.

What are Roth IRAs and how do they work?

Roth IRAs are one type of individual retirement arrangement (IRA), a tax-advantaged retirement savings account that you can use to save and invest for your future. The other kind of IRA is a traditional IRA. With a traditional IRA, you can get a tax deduction on the money you put in, similar to a 401(k). Your money grows tax-deferred, and then you pay taxes on the money you take out in retirement.

Roth IRAs are different. You don't get that 401(k)-style tax break on the money you put in. But instead, your Roth IRA money grows tax free, and then you can take tax-free withdrawals in retirement. The Roth IRA gives you a source of tax-free income in retirement! This tax-free advantage makes it a great choice for people who can use a Roth IRA to save for the future.

For 2024, Gen Zers can put up to $7,000 into all of your IRAs (traditional and Roth combined).

Why Roth IRAs are Gen Z's best friend

Roth IRAs are a great retirement savings option for people who are young, single, and at the early stages of their careers. That's because if you're (for example) 24 years old and working at your first "real" job, you might be in the lowest tax bracket of your life. Your income is likely to go up during the rest of your working years, and so will your marginal tax rate.

For example, according to McKinsey research, as of 2023, the median salary for Gen Zers aged 20-24 was $38,325. Let's say that you're single and your salary is a bit higher than the median: $45,000 -- that would put you in the 12% tax bracket for 2024. But if your salary goes up by just a few thousand dollars, you'll be in the 22% tax bracket.

This means that, at this early stage of your career, every dollar you can afford to save for retirement is getting taxed at the lowest rate of your life. So instead of trying to maximize your tax breaks by putting extra cash into a 401(k) or traditional IRA, it makes sense to just pay that 12% marginal tax rate and then let your cash grow tax free in a Roth IRA.

(There are some income limits for who can use a Roth IRA, but you have to be a pretty high earner with an income of $146,000 or more for singles. Most Gen Zers are not yet at such a prosperous level of income.)

How to use a Roth IRA and a 401(k)

You don't have to choose between a Roth IRA and a 401(k) or other workplace retirement plan -- if you have enough spare cash, you can and should use both. If your employer offers to match your 401(k) contributions, be sure to put in at least as much money as it takes to get that full match.

For example, some companies might match 50% of the first 5% of your salary that you put into your 401(k). So if you make $45,000 per year, you'd put $2,250 into your 401(k) and get $1,125 of employer matching money, for a total of $3,375 invested for retirement. Get that "free money" if you can, don't leave it on the table.

Using a Roth IRA can give you an extra retirement savings account beyond your 401(k). Continuing from the example above, if you put $200 per month into a Roth IRA, by the end of the year you'd have $2,400 saved -- for a total of $5,775 invested for retirement. The best Roth IRA accounts let you invest your money in a wide range of stocks, bonds, and ETFs. Sometimes your Roth IRA account might offer better, more diversified investment options than your 401(k) plan.

Bottom line

If you're young, just starting your career, and in a lower tax bracket, opening a Roth IRA can be a smart financial move to save for your future. This makes the Roth IRA a good fit for Gen Zers who want to save extra cash for retirement beyond the 401(k) -- if you're in the 12% tax bracket, getting decades of tax-free investment growth is a bigger benefit than a 12% tax break in 2024.

Before you decide to put cash into a retirement account, make sure you understand the rules and limits. And don't be in too big of a rush to lock up your money in tax-advantaged accounts if your emergency savings fund is not yet where you want it to be. Some Gen Zers might prefer to put more cash in a savings account for now.

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