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Young savers are loving Roth IRAs.

New data from Fidelity Investments shows younger Americans are the biggest fans of the more versatile retirement savings account, overwhelmingly choosing it over the traditional IRA. In the third quarter, Gen Zs with Fidelity IRAs funneled 95% of their contributions to Roths, while millennials contributed 75% to Roths, and Gen X, 66%.

What exactly is the draw? Roth IRAs are especially useful when you’re in a lower tax bracket than you expect to be in once you retire — or if you might need to access your money sooner. Here’s how they work and how to decide if they’re right for you.

The Appeal of a Roth IRA

You get the taxes out of the way

Some people immediately think of pretax money when they think of a retirement savings account. With a traditional IRA or 401(k), you often don’t pay taxes until you withdraw the money, usually in retirement.

But with Roth IRAs, you invest money you’ve already paid taxes on, which can benefit young people more likely to be in a lower tax bracket. Then your money is able to grow tax-free, and once you’re ready to retire, everything in your account is yours to keep — no strings (aka potentially higher tax rate) attached.

In other words, Roth IRAs align with how most people’s careers actually unfold. They let you get the taxes out of the way when you’re earning less so you can maximize the potential of tax-free compound growth.

Your compound growth is tax-free, too

For any retirement account, the longer you invest, the more opportunity there is for compound growth: Any capital gains, interest, or dividends you earn can be reinvested to potentially earn even more money, giving contributions you make in your 20s and 30s the chance to grow significantly by the time you retire.

With a Roth IRA, this benefit is amplified because whatever you earn won’t be taxed, unlike with a traditional IRA or 401(k).

You have access to your money

In contrast to most retirement accounts, Roth IRAs let you withdraw your contributions anytime, with no penalties or additional taxes. Any investment earnings are a different story, but this flexibility on the amount you contributed makes a Roth IRA especially versatile. Think of it as part long-term investment vehicle, part emergency fund. (Though you’ll miss out on compounding your gains if you dip in to cover an unexpected expense.)

Plus, even earnings aren’t completely locked up in a Roth. While you’ll typically have to pay early-withdrawal penalties of 10% before age 59½, there are some exceptions. You can spend the money on qualified higher education expenses or use up to $10,000 for a first-time home purchase, for instance.

You can leave your money in a Roth

Unlike a pretax retirement vehicle, there’s no requirement to withdraw your money at a certain age. (If you’re wondering why you’d ever want to wait, here’s more on the Required Minimum Distributions, or RMDs, that apply to traditional IRAs.)

What You May Not Like About a Roth IRA

Here are some reasons to choose a traditional IRA or 401(k) over a Roth IRA.

•   You don’t get a tax deduction. Contributing to a Roth IRA doesn’t lower your taxable income because the whole point is to pay the taxes first. A traditional IRA or 401(k), in contrast, can lower your tax burden and potentially your tax bracket now.

   (Not surprisingly, while Gen Zs are more than twice as likely to have a Roth over a traditional IRA, almost the reverse is true of Baby Boomers, according to a mid-2024 analysis by the Investment Company Institute.)

•   High earners aren’t eligible to use a Roth IRA. You can’t contribute to a Roth IRA if you earn over a certain amount (the threshold next year for a single taxpayer is $168,000 in modified adjusted gross income). There is a completely legal loophole, however. Often termed the backdoor option, it essentially involves making a contribution to a traditional IRA that’s not tax-deductible (yes, that’s allowed) and then rolling the funds over into a Roth IRA.

•   There’s no borrowing against your account like some 401(k) plans allow.

•   You can’t contribute as much to an IRA (either Roth or traditional). Next year the contribution limit is $7,500 for either type of IRA versus $24,500 for a 401(k).

Also, while you can withdraw earnings without any penalty once you’re 59 1/2, there’s a catch: It has to be at least five years after you made your first contribution.

*SoFi Plus 2% match on recurring IRA deposits: Active SoFi Plus members are eligible for a 2% match offer on qualifying recurring IRA contributions, up to their Internal Revenue Service (IRS) contribution limit, into their eligible new or existing SoFI IRA account. The match requires the funds and match to be maintained in the account that received the match for five (5) years from the settlement date. Matches are paid in cash within five (5) business days. For complete eligibility and terms, please see the SoFi Plus terms and SoFi 1% Rollover and IRA Deposit Match terms.

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