The rise of the Roth IRA: Gen Z and millennials have a new favorite investment account

The percentage of households headed by a twentysomething investing in a Roth IRA almost tripled from 2016 to 2022—6.6% to 19.2%—according to data from the U.S. Federal Reserve analyzed by Boston College’s Center for Retirement Research. No similar growth was seen in households headed by older age groups or in terms 401(k) participation.

The growth in Roth IRA usage was concentrated among the top-third highest earners, according to CRR’s analysis, which the organization credits it to fintech platforms like Robinhood making it easier in recent years to access financial instruments.

Also at play: Many young households, particularly the 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 found the inflation-adjusted wealth for Americans under age 40 grew by an astounding 80% between Q1 2019 and Q3 2023, primarily due to stock investments.

“During the pandemic, people had more time on their hands, stimulus checks, and took an opportunity on the market decline,” says Evan Potash, executive wealth management advisor at TIAA. “This 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’t phased out yet for Roth IRA contributions.”

While this is good news for higher earners, those at the other end of the income spectrum aren’t faring quite as well. CRR’s research found just 4% of households headed by a twentysomething in the bottom third of the income distribution to be investing in a Roth in 2022. That’s still up from 2% in 2016, but it’s significantly less than the 41% of those in the top third.

“The 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,” Alicia Munnell, director of CRR, wrote.

Other studies have also found that the wealth gap between the poorest and richest young people is growing. According to research 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.

401(k)s vs. Roths

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.

And a Roth IRA is one of the best ways for young people, especially, to start investing, experts say. Because of the way it’s structured—investors contribute money that’s already been taxed, and the investments then grow tax-free until retirement—it’s a good deal for those in lower tax brackets who don’t need the tax break provided by a traditional IRA or 401(k) now. Generally speaking, employees earn less when they’re young compared with when they’re older.

Additionally, Roth IRAs are an especially good deal now given how low federal income taxes are, althugh that may change in the next few years.

“The sooner you start saving in a Roth IRA, the more time you have for growth,” adds TIAA’s Potash.

Although the growth in IRA investments is concentrated among top earners, it’s yet another indicator that young people are serious about investing—and are doing so earlier than previous generations. Prior research has found the average Gen Zer started putting money away for retirement at age 22—15 years earlier than the average baby boomer.