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When it comes to retirement planning, there’s a racial disparity that’s leaving employees of color behind their white peers.
According to a 2013 report by Dr. Nari Rhee of the National Institute on Retirement Security, just 54% of Black and Asian employees and 38% of Latino employees aged 25 to 64 work for an employer that sponsors a 401(k) plan, compared to 62% of white employees.
This is a problem, since employer-sponsored 401(k)s are the most ubiquitous form of retirement savings account. Indeed, Dr. Rhee’s data shows that workers of color are behind on saving for retirement — 38% of Black households and 31% of Latino households have some assets in a retirement account, compared to 63% of white households.
For these reasons, I think it’s critical for workers of color to open Roth IRAs. Whether your employer is providing a retirement plan or not, saving for retirement is a must, and a Roth IRA allows you to plan for the future no matter what.
What’s the difference between a 401(k) and a Roth IRA?
A 401(k) is a type of employer-sponsored, tax-advantaged retirement account. You get certain tax benefits (hence “tax-advantaged”) for putting money in this plan for the purposes of retirement. “Employer-sponsored” means that you cannot open up one of these by yourself; you need to work for an eligible, participating employer. Last thing — you contribute pre-tax dollars to a 401(k), so you’ll have to pay taxes on the money when you take it out at retirement.
A Roth IRA (Individual Retirement Account) is another tax-advantaged retirement account. You don’t have to rely on an employer to open one of these up for yourself. Just like a 401(k), you get certain tax benefits for putting money into this plan for the purposes of retirement.
The main difference between a Roth IRA and a 401(k), besides who is allowed to open one, is that you contribute post-tax dollars to a Roth IRA, so when you’re ready to retire you don’t have to pay taxes on the money that you take out because you already paid the taxes when you made your contributions.
My experience working without a 401(k)
I have personally experienced the negative effects of not having a Roth IRA. To start, a Roth IRA can be opened when you’re 18 years old versus a 401(k) that has to be employer-sponsored.
If you’re anything like me, you didn’t work at a job that gave you a 401(k) during college. So, while I was 18 to 22, I didn’t invest for retirement at all. In addition, when I first got my “big-girl job,” they offered a 401(k) plan, but I wasn’t eligible to start contributing to that until the first month after the second quarter that I’d been employed there. So that’s at least six months of, again, not being able to contribute to the “only” retirement account that I thought existed at the time.
Something to note is that I ended up having to quit that job after only eight months of working there because I left to go to graduate school. All in, I ended up only contributing to my 401(k) for about six weeks before my last day.
If I had known about a Roth IRA when I was younger, I could have been more proactive about my own retirement. I don’t like to dwell on the potential growth of my investments that I lost out on, because I can’t change the past. But what I can do is help other people of color not make the same mistakes I did.
The benefits of a Roth IRA
Now, while there’s a plethora of alternative tax-advantaged retirement accounts out there, I think a Roth IRA is the most important alternative to a 401(k) because it’s very simple to open and isn’t tied to working for a certain employer or being self-employed.
Almost anyone can open a Roth IRA, sometimes in combination with other retirement accounts. I even recommend that my clients who already have employer-sponsored retirement accounts also get a Roth IRA. It’s especially helpful to me, because I’m pursuing financial independence, which I think is an imperative for marginalized professionals.
Why is access to a retirement account important for POC?
Because of the racial disparities at play, getting access to a retirement account can help employees of color become more prepared for retirement and decrease the wealth gap. Please know that just because you don’t have access to a 401(k), it doesn’t mean that there’s no way for you to prepare for retirement. There are many alternative options and many tax-advantaged retirement accounts beyond a 401(k) that you can invest through.
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