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Apparently, youth isn't the only thing wasted on the young. So, too, are tax breaks.
Several recent studies say the vast majority of young workers are failing to sign up for myriad tax-advantaged accounts, potentially leaving hundreds if not thousands of dollars of benefits on the table.
Though the vast majority of eligible baby boomers participate in their 401(k)s, less than a third of workers 25 and under are contributing to these employer sponsored retirement plans. Even worse, only 4% of young workers are maxing out their workplace retirement plans, according to a recent survey by the tax information service CCH.
Ironically, these accounts are more important to young workers than to older Americans. That's because the majority of younger workers aren't covered by an old-fashioned guaranteed pension. Moreover, every dollar that 20-somethings save will be more valuable over the course of their lives than the same dollar will be for older workers. That's because young workers have more time to invest their savings and then let that money grow, tax-deferred.
Sadly, there seems to be little urgency among young Americans to remedy this situation. For instance, a paltry 19% of young workers say they plan to fund a traditional or Roth IRA this year. In fact, the majority of 18- to 24-year-olds don't even know whether they qualify to fund various types of IRAs, according to CCH.
The good news is, as workers get older, their financial awareness improves. But there's some bad news, too: Even among 26- to 40-year-olds, only around 40% are contributing to a tax-advantaged IRA, according to a survey by the brokerage Charles Schwab.
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Why? Many cite a lack of money or awareness to take advantage of these plans. Yet "with a few minor adjustments, younger investors can make the necessary changes to ensure they are doing everything they can to save for the future," says Rande Spiegelman, vice president of financial planning for the Schwab Center for Investment Research.
| 401(k) participation | ||||
|---|---|---|---|---|
Participate | % of pay | Avg. balance | Median balance | |
18-25 (Gen Y) | 31.3% | 5.6% | $3,200 | $1,280 |
26-41 (Gen X) | 63.1% | 7.2% | $31,240 | $14,730 |
42 and up (boomers) | 72.0% | 8.3% | $93,190 | $44,330 |
Source: Hewitt and Associates
Young workers aren't simply turning their backs on tax-sheltered retirement plans, they're failing to utilize other benefits as well. For example, only 10% of 18- to 24-year-olds are taking advantage of health-care flexible-spending accounts (FSAs) at work. These accounts allow workers to set aside money on a pretax basis from their paychecks to cover various out-of-pocket health care costs throughout the year.
By utilizing these FSAs, you are in essence getting the government to help you pay for an assortment of routine expenses, including co-payments for doctor visits, eyeglasses, over-the-counter medicines and other uninsured health-care costs. Think of it this way: If you were to spend $100 in over-the-counter drugs using an FSA account, it might cost you only around $70, depending on your tax bracket. That's because this account is funded with a portion of your paycheck before it's taxed.
Get more from your IRAUnfortunately, only around 4% are contributing the maximum amount allowed into these tax-advantaged FSAs.
So what should young workers do?
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