Here’s what I learned about Roth IRAs and HYSAs as a Gen Z reporter

Roth individual retirement accounts require investors to pay taxes on the contributions they make now, rather than when they take withdrawals in their retirement years. That trade-off means after-tax dollars grow tax-free for decades.

A Roth can be a powerful tool for younger investors, who are often starting out their careers with lower salaries, putting them in lower tax brackets. And in all likelihood, they are in lower tax brackets than they’ll be later in their careers.

2. While you can’t get a deduction, you may qualify for a credit: Unlike a traditional IRA, you can’t get a tax deduction from Roth contributions. Yet, there is a perk that gets overlooked a lot, said Lucas: Roth savings count toward the so-called Saver’s Credit, which is available to low- and moderate-income taxpayers.

“Depending on your income level, it can go as high as for every $2 you put in, you get $1 back,” he said. “To be able to put money tax free and essentially get some sort of matching contribution from the IRS is actually really nice.”

3. Remember to invest the money: This point was more of a self-reminder for me, especially after I saw my initial deposit linger in cash in my account for 24 hours. In order to make your money grow, it’s not enough to merely fund the account; you have to invest the money. (Not doing so is actually a common mistake.)

“The Roth IRA is kind of like a label on the account; it still must be invested,” Cornell said.

While there’s a plethora of investment products to choose from, ask yourself two important questions: “How hands-on do you want to be? What’s your risk tolerance?” Cornell said.

Younger investors are able to be more aggressive with their investments because these are savings they won’t, ideally, use for two or three decades, Lucas explained.

“Investing in a diversified way is what yields results over the long term,” he said.

Investors can either build their portfolios themselves or delegate the decision-making process to an account manager or robo-advisors. From there, you can decide how you want your post-tax dollars to grow over time.

About 56% of adult Gen Zers, or ages 18 to 26, did not have enough savings aside to cover three months of expenses, according to Bank of America, which conducted the survey in August.

Reading these reports sometimes feels like I’m looking into a mirror, or even the renowned line from Taylor Swift’s song “Anti-Hero”: “It’s me, hi. I’m the problem, it’s me.”

To address the issue, I opted for a high-yield savings account. While you are typically limited to a certain amount of penalty-free withdrawals per month, these accounts can be an ideal nest for both emergency funds and sinking funds, or money saved for bigger goals such as homeownership.

Here are two things to know about opening an account like this:

1. Compound interest does not make money appear overnight: When it comes to compound interest, it will depend on the bank or financial institution you choose to work with. But usually, the 5% interest is an annual rate, not monthly, said Lucas.

For example, if you put in $10,000 into an account that earns a 5% APY, you could earn $500 worth of interest, said Lucas.

“So it’s not $500 a month, it’s $500 for the year — and that’s assuming that the interest rate doesn’t change with the high yield savings account,” he said.

2. The IRS wants a piece: The tax man considers money earned from compound interest as an income. Any time you make over $10 in interest income, the bank will notify the IRS, which will send you a 1099-INT form, said Lucas. Even if you earn less than that, you’re supposed to report it on your taxes.

“The IRS knows you made $500 on that interest, you need to pay tax on it,” Lucas said.

Even so, “that is a lot better versus a checking account making half a percent,” he added.