What is the Irish Equivalent to a Roth IRA?

  • By: Walter Dunphy ACCA
  • Date: April 14, 2022
  • Time to read: 4 min.

There is very little education in Ireland when it comes to pensions and this has a big part to play in the reason why young people are so slow to start investing for their retirement. Almost two-thirds of private-sector workers in Ireland are not paying into a pension.

As a small country, many Irish people consume educational content on investments and pensions on platforms such as YouTube. Inevitably they spend most of their time watching big finance YouTubers such as Graham Stephan, Meet Kevin and Andre Jikh who often talk about US pension products – particularly the Roth IRA.

Graham Stephan

This causes a lot of confusion for the younger generation and whenever I post some content on platforms like TikTok about Irish pensions, there are always numerous questions about how to open a Roth IRA in Ireland and “is there an equivalent to a Roth IRA in Ireland?”.

In this blog post, I’m going to try and clear everything up.

I will discuss the main differences between the Roth IRA styled pension investment vehicles in the United States and the Personal Retirement Savings Account (PRSA) which are available in Ireland.

Key differences

ROTH IRAPRSA
Tax on Contributions Contributions are made from post-tax incomeGet tax credit 20%/40% on contributions
Contribution Limits$6,000/$7,000 per year depending on ageTax credits only on a specific % depending on age – but you can still contribute more
Tax-Free Growth?Tax-freeTax-free
WithdrawalsTax-free once invested for 5 years at a minimum. Penalties may apply if withdrawn before the age of 59Max €200k Tax Free at retirement (age 60 at the earliest), the remainder will be subject to income tax
Can Your Employer Contribute?NoYes
Can you manage your own self directed pension?YesYes but not many options are available

The biggest difference between a Roth IRA account in the US and setting up a PRSA in Ireland is how they are taxed. A Roth IRA will be funded with money that has already been taxed, but with an Irish PRSA you can get up to 40% tax back on any contributions made depending on your income and contribution levels.

Below is a table showing the % of your income (one source) that can contribute to your pension and avail of the income tax relief.

AgePercentage Limit
Under 3015%
30-3920%
40-4925%
50-5430%
55-5935%
60 or over40%

This tax incentive of investing in your pension in Ireland is really good. Think of it this way, if your income puts you in the top tax bracket (over €36,800), then every €100 you contribute to your pension will only cost you €60. That is an instant 66% on your investment before it even starts to grow.

It is amazing that people still are hesitant of investing in a pension when these tax incentives are in place. The thought of having money locked into a pension for 30-40 years tends to scare people.

The biggest appeal of the Roth IRA styled pension in the US is that it makes it very easy for individuals to manage their own investments if they wish. The investor can make all the investment trades and decisions such as what stocks or ETFs they want their pension fund to be exposed to.

The vast majority of PRSAs in Ireland would be managed by an investment manager with the individual contributing to the pension having little or no say in how the money is invested. At most you would be asked what your risk profile is and based on this information what fund might be best suited to house your pension.

But in the past two years, there has been a huge growth in the popularity of retail investing in Ireland, everybody now fancies themselves as an investor. This enthusiasm should be used to entice people to start their pension earlier in Ireland even if it means they manage the investments themselves.

But how easy is it to manage your own pension investments in Ireland…

How to set up a self-directed pension in Ireland

There are not many options for Irish investors when it comes to operating your own self-directed pension. Also within this category, there are a few definitions of what ‘self-directed’ means.

Some pension funds may just allow you to decide what asset classes you want your money to be invested in whereas others will give you complete autonomy to make the individual manual trades and decisions on what to invest in all by yourself.

Davy Select PRSAs are one of the most popular options when it comes to investing in a self-directed pension in Ireland. Davy has their own trading platform called ‘myDavy’.

Davy also has an option available for people who are already are part of a company pension scheme that wish to make additional contributions. An AVC( Additional Voluntary Contribution) PRSA can be set up in these cases.

This platform will allow you to manage your regular investments and your pension all in one place which may be appealing to some investors. Although on the downside the fees charged by Davy are much higher than what you would expect in some of the Europe-wide brokerages.

In terms of the fees on these accounts you will have to pay the following:

  • Annual dealing charge 0.75% (inclusive of commission charges)
  • Transaction fees for non Irish/UK securities – min 0.06% plus €25
  • Negative interest rate of -.65% on any uninvested cash

Final Thoughts

It was announced recently that Ireland will be implementing an auto-enrollment scheme to increase the participation of the private sector employees.

Investing in your pension early and often is the key to having an adequate pension fund for when you retire. Whether you are looking to self direct your pension or want to hand that responsibility over to a professional the most important thing is to start.

Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.

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