Roth IRA: is there an equivalent in Italy?

What is a Roth IRA?

A Roth IRA is a retirement investment account for Americans that comes with tax benefits. Ever year, they can contribute up to $6,500 to the account. The contributions must come from post-tax income, meaning they can't deduct them from their taxes.The main benefits of the Roth IRA are that the contributions grow tax-free, and they can also withdraw them tax-free after the age of 59½.

The contributions to a Roth IRA aren't just sitting on a savings account: they are put to work through investing. A variety of investment options exist, including mutual funds, stocks, bonds, exchange-traded funds (ETFs), and even cryptocurrency.

Because the contributions are taxed today rather than when withdrawing, Roth IRAs are best suited when their income tax will be higher during retirement than they are now. This means they're interesting mostly for young people, when they are starting their career and their income is still relatively low compared to what they could be earning later in their life.

The Roth IRA sounds a great system for Americans to secure their financial future. But is there an equivalent in Italy?

Does Italy have a Roth IRA?

Unfortunately, Italy does not have a Roth IRA. But there are some Italian alternatives so let's take a closer look at them.

The Italian pension system

A Roth IRA in the United States and the Italian National Social Welfare Institution (INPS, Istituto Nazionale della Previdenza Sociale) pension system in Italy serve similar overarching purposes of providing for retirement, but they differ significantly in their structures, tax implications and general flexibility. It can't really be classified as an alternative.

What's the INPS?

The INPS manages Italy's public pension system. The Italian government deducts a portion from workers' salaries to finance the retirement funds for its citizens. Present-day workers support this system via their social security contributions and, in exchange, receive pensions upon reaching retirement age. This "pay-as-you-go" approach means that the money collected from current contributors directly funds the pensions for the retirees of the same period, without investing those funds elsewhere.

Italy's pension system has sparked discussions due to its ageing population and the growing ratio of pensioners to contributing workers. Over time, reforms have been introduced to maintain the system's financial viability. However, considering Italy's demographic and employment trends, doubts arise about the system's capacity to ensure adequate pensions in the future.

Beyond the public option, you can also invest in a supplementary pension fund. By making consistent contributions throughout your career, this fund can augment the state pension. This scheme, offering tax benefits, is comparable to a Roth IRA.

Let's look more closely at the Fondo Pensione Integrativo.

Italian equivalent to the Roth IRA: Fondo Pensione Integrativo

The 'Fondo Pensione Integrativo' or 'Supplementary Pension Funds' enable individuals to divert a portion of their earnings for an additional retirement benefit. Managed by asset management firms, they provide more investment options than the traditional state pension system. Workers have the choice of contributing to various funds. Furthermore, contributors can deduct up to €5,164.57 annually from their gross income for these contributions. The tax structure is favourable and adjusts based on the investment's duration, ranging from 15% to as low as 9%. Some funds even require employers to match employee contributions up to certain limits.

While the mechanism seems beneficial on the surface, the associated fees can be significant. For instance, full equity (stock) funds can have costs up to 3.44% annually. These charges can significantly diminish the returns, undermining some of the fiscal benefits they offer.

Roth IRA vs Fondo Pensione Integrativo

There are a few key differences between both plans:

1. Source of contributions: the Roth IRA is based on post-tax income whilst the Fondo Pensione Integrativo is on pre-tax income
2. Type of investment: there's no limits with a Roth IRA of where you can invest your money
3. Taxation at withdrawal: although you get a reduced tax rate, you still need to pay taxes when withdrawing from your Fondo Pensione Integrativo

As you can see from the comparison above, there has to be a better alternative for your pension and this is to invest in ETFs. At Curvo, we actually believe they are the best type of investment for most Italians to grow their wealth and secure their financial future, as the savings account is no longer sufficient. We are especially fond of index ETFs which track an underlying index and are a form of passive investing. Let's unpack this.

Best Italian alternative to the Roth IRA: ETF investing

Investing in index ETFs, also called passive investing, is a tried and tested method for growing your wealth. It’s based on the observation that rather than picking individual stocks and trying to buy and sell at the right time, it’s usually more profitable to invest in the stock market as a whole. Instead of finding the needle in the haystack, you buy the entire haystack.

When index investing, you invest in a type of fund called an index fund or ETF. Each index fund tracks a specific index, which is a collection of stocks with strict rules on which stocks are included and how much of each company the index contains. An index fund invests in the companies dictated by the rules of the index.

The most famous index is the S&P 500, which contains the 500 biggest American companies. Large companies such as Apple, Google or Amazon are represented in the S&P 500. The main Italian index is the FTSE MIB index, which consists of the 40 largest companies in Italy.

Ever since the first index fund was created in 1976, index investing has proven to be a great way to invest. By effectively becoming part owner of thousands of stocks across the world, index investing lets anyone earn a dividend off of the growth of the world economy.

The graph below shows the growth of the S&P 500 index since 1992. A €10,000 investment in 1992 would have resulted in over €200,000 by the start of 2023, or an average 10.3% return per year!

There are many other reasons why we think index investing is the best way for most people Italians to grow their savings:

• Low-cost: index funds and ETFs are cheap to manage, and fund providers pass on these savings to their investors.
• Diversified: one of the goals of index investing is to diversify as much as possible, across many sectors and countries. Some funds invest in thousands of companies!
• Rooted in the real economy: unlike for example cryptocurrencies, stocks are backed by real companies, with real factories, employees, intellectual property, and so on.
• You can buy and sell whenever you want: you can buy or sell any ETF within minutes.
• You can start investing with low amounts: you can even invest with as little as €50.
• It works: long-term index investing has delivered great returns to investors for the past 50 years.

Curvo: the easiest way for ETF investing

There are two common ways in Italy to do index investing:

1. Through a broker. A broker is a middleman that gives you access to the stock markets and allows you to buy and sell ETFs. It gives you the most flexibility because you're in control of what you buy. But it also means you're fully responsible for the management of your investments.
2. Through an app like Curvo. The goal of Curvo is to address the challenges of managing your own investments through a broker. Curvo provides access to the portfolios of NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM). All the work is done for you so you don't have to worry.

The difficulties of investing through a broker

Managing your own portfolio of index ETFs through a broker can be challenging. You need to choose the indices, build your portfolio as the right mix of indices that suit you and your goals, and choose the ETFs that track these indices. For each step, there are thousands of options. But that's not all. Understanding what taxes you have to pay is important, as well as learning how to use your broker, or knowing when to rebalance your portfolio.

You may not have the time, motivation, or simply interest in finance to climb over the learning curve. Or you'd rather spend time on things more important to you than the management of your investments.

We created Curvo to address the challenges of investing through a broker. We started investing through a broker ourselves. Our founder Yoran spent hours researching and figuring out how to build an optimal portfolio to prepare for his financial future. He read books, scoured the web and got lost on Reddit. Finding the right resources was challenging. From this experience, he realised why none of his friends were setting up their own investments through a broker: it's too complicated. At the same time, we've seen that index investing is such a powerful tool to grow our wealth. So it made sense to build something to solve this problem. Enter Curvo.

The work is done for you

Our goal is to make good investing as easy as possible and accessible to everyone.

Diversified portfolio built for you

We understand that it's hard to build the portfolio of index funds that's right for you, so creating an account starts with answering a questionnaire on your investment goals and your appetite for risk. You’ll then be assigned the best portfolio of index funds that matches your goals and risk tolerance. Each portfolio is built and managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM). They're all globally diversified and invest in over 7,500 companies.

Sustainability at the core

Your investments focus on one guiding principle: don't invest in companies that are considered destructive to the planet. This means that sectors like non-renewable energy, vice products, weapons and controversial companies are excluded from the portfolios.

Built for monthly investing

You can set up a monthly savings plan where your selected amount is automatically debited from your bank account and invested in your portfolio at the start of each month. This way, it's easy to adopt the best saving habits. Also, no transaction fees are charged. Lastly, your investments with NNEK, through the Curvo application, support fractional shares meaning all your money is invested. So it's ideal for monthly investing.

No learning curve

Our goal is to solve all the complexities of index investing through a broker. This means you don't have to worry about:

• Choosing a broker. There are many options available and it can be hard to pick the one that you feel most comfortable with.
• Rebalancing. It is made sure that your portfolio is kept in balance.
• Calculating and executing your orders every month. It's all set up for you.
• Keeping discipline. We help you stay the course!

Learn more about how Curvo works.

Summary

The Roth IRA, an American retirement investment tool, offers an innovative and tax-efficient way for individuals to plan for their future. While its benefits are clear – post-tax contributions, tax-free growth, and tax-free withdrawals post-retirement – it's important to note that not every country has an equivalent system in place. We saw that there is no direct equivalent of the Roth IRA investment retirement account in Italy. Instead, it relies on the INPS, a public pension system which currently faces challenges given the nation's demographic shifts and employment patterns.

Nevertheless, Italians can opt for the 'Fondo Pensione Integrativo,' a supplementary pension fund similar to the Roth IRA in some respects. Yet, when we delve deeper, noticeable differences between the two become evident, particularly in terms of taxation, fees, and investment flexibility. In light of these difference, many Italians are turning towards index ETFs, a form of passive investing, to secure their financial future. Apps like Curvo simplify the investment process, making it more accessible and less daunting for you as an Italian investor.

Questions you may have

Does Italy have a 401(k)?

You may have also read about the other US-centric retirement plan, the 401(k). A 401(k) is typically offered by an employer, while a Roth IRA can be opened by any individual, outside of their employment. Italy does not have a direct 401(k), but we've looked at the Italian alternatives if you wish to learn more on the topic.