Should I invest in a Traditional IRA or a Roth IRA?

I recently started my first job after graduating from college. I have the option to invest in a Traditional IRA or a Roth IRA. I'm 25 years old. Which do you suggest?

Investing, IRAs, Starting Out
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3 weeks ago
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Congrats on your new job!  Always great to hear! 

You should find out if you are eligible to enroll in your company's retirement plan, assuming they offer one.  Some employers allow new employees to enroll right away, while others have a grace period of up to six months or a year before they can officially enroll.  The most common employer retirement plan these days are 401(k) plans that allow you to contribute up to $18,500 pre-tax.  In other words, your taxable income would be reduced by the amount of your pre-tax contribution.  Some employers even match a certain percentage of your income or contributions, making enrolling and contributing to the plan even more valuable. 

If you have access to a 401(k), then I would strongly encourage you to establish a Roth IRA.  A Roth IRA allows your money to grow tax-free, as opposed to tax-deferred like a traditional IRA and 401(k) plan.  However, some employers are now offering Roth 401(k)s.  Contributions to both a Roth IRA and Roth 401(k) are done with after-tax dollars, which means you receive no tax deduction.  The offset is, the money grows tax-free.  And if you are just getting started, a Roth IRA can prove to be a very powerful retirement account, allowing your capital to compound over many decades without having to pay any income tax on withdrawals down the road.  Even if you cannot enroll in your employer plan, you might still want to consider contributing to a Roth IRA.  Depending on how much you earn, you may be able to make a tax deduction for a traditional IRA contribution, but it may be more beneficial contributing to a Roth IRA instead. 

Too, unlike a traditional IRA and/or 401(k) plan, Roth IRAs do not have any mandatory withdrawal requirements.  The IRS rules say people age 70 1/2 have to begin taking mandatory distributions from their IRA accounts.  This is not the case with Roth IRAs.  

Best of luck on your new job!

 

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