What's the best kind of IRA for a 20-something?

IRAs, Starting Out
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2 weeks ago
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I'm a millennial and so are many of my clients. I encourage all of my younger clients to begin saving for retirement by contributing to a Roth IRA or Roth 401(k) over a Traditional IRA or 401(k). The truth is one isn’t necessarily better than the other, each have their advantages and should be evaluated for your specific situation.

In general, there are three key reasons I feel Roth contributions have an edge over Traditional contributions for young people.

  1. Having tax free distributions in retirement is great, especially if you feel taxes are likely to go up in the future. Since younger investors have a longer time horizon, the impact of compounding growth in these accounts benefits even more from tax free distributions.
  2. Most young people are not yet at their highest earnings potential and tend to be in lower tax brackets at this stage in life. The benefit of deferring income taxes by making Traditional contributions to an IRA or 401(k) may not have as much of a tax savings impact as it will in the future when you are earning more income.
  3. There are income limits which disqualify you from making Roth IRA contributions in years which your income (includes spouse if filing jointly) exceeds a certain threshold. Ideally, one day your income will surpass that threshold, you’ll be able to keep your Roth IRA invested but can’t add to it. At this point you’ll be limited to only making non-deductible or traditional contributions which are deductible. If you have access to a Roth 401(k) you may still qualify to make contributions depending on your situation.

Ultimately, you should seek a balance of making both Roth and Traditional contributions to retirement accounts over your lifetime. It’s ideal if you can balance taking tax free and tax deferred distributions in retirement.

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