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

IRAs, Starting Out
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3 weeks ago
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Making the assumption that your current income level allows for a Roth IRA contribution it is usually more beneficial for a 20-something to contribute to a Roth IRA.

Remember the difference between a Traditional IRA and a ROTH IRA.

Traditional IRA is pretax dollars contributed (you have not paid income taxes on those funds) all gains grow tax free but when you withdraw the funds the taxes are then paid as if it were income.

A ROTH IRA is after tax dollars contributed (income taxes were paid already) and then all gains are tax free and any withdrawals are tax free (assuming all proper withdrawal rules are followed).

So it is important to consider two things:

  1. What is my tax rate now?
  2. What will be my tax rate at retirement? 

The assumption in this scenario is that your income level will be higher when you retire than it is now therefore, you paid less tax on the money.

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