For a new college graduate with a good paying first job, do you recommend a Roth IRA or Traditional IRA?

I've heard the positives and negatives on both accounts. Which account makes the most sense if I am in the 25% tax bracket?

IRAs, Starting Out
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September 2017

Normally, the younger you are and the lower your tax rate, the more the Roth makes sense.  This is because there is not much opportunity costs with the lower tax rate and you have decades to compound and make up the difference.  Now 25% is fairly high, but if you just graduated and are in your mid-20s, you have decades to make up the difference and I would probably go with the Roth.  

One caveat though, everyone assumes the government won't change the laws later.  Social security was never supposed to be taxed initially when they "sold" it to everyone (before my time but I study history).  So don't assume that the government won't later decide they want to tax Roths EVEN THOUGH you have already paid tax on the monies.  If many more younger people do the Roths and that is where the money is, that is what they will tax.  The reason the tax code is so convoluted is Congress makes the rules, then taxpayers adjust to pay less in tax, so then Congress goes to & taxes where the money is.  Follow the money.

One advantage to the Roth is you can take out contributions at ANY time for ANY reason.  It is only the growth that may have penalties or taxes.

In a perfect, just world I would probably do the Roth.  And in your situation, I would probably do the Roth anyway. But they aren't mutually exclusive either.  So you can do $5,500/yr in either, or in combination.  So you could split down the middle as well.

Sorry for the ranting but I wanted you to go into your decision with your eyes open.

Best of luck, Dan Stewart CFA®

September 2017
September 2017
September 2017
September 2017