FINANCING | Is Roth IRA Better For Young Workers? | latest news
f you are at the start of your career, you probably don’t think much about retirement. Still, it’s never too early to start preparing for it, as time can be your most valuable asset. So, you might want to consider retirement savings vehicles, one of which is an IRA. Depending on your income, you might have a choice between a Traditional IRA and a Roth IRA. What is best for you?
There is no one right answer for everyone. But the more you know about the two IRAs, the more confident you will be when choosing one.
First of all, IRAs share some similarities. You can fund either one with many types of investments – stocks, bonds, mutual funds, etc. And the contribution limit is also the same – you can contribute up to $ 6,000 per year. (People over 50 can contribute an additional $ 1,000.) However, if you earn more than a certain amount, your ability to contribute to a Roth IRA is reduced. In 2021, you can contribute the full $ 6,000 if your modified adjusted gross income (MAGI) is less than $ 125,000 and you are single, or $ 198,000 if you are married and filing jointly. The amount you can contribute gradually decreases, and is eventually limited, at higher income levels.
But the two IRAs differ greatly in the way they are taxed. Traditional IRA contributions are generally tax deductible (subject to income limitations) and any growth in income is tax-deferred, with taxes payable when you make withdrawals. With a Roth IRA, however, your contributions are never tax deductible – instead, you contribute in after-tax dollars. All income growth is tax-free upon withdrawal, as long as you have had your account for at least five years and do not withdraw until you are at least 59 and a half years old.
So which IRA to choose? You will need to weigh the respective advantages of the two types. But when you are young, you may have particularly compelling reasons for choosing a Roth IRA. Since you are at an early stage in your career, you may now find yourself in a lower tax bracket than you will be in retirement, making the traditional IRA contribution tax deduction less beneficial. So it may be a good idea to contribute to a Roth IRA now and make tax-free withdrawals when you retire.
In addition, a Roth IRA offers more flexibility. With a traditional IRA, you could face an early withdrawal penalty, in addition to taxes, if you withdraw money before you are 59 and a half. But with a Roth, you won’t incur any penalties on withdrawals of the money you contributed (not your income), and you’ve already paid the taxes, so you can use the money for any purpose, like make a down payment on a house. Nonetheless, you may still want to exercise caution before tapping into your IRA for your pre-retirement spending needs, as IRAs are designed to provide retirement income.
If your income level allows you to select a Roth or a Traditional IRA, you may want to consult your tax advisor to help you make your choice. But in any case, try to maximize your IRA contributions each year. You could spend two or three decades in retirement – and your IRA can be a valuable resource to help you capitalize on those years.
Jennifer Barrett (AAMS) is a local financial advisor to Edward Jones.
225-612-0413 | [email protected]
Edward Jones. SIPC member.
Edward Jones, its employees, and its financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate planning lawyer or qualified tax advisor about your situation.