Financial Corner: Is Roth IRA better for young workers?

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If you’re in the early stages of your career, you’re probably not thinking much about retirement. Nonetheless, it’s never too soon to start preparing for it, as time may be your most valuable asset. So, you may want to consider retirement savings vehicles, one of which is an IRA. Depending on your income, you might have the choice between a traditional IRA and a Roth IRA. Which is better for you?

There’s no one correct answer for everyone. But the more you know about the two IRAs, the more confident you’ll be when choosing one.

First of all, the IRAs share some similarities. You can fund either one with many types of investments – stocks, bonds, mutual funds and so on. And the contribution limit is also the same – you can put in up to $6,000 a year. (Those older than 50 can put in an additional $1,000.) If you earn over a certain amount, though, your ability to contribute to a Roth IRA is reduced. In 2021, you can put in the full $6,000 if your modified adjusted gross income (MAGI) is less than $125,000 and you’re single, or $198,000 if you’re married and file jointly. The amount you can contribute gradually declines, and is eventually limited, at higher income levels.

But the two IRAs differ greatly in how they are taxed. Traditional IRA contributions are typically tax-deductible (subject to income limitations), and any earnings growth is tax-deferred, with taxes due when you take withdrawals. With a Roth IRA, though, your contributions are never tax-deductible – instead, you contribute after-tax dollars. Any earnings growth is tax-free when withdrawn, provided you’ve had your account at least five years and you don’t take withdrawals until you’re at least 59½.

Roth IRASo, which IRA should you choose? You’ll have to weigh the respective benefits of both types. But when you’re young, you may have particularly compelling reasons to choose a Roth IRA. Given that you’re at an early point in your career, you may be in a lower tax bracket now than you will be during retirement, making the tax-deduction of traditional IRA contributions less beneficial. So, it may make sense to contribute to a Roth IRA now and take tax-free withdrawals when you’re retired.

Also, a Roth IRA offers more flexibility. With a traditional IRA, you could face an early withdrawal penalty, in addition to taxes, if you take money out before you’re 59½. But with a Roth, you’ll face no penalty on withdrawals from the money you contributed (not your earnings), and you’ve already paid the taxes, so you could use the money for any purpose, such as making a down payment on a home. Nonetheless, you may still want to be cautious about tapping into your IRA for your spending needs before you retire, since IRAs are designed to provide retirement income.

If your income level permits you to select a Roth or traditional IRA, you may want to consult with your tax advisor for help in making your choice. But in any case, try to max out on 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 enjoy those years.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Edward Jones, Member SIPC


Bio of Local Resident John-Paul:

John PaulHi, my name is John-Paul Tancona and I’m a financial advisor with Edward Jones. I have over 19 years of experience in this industry, working with both institutional and retail investors.

John PaulI earned my bachelor’s degree at Villanova University in 2000 and immediately started my years journey into the world of finance. My first 13 years were spent working at high profile wealth management firms covering large institutional investors. Recently, I joined Edward Jones and changed my focus to educating and empowering individual investors so they can achieve all of their financial goals.

We believe in working with investors one on one, either at your local Edward Jones office or conveniently at your kitchen table. We want to find out what is most important to you and your family so we can take you through our established process and partner together for life.

Whether you’re planning for retirement, saving for your children or grandchildren’s college education or just trying to protect the financial future of the ones you care for the most, we can work together to develop personalized solutions tailored specifically to help you achieve your goals.

I live in Sparta with my wife, Julieann, and two children: Dominic (10) and Daniel (7).

My branch office administrator, Ellen Hawkins, has 35 years of experience and is dedicated to offering you an ideal client experience.

I look forward to answering your financial questions and concerns. Please contact me to discuss your options so you can make informed decisions about your unique financial situation.  

 


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