Is Roth IRA better for young workers?

Long version

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 Any earnings growth is tax-free when withdrawn, provided you’ve had your account at least five years and you don’t take withdrawals until you’re at least 59½.

So, 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

Number of words: 532

Short/radio version

PSA: Is Roth IRA better for young workers?   

TBA: July 26, 2021

Words: 186 (excluding FA’s name, address/phone number)

If you’re early in your career, you’re probably not thinking much about retirement. Nonetheless, it’s never too soon to start preparing for it. So, you might want to consider choosing a traditional or Roth IRA. Which is better for you?

There’s no easy answer. Depending on your income level, you can make tax-deductible contributions to a traditional IRA and your earnings are tax-deferred, meaning taxes are due when you take withdrawals. With a Roth IRA, contributions aren’t deductible, but earnings and withdrawals can be tax-free, provided certain conditions are met.

It might benefit you to choose the Roth option and essentially pay taxes on your contributions now, especially if you think you’ll be in a higher tax bracket when you retire.

Also, a Roth IRA allows you to withdraw contributions – but not earnings – at any time, without penalties.

You may want to consult with your tax advisor for help in picking either the traditional or Roth IRA. But try to contribute as much as you can each year to whichever one you choose. Your IRA can be a valuable source of income during your retirement years.    

This content was provided by Edward Jones for use by (FA’s NAME), your Edward Jones financial advisor at (Branch address or phone #).

Member SIPC

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