The Roth Advantage

It’s important to save for retirement as early as possible. You want to be using a 401(k) if it’s available. Particularly if you don’t have a workplace plan (but even if you do), you also should consider a Roth IRA — especially if you are just starting out in your career. Here’s why.

There are a few differences between a Traditional IRA and a Roth IRA. Traditional IRA contributions are typically deductible, depending on your income and tax bracket. Meanwhile, your contributions to a Roth IRA can’t be deducted and can be phased out if you start making too much money. For young savers, the key difference between the two is when you pay taxes. As USA Today reports, with a Traditional IRA, you’ll pay taxes on withdrawals in retirement. Conversely, with a Roth IRA, you’ll get to make withdrawals tax-free in retirement. If you’re just starting out in your career, chances are you’ll be in a higher tax bracket when you’re ready to retire than you are now. Therefore it’s smarter to pay the Roth IRA taxes now, rather than later when they will be more expensive.

The other key difference between a Traditional IRA and Roth IRA for young people is that your ability to contribute to a Roth gets phased out if your income is too high. While you eventually want to get to that point, you should take advantage of the Roth while you can. The money that is stockpiled in the Roth will one day be withdrawn without taxes. That can save you thousands, and that could be a huge difference during your golden years.

 

 

This article was originally posted on savvymoney.com 

 

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