Roth IRAs Could Be More Beneficial For Younger Workers Featured Columnist

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 save an additional $ 1,000.

If you earn more than a certain amount, however, 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 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 benefits of both. But when you’re young, you can 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’ve contributed (not your income), and you’ve already paid the taxes, so you can use the money for any purpose.

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.

This article was written by Edward Jones for use by Nathan Lindeman, a local financial advisor to Edward Jones.