I’m curious to hear your arguments for contributing to either a Roth IRA, traditional IRA, or both. What do you do? Unless I’m missing something, the scales tilt heavily on the side of Roth IRAs for us twentysomethings.
For those who need a primer, an IRA is a retirement account with significant tax benefits that you can fund each year in addition to the contributions you make to an employer-sponsored plan like a 401(k). There are two kinds of IRAs: Roth IRAs and traditional IRAs. Here are their primary differences:
- Contributions are tax-deductible (up to IRA contribution limits)
- Withdrawals can begin at 59 ½; are mandatory by 70 ½
- Withdrawals are taxed as income
- No income restrictions
- 10% penalty on most withdrawals before 59 ½
- Contributions are not tax-deductible
- Withdrawals can begin at 59 ½; no mandatory withdrawal age
- Withdrawals are 100% tax-free
- Cannot contribute if you are single and earn more than $95,000 or married and earn more than $150,000
- Principal can be withdrawn almost any time with no 10% penalty
The big perks for investing in a Roth IRA—especially in our twenties—is that we are (hopefully) in a lower tax bracket now than we will be at retirement, meaning tax-free income will be more valuable later than a tax deduction is now.
Furthermore, and perhaps more importantly, is the fact that the principal we invest in a Roth IRA can double as an emergency fund. (You can, however, also take penalty-free withdrawals from a traditional IRA for certain higher education expenses and—up to $10,000—for the purchase of your first home).
To which kind(s) of IRAs do you contribute? Why?
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