Comments on: Traditional IRA or Roth IRA for Young Investors?

By: Curious Cat Investing Blog

Curious Cat Investing Blog — Thu, 10 Dec 2009 22:36:22 +0000

There is actually two right ways – a Roth or regular IRA I think Roth is the best choice but regular is very good too.

By: Britt Gillette

Britt Gillette — Sun, 06 Dec 2009 18:13:39 +0000

I agree with the idea that a Roth IRA is generally more favorable for young people just starting out. Mostly for the reasons you already stated such as the unknown of future tax rates and the lower current tax rates at the lower early-career salary. However, I’d also like to add that the IRS places income limits on who can and can not contribute to a Roth IRA. Early in your career you’re more likely to eligible to contribute the max to your Roth IRA, while later on, you may be ineligible to make ANY contributions. But a Traditional IRA? While there are income limits on the deductibility of your contributions, anyone can make non-deductible contributions regardless of income.

As a result, if tax diversification is important and you wish to have both types of accounts in retirement, then you should fund the Roth IRA when you can, because a Traditional IRA will always be available for contributions.

By: Don@MoneyReasons

Don@MoneyReasons — Sat, 05 Dec 2009 17:23:26 +0000

I have both a Roth IRA and a 401(k).

I get a match on my 401(k) at work (it’s nice – for the first 5% of my salary that I contribute, the company will match 100%) . So for example, if my yearly contributions of 5% equal $5,000, my company will also put in $5,000 for a grand total put into my 401(k) of $10,000 yay! Matches = free money! I don’t turn away free money.

I also put money in my Roth IRA (not to be confused with a Roth 401k). While I use it for investing, it also doubles as an extra hands-off “emergency fund” (since any contributions you make can be withdrawn without penalty).

I think it’s great that a $22 year old is so financially aware! Kudos to Joseph!

By: JoeTaxpayer

JoeTaxpayer — Sat, 05 Dec 2009 01:17:43 +0000

At retirement, it would take quite the pre-tax savings to create enough income to be in even the 25% bracket. For this reader, I suggest that when in the 15% bracket or lower, he go with the Roth, but if he is in the 25% bracket, use a pre-tax account.

By: Craig

Craig — Fri, 04 Dec 2009 17:40:12 +0000

I am a post grad too in a similar situation (although wish I had that salary) and have just maxed out my Roth IRA in its first year. I am sticking with that and while I have no 401K now, just Roth, figure that is the best strategy. I would rather no what’s in my account is exactly what I will get at retirement opposed to dealing with taxes being taken out.

By: Miranda

Miranda — Fri, 04 Dec 2009 15:29:00 +0000

I’m glad I have a Roth IRA. And we’ll probably open one for my husband soon. And when he gets done with school, and gets a job, we’ll hopefully have a 401k. I am also currently looking into my options for self-employed retirement planning beyond the Roth IRA (SEP, solo 41k, etc.).

By: Ryan

Ryan — Fri, 04 Dec 2009 15:08:18 +0000

Great tips, Neal. I think the 401k contributions could cover the tax exemptions now, and the Roth could be good for the tax exemptions later – which would offer more tax diversification than going with a traditional 401k and a Traditional IRA.

But I agree, one should look at their needs often and adjust accordingly. A big life event could change the way someone should plan for their retirement and current finances.

By: Neal A. Deutsch, CFP

Neal A. Deutsch, CFP — Fri, 04 Dec 2009 15:01:05 +0000

While the comment by Financial Samurai is great in theory, the fact is a bit more down to earth planning may be in order. One of the common mistakes made in making IRA contributions is neglecting the ultimate outcome and need at retirement. From our earliest working age through retirement age, the goal is to be in the accumulation phase of investing, moving into the income phase once your wage earning years have theoretically ended. At that time, all dollars count and taxation may take a bite into your income. Therefore, it would be prudent to invest in both a traditional plan where you get the deduction now but your withdrwawels will be taxable, and an after tax (Roth) vehicle which will give you income with no taxation at retirement. Be sure to evaluate your planning every few years, and make adjustments accordingly- that’s why they call it “financial PLANNING”.