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Roth vs. traditional IRAs?
I am a recent college graduate and just got a job where my company matches my IRA contributions. I know the main difference between a Roth and traditional IRA is how they're taxed, but I'm wondering what would be better for someone in my situation? I probably won't be retiring until I am 70. Is it better to pay taxes now or when I take the money out? What are some other differences between the two?
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3 Answers
As a general rule, younger adults get Roths because you can take distributions tax free in the future. Right now, you are in the lowest tax bracket you will probably ever be in, so take advantage of that now and pay taxes now.
Another strategy is to have some tax free distributions with some taxed distributions at retirement. This gives you a balance during retirement and helps ease the tax burden. A prime example is having a Roth and a 401K.
I agree with Charlotte. The benefit of a Roth IRA is that you pay taxes on it now so that when you retire you don't have to pay. At the same time if your company is going to match your contribution then that is a benefit that you don't want to miss out on. I'd also suggest opening up both a Roth and a 401K and contribute to both while you can.
As a general rule, you should save as much as you can in Tax Free accounts. Most (depending on your income level) people can contribute to both a Roth IRA and their company 401K plan.
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