Should Young Investors Choose a Roth IRA or a Traditional IRA?

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Ryan Geary

Important Investment Considerations for Young Professionals

The most significant benefit that comes from focusing on saving and investing at an early age is that your savings have more time to grow, meaning you’ll end up building more wealth for your retirement years than if you started investing later in your career. However, making decisions about which retirement savings vehicles may serve you best can be overwhelming. In this article, we’re weighing the pros and cons of two common types – the Roth IRA and the Traditional IRA – and discussing the factors that will help you determine which may be best for you as a young investor.

First: Why Choosing the Right Investment Vehicle Matters

If you’re a young professional, your life is probably both hectic and exciting. You may be navigating life transitions like buying a home, getting married, and having children, all while also continuing to build your career. With so many irons in the fire, it may be difficult to find time to plan for retirement. Or, it may seem too early to think about things like how your savings plan will impact your tax strategy and your financial future. However, that’s not the case.

The truth of the matter is that your early earning years are when the impact of your savings is the strongest. The sooner you begin to invest your money into your future, the better off you’ll be down the road.

Considerations for Your Savings Strategy

It’s not always possible to put a large percentage of your income into savings, especially as you’re working on building a life for yourself, possibly with a growing family in tow. However, it’s important to prioritize maximizing your savings as much as possible. This means doing what you can to meet employer matches of “free” money while also maxing out your own retirement plan contributions. Even if these things aren’t possible, it’s important to remember that when investing early, even the smallest contributions can compound into meaningful sums in the future.

Regardless of how much you’re investing into your savings, if you want to make the most of it then you’re going to have to be deliberate with making your investments as tax-efficient as possible to avoid losing unnecessary money to taxes. Aside from the common employer-sponsored retirement plans, such as 401(k) or 403(b), the most popular investment vehicles used are Roth IRAs and Traditional IRAs. Which may be the best option for you? Let’s dig into it.

SEE ALSO: Finance Tips for First-Generation Wealth Builders

Roth IRA vs. Traditional IRA

While both Roth IRAs and Traditional IRAs come with tax benefits, there are key differences for you to consider when determining which one will work best for your overall financial strategy. Here’s a brief summary of each:

Roth IRA

  • Contributions made to this account grow tax-free.
  • Contributions come from after-tax dollars.
  • Account holders must fall under certain income levels. (See 2023 limits here.)
  • There are no immediate tax-deductibility benefits.
  • For 2023, the maximum total annual contribution limit is $6,500 for those under 50, and $7,500 for taxpayers 50 or older.

Traditional IRA

  • Contributions made to this account grow tax-deferred.
  • Contributions can be made from pre- or after-tax dollars.
  • There is no income level requirement for account holders.
  • There may be immediate tax-deductibility benefits.
  • For 2023, the maximum total annual contribution limit is $6,500 for those under 50, and $7,500 for taxpayers 50 or older.

It’s clear that both accounts make for great investment vehicles, but there is one key difference. With a Traditional IRA, since most contributions tend to be made with pre-tax dollars, your contributions will not be taxed until you begin withdrawing money in retirement, whereas you’re taxed upfront on any contributions made to a Roth IRA. So, while you are paying taxes on both accounts at some point in time, you know your current income tax rate for Roth contributions, but you cannot know what your income tax rate will be in retirement when you will have to pay taxes on Traditional IRA contributions. Your Roth IRA dollars will also grow tax-free.

Why Roth IRAs Are Often Better Suited for Young Investors

Because of the benefits that come from tax-free growth, a Roth IRA is often the best option for young investors. As a younger employee in the earlier stages of your career, chances are you’re not in your peak earning years, meaning you’re in a lower tax bracket now than you are likely to be in the future as you rise through the ranks and your salary increases. So, paying taxes upfront on any contributions you’re making now, while you’re in a lower tax bracket, means you’ll ultimately be paying less in total income taxes throughout the course of your working years.

Another benefit of a Roth IRA that is especially advantageous to young investors is that there are no Required Minimum Distributions (RMDs). This means your wealth can continue to grow without required withdrawals.

SEE ALSO: Maximize Your Health Savings Account for Your Financial Future

Being Tax-Savvy with Your Savings Strategy as a Young Investor

Of course, part of planning for retirement is being able to make smart financial decisions under uncertain conditions. It’s impossible to accurately predict what tax rates will look like 30 or 40 years from now, or precisely what your taxable income will look like in retirement. And, every person’s financial situation is unique. Still, Roth IRAs offer a tax-savvy option for many young investors. If you think it may be right for you, let’s talk.

At Resolute, we help clients at every stage of life build wealth and financial security. Our team is committed to helping you create a comprehensive wealth management plan that empowers you to achieve your short- and long-term goals. Give us a call today to begin a conversation about how you can make the most of your savings for maximum benefits in retirement.

The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

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