An IRA (Individual Retirement Account) is a great opportunity for younger investors to save for retirement. IRAs come in two flavors, Traditional and Roth, the main difference being when taxes apply.
While traditional IRA contributions may provide a current year tax deduction, Roth IRAs contributions are not deductible, but the investments grow tax free forever. Traditional IRA distributions will always be taxed as ordinary income.
You must have earned income to contribute to any IRA (compensation received from working), and there is a maximum contribution amount set by the IRS each year ($7,000 for 2024).
Considerations when choosing between IRA types:
Age: The younger you are, the more sense it makes to contribute to a Roth IRA. The compounding tax-free growth is likely to outweigh the value of the up-front tax deduction.
Income: At higher income levels the ability to contribute to any IRAs phase out. However, your employer 401(k) plan may include a Roth option.
Deductibility: If you are covered by an employer retirement plan, you’re likely not eligible to make deductible IRA contributions. However, you may still be able to contribute to a Roth IRA.
Flexibility: With limited exceptions, withdrawals from an IRA before age 59 ½ are subject to a 10% penalty. Roth IRAs offer more flexibility, allowing for penalty-free withdrawals of contributions (but not earnings) after the account is at least 5 years old.
