Which would be better, a Traditional or Roth IRA?
I don't see a difference other than Roth you can withdrawal funds without penalties, after 5 years.
I turn 20 years old next month. I work with people who are in their 50s and 60s, for the most part. Some are as young as 30. But they all tell me I need to start saving for retirement NOW and I need a 401(k) and yadda-yadda. Well for some dumb reason, my work's 401(k) you have to be 21 years old. I started here when I was 17, so I make the other qualification of having been here for 2 years. But they still won't let me. This is one of the only bad things about my company. So I can't start a 401(k) but was thinking maybe I can start contributing a couple dollars a month to an IRA with my bank. But I don't know which one I should open.
Or should I not worry about retirement funds until I'm 25? Because I don't have a house now, and would REALLY love to save for a large down payment on a house in 3-5 years. So since I want to save for that, I don't have much to put into the IRA. I was thinking only -50 a month for the IRA, anyways, for right now.
If I were waiting to buy a house until I'm 25, I would just get a Roth IRA and put a crap load in right now because I saw I can deeduct ,000 after 5 years without penalty. But I do not know for sure if I am going to live in apartments for the next 5 years or if I'm going to buy a house before then. If I would buy it before 25, then I would just get a Money Market or CD, both having much higher interest than an IRA, for house savings. But I guess I'll never know. It's a gambling game, and I'm not very good at gambling….
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The difference between a Traditional IRA and the Roth IRA is when you pay the taxes. With a traditional IRA, you deduct the amount you contribute from you taxes, so the contribution is made after tax now. But, you have to pay taxes on the money when you withdraw it.
With a Roth IRA, you put the money in now post-tax, so you pay the taxes on it now. But, as long as you meet the age requirements at withdrawal, you can take the money tax free.
So, you have to decide if you think it would be better to pay the taxes on the money now (Roth IRA) or later (traditional IRA). If you think you are in a lower tax bracket now than you will be when you retire, then choose the Roth IRA. If you think your tax bracket is higher now than it will be when you retire, choose the traditional. For most people, especially people that start investing when they're young, the Roth is considered the better choice.
Definitely start contributing now, if you can. Compounding the money you put in now vs. waiting 5 years will have huge rewards when you retire.
One of the nice things about the Roth IRA, is that any contributions you make can be withdrawn at any time with no tax penalty. Any earnings on that money would be subject to taxes and penalties if you withdrew that. Roth IRAs also have the provision that you can withdraw up to $10,000 of earnings with no taxes or penalty for use as a first-time home down payment, if you take that money at least 5 years after opening the IRA.
At your age, use a Roth IRA. Here are the advantages:
1. The earnings grow tax free. So, when you are 59 1/2, all of the money in the Roth IRA is yours — none of it will be taxed.
2. You can withdraw the principal at any time, should you need to, without penalty.
Adding to what zeuz said, you can use the money in your Roth for the house downpayment without penalty as well.
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