August 2, 2013
I find working with young investors to be an extremely rewarding part of my job. It's exciting when a person in their 20's comes in and tells me they are done with school, beginning their career and want to start saving right away. Often they have begun already. They are putting into their 401(k) the amount needed to take full advantage of the company's matching contribution. They want to do more. "What's next?"
A Roth IRA may be a good next step, especially for young savers. Unlike a 401(k) or Traditional IRA, a Roth provides tax-free (rather than tax-deferred) growth. You give up a tax deduction now, but will be able to withdraw money tax-free in retirement. Why might this be the better choice?
For one, a young person may have a lower tax rate now compared to when they are retired or in their peak earning years. Also, having a Roth alongside a 401(k) provides you with tax diversification. This is a "hedge" against the potential that tax rates are raised in the future. Contributing to a Roth now effectively locks in your current tax-bracket. Lastly, the farther away you are from retirement, the better. The amount of potential growth you could experience in 40+ years is so substantial that it would greatly outweigh the benefit of taking the deduction today.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).