Invest Gen Y

You’re ready.  You’re showered, you’ve got your new coat on, you’re about to go to the corner brokerage firm and open an IRA.  Then, it happens, you realize you don’t know if you should open a Roth or Traditional IRA.  Coat off, TV on, deal with it next year.

NO.  GO.  NOW.  When in doubt (and if you make less then $112 as a single and less than $178 as a married), open a ROTH.  It will offer you more flexibility in the future.  And it doesn’t matter if you already have a plan at work.  You can stop here and trust me, or read on for the reasons why this makes sense.

Reason 1.  FLEXIBILITY.  You pay taxes first, then you drop money into your account.  So you don’t get that great deduction we talked about earlier: however, you can take the money you put into the account (not earnings/gains on that money) anytime.  This is a nice feature given that you are young and  may want to transfer savings to a real estate asset at some point.  A traditional IRA lets you deduct your contributions now, and then you’ll have to pay taxes when you withdraw at age 59.5.  If you want to pay less in taxes today, then go for the traditional IRA.  You can still take some of the money penalty free if it is to buy a first time home ($10,000 max), pay for college, incur medical emergency costs (those that exceed 7.5% of adjusted gross income), have to pay for health insurance premiums after you’ve been out of work for over 12 months and a couple of other things.

Reason 2.  PEOPLE ARE OLD AND THE GOVERNMENT IS STUPID.  If you pay taxes now, this might be cheaper in the long run.  The tax rate for everyone may go up given the huge national debt coupled with the aging population (more retired people means the people who are working have to pay more money into the system to keep things running).  Also, you might make more money if you keep your nose to the grindstone and your head out of the clouds (I know you can do it).  And if this happens, you’ll get pushed into the next and higher bracket.  So pay taxes on it now to save money in the long run.

Reason 3.  FLEXIBILITY – AGAIN.  You’ll have more flexibility at the back end.  For a traditional IRA, you have to start taking the money at age 70.5.  But what if you don’t need to?  What if you are still an earner and don’t need the money?  The Roth allows you to sit tight and take nothing.  If you never need the money, you can leave it to your kids.  Or save it for when you’re 90+ and need to hire a live in nurse to make you food and change the channels.

You can find out more information in the differences, but I think given your young age, the fact that you may switch jobs (have a plan at work, don’t have a plan at work), and may need to take some of the principal for real estate, a Roth makes sense.  But if you want/need to pay less in taxes today, then open a traditional IRA.  You can always open a Roth at a later date and have two accounts – no big deal.

Final note.  Open the account with a firm that allows you to make your own investment decisions.  Try not to get locked into a situation where you are stuck with one or two vehicles in which to invest.  Fidelity, Schwab, or even TD Ameritrade all will have tons of options.

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Connie