They say it’s never too early to plan ahead, and they’re right. Young professionals just now starting to walk the career path are in a prime position to take advantage of the benefits a Roth IRA provides for their retirement needs.
Contributing to a Roth IRA means that account holders pay taxes on the amount upfront, making the funds tax-free at the moment of withdrawal. Paying taxes upfront particularly serves those that are currently in a lower tax bracket than they will be in the future. This is in direct contrast to a traditional IRA, in which contributions are tax-free when put in but will be taxed when withdrawn.
Of course, Roth IRAs are not the only retirement option to which one can contribute to. In fact, financial advisors are prone to recommend having both Roth IRAs and traditional IRAs in order to cover all possible tax-related scenarios.
As a worker’s earnings increase they also climb to a higher tax bracket. Meanwhile, retired persons are generally classified in lower brackets due to no longer having a steady paycheck. Therefore, if an account holder’s tax bracket is higher now than it will be in the future, paying upfront taxes for a Roth IRA wouldn’t be as beneficial as paying lower taxes at withdrawal in a traditional IRA.