As we navigate the complexities of financial planning, one opportunity stands out for young adults: individual retirement accounts (IRAs). Although the 2023 tax-year contributions deadline has passed, plan ahead to leverage an IRA for the 2024 tax year.
Traditional and Roth IRAs: A Brief Overview
Both traditional and Roth IRAs offer unique benefits, so the choice between them largely depends on your current financial situation and future expectations. For the 2024 tax year, you can contribute up to $7,000 or your earned income for the year, whichever is less. This is a $500 increase from the 2023 tax year.
Traditional IRAs provide the potential for tax-deductible contributions, which can be particularly advantageous if you’re looking for immediate tax relief. The deductibility of your contributions may phase out based on your income and whether you’re covered by a workplace retirement plan. It’s also important to note that withdrawals from traditional IRAs are taxable, and early withdrawals may incur penalties.
On the other hand, Roth IRAs offer tax-free growth and tax-free withdrawals in retirement. Although contributions are not tax-deductible, the tax-free withdrawal benefit in retirement can be significant, especially if you expect to be in a higher tax bracket then. Additionally, Roth IRAs do not require minimum distributions during your lifetime, offering more flexibility in retirement planning.
Key Considerations for Young Adults
Income limits and phaseouts. Be mindful of the income-based phaseout ranges that may affect your ability to contribute to Roth IRAs or deduct traditional IRA contributions.
Tax bracket considerations. Your current and expected future tax brackets are critical in deciding between traditional and Roth IRAs. If you anticipate being in a higher tax bracket in retirement, Roth IRAs may offer greater benefits.
Flexibility and future planning. Roth IRAs provide significant flexibility, allowing for tax-free and penalty-free withdrawals of contributions and offering benefits to your heirs.
The Power of Early Contributions
If you can start your IRA contributions while young, you can significantly impact your retirement savings. Even modest annual contributions can grow substantially over time, thanks to the power of compounding.
Questions
If you want to discuss retirement plan strategies, please contact TrueBlaze Advisors.