Best IRA Options for Young Adults Starting Their Financial Journey

ByBNW TEAM

If you are young and have just started building your career, be smart and think about your cash from now on. This way, you will not only set yourself up on the journey to success but also save a lot for your retirement. The choices you make today can shape your life for years to come. And one of the best moves you can make is to open an IRA.  

But with so many options available, choosing which IRA is best for you can be overwhelming. But worry not. Here is a detailed guide to help you out. 

1. Roth IRA

Think of the Roth IRA as a special kind of box for your money. You put cash in this box that you have already paid taxes on. It is actually the money from your paycheck and other income sources.   

Once your money is in a Roth IRA, it starts growing over time. And the best part is when you are old and ready to take that money out, you do not owe any more taxes, not on the money you put in, as well as not on all the growth it earned. This fund is all yours. 

A Roth IRA is the best IRA for young adults. However, for the best experience, you must choose a reliable option to open your Roth IRA account, such as SoFi.

Key Advantages of Roth IRA for Young Adults

Here are some key benefits of a Roth IRA. 

  • Tax-Free Withdrawals: In a Roth IRA, you pay taxes now, and you take out all your money later with no tax bill. 
  • Flexibility with Your Funds: Do you need to pull out the cash you put in a Roth IRA for a big life event? You can often do so with no tax or fee.
  • No Required Minimum Distributions: The Roth IRA does not require you to start taking withdrawals at a fixed age, allowing your money to grow as long as you want.

 2. Traditional IRA

The Traditional IRA is a different type of account. It gives you a tax break right now. When you put money in, you can often deduct that amount from your income for the year. This will lower your tax bill. However, when you take the money out in retirement, you will have to pay income tax on those withdrawals. 

Tax Advantages of Traditional IRA

The traditional IRA offers the following benefits to young adults. 

  • Tax Deductible Contributions: These accounts allow you to deduct your contributions from your current taxable income, which ultimately places you in a lower tax bracket. 
  • Tax-Deferred Growth: In traditional IRAs, your money grows without paying taxes each year, and you only pay tax when you take the money out later.

3. SEP IRA

Are you self-employed or a small business owner? The SEP IRA is made for you. It is a plan for self-employed people and small business owners.  The key advantage of these accounts is the high limit on savings. You can save away a much larger part of your income than with a Roth or a Traditional IRA. This is the best power tool for serious savers who have a variable income stream.

Which is the Best IRA for Young Adults?

If you are a young adult just starting your career, a Roth IRA is the best option. Your income is likely lower now, so you have to pay lower tax. And in return, you will get a lifetime of tax-free growth. In a Roth IRA, you lock in a low tax rate and never worry about it again. On the other hand, the Traditional IRA is a good fit if you need a tax break this year. And the SEP IRA is the perfect option if you work for yourself. 

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