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Carla Fried: For 20-somethings, how to choose the right retirement account

Carla Fried, on

Published in Home and Consumer News

That’s a smart deal when you’re young, and likely in a low tax bracket. You don’t need a tax break on the money you are contributing. What you want to focus on is what happens when you withdraw the money. In retirement, every dollar you pull out of a Roth IRA will be 100% tax-free.

In retirement every dollar you withdraw from a traditional IRA or 401(k) will be taxed as ordinary income.

Roth IRA or workplace plan? It depends

If you’ve got a workplace retirement plan, you may not need to focus on a Roth IRA. Emphasis on may.

A decision tree to sort through:

—Is there a matching employer contribution for your 401(k)? In that case, you definitely want to participate in the workplace plan. It would be nuts to turn down this bonus.

—Is there a Roth 401(k) option? Most big employers now offer the choice between a Roth 401(k) or a traditional 401(k). If you have a Roth 401(k) and you have a match, you don’t need to consider a Roth IRA. With one caveat: If your Roth 401(k) offers mutual funds with high annual expense ratios (say, more than 0.50%), you might consider limiting your contribution to what you need to earn the maximum matching contribution, and then do the rest of your saving in a Roth IRA. It’s easy to find index mutual funds and exchange-traded funds for an IRA that have expense ratios below 0.10%.

—Got a match, but no Roth 401(k) option? OK, you definitely want to participate in the workplace plan to get the match. But maybe limit your contribution to whatever is necessary to pocket the maximum employer match. (HR will tell you the percentage of your salary you need to contribute to reach the max match.) And then do additional saving in your own Roth IRA.


—No match? If you have a Roth option, it can still make sense to do your retirement saving at work, as long as your plan offers low-cost mutual funds.

—No match and no Roth option? You def should be focusing on the Roth IRA first.

How to set up your own Roth IRA account

Any discount brokerage such as Fidelity, Schwab or Vanguard will be happy to help you set one up and get rolling.

The key is to sign up from the get-go to have a weekly/monthly/quarterly deposit sent from your checking account into your IRA. Automatic transfers are free on both ends.

The IRA contribution limit for 2021 is $6,000 for everyone younger than 50. That works out to $115 a week. If you can pull that off, fantastic. But you can work your way up to that, too. In 2018, the average annual Roth contribution for 20-somethings was close to $3,000.

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