The term “Young Professionals” can be vague, and many skip over opportunities out of a false belief that they do not belong. When it comes to starting a Roth IRA, a Young Professional is anyone who is making an income and wants to contribute to their retirement savings. There is no age floor, however a person under 18 would simply need a guardian to be the custodian of their account until they come of age. The younger you are when you open a Roth IRA, the more time your money has to grow, but the rule of thumb remains that a Roth is advantageous so long as you are in a lower tax bracket than you anticipate being in when you retire.

So, what is the difference between a Roth IRA and a Traditional 401(k)? Traditional retirement accounts are generally funded with pre-tax money, meaning the money comes directly from your paycheck and reduces your annual income. This offers a tax break in the current year but can be daunting when it comes time to withdraw. Roth IRAs are taxed as you contribute, but there are no taxes or penalties when you withdraw the money.  Another major difference is that a Traditional 401(k) comes with required minimum distributions, which is money that you must start to withdraw once you reach a certain age (currently 72). Roth IRAs do not require distributions at any point. In fact, you can withdraw your Roth contributions at any point, for any reason, without owing tax. Once hitting age 59 ½, you can withdraw your earnings tax free as well. You can also begin to take out regular distributions from a traditional 401(k) at this point if you are still working. However, there are exceptions for withdrawing earnings from a Roth early without penalties, like being a first-time homebuyer, participating in qualifying higher education, and covering costs of having or adopting a child.

There are also limits to both kinds of accounts. In 2022, the IRS allows an employee to contribute up to $20,500 to a 401(k) account and $6,000 to a Roth account, as well as $6,500 in catch-up contributions if you are over 50. Roth accounts also carry an annual income limit. In 2022, this is $144,000 for single filers and $214,000 for those married filing jointly. In peak earning years where you find yourself in the highest tax bracket you expect to be in, a Traditional 401(k) may be the better option. Traditional might also be the way to go if you are having trouble saving, as it enables you to receive the match from your employer with less impact on take-home pay.

You can open a retirement account through your employer, on your own, or a combination of these. Savings accounts are offered through banks, brokerages, and more. If you are already enrolled in a retirement plan and are looking to switch from a Traditional 401(k) to a Roth or vice versa, it is as simple as a click of a button through most plans. Take it from me, I switched today, and it took less than a minute!

As mentioned previously, it is never too soon to start saving for retirement. Each plan is different, but you generally have the option to change how much you have elected to save anywhere from yearly to daily, and all of that information will be readily available to you within the plan documents on your provider’s website. The younger you are, the more time your money has to compound and grow, and the more comfortable you will feel as you advance in your age and career.

A Roth IRA is the more favorable option for Young Professionals because it locks in a lower tax bracket, acts as an emergency backup fund with the option to withdraw at any time, and leaves you with the comfort of knowing the taxes are already paid when it comes time to withdraw your money. The fact is, whether you’re using a Traditional 401(k) or a Roth IRA, you’re on the right path. Saving for retirement as early as feasible is always a good idea. It is up to each individual whether you prefer the advantages of a tax break now or tax-free withdrawals later. Each plan has its own nuances and exceptions, but at their core it comes down to pre-tax versus after-tax. The point is that you are creating better opportunities for the future version of yourself.

About the Author

Julianna Abramson is an accountant in the Assurance Practice at SobelCo. Julianna works with the firm's employee benefit plan practice group, while also servicing the firm's nonprofit and commercial business audit clients in a variety of industries.

For more information contact Julianna Abramson at julianna.abramson@sobelcollc.com.