The best IRA for a young investor

Q. How can I decide between a Roth IRA and the other kind? I’ve never invested before. I’m 32.
— Getting started

A. We’re glad you’re ready to start saving for your future.

But before you look at an IRA, make sure you first look at your 401(k) — if your employer offers one.

“If your employer provides any company match into a 401(k) you will want to contribute to that account before you start an IRA to take advantage of the `free money’ provided by your employer,” said Nicholas Scheibner, a certified financial planner with Baron Financial Group in Fair Lawn.

That “free money” comes in the form of matching contributions from your employer.

If you’ve already done that, it’s time to choose the best IRA for you.

The Roth IRA and the traditional IRA offer different tax strategies.

When you fund a traditional IRA, you may have the opportunity to take a deduction now, but when you withdraw the money in retirement, you’ll pay income taxes on the distributions. When you fund a Roth, there is no tax deduction now, but the money is completely tax-free when you withdraw the funds.

“You can’t avoid paying taxes, and the decision between a Roth and a traditional IRA is `pay taxes now or pay taxes in retirement?’” Scheibner said.

Scheibner said a Roth IRA is usually best for someone who is in a lower tax bracket.

“The idea is that you want to pay taxes in the lowest bracket possible,” he said. “So if you are making a lower income than you may in the future, you would want to pay taxes now using a Roth.”

Scheibner said because a Roth provides tax-free withdrawals in retirement, the account provides for “tax diversification” and can compliment your 401(k), traditional IRA and taxable brokerage accounts.

Good luck with your decision!

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.