Roth IRAs may be a good choice for young people. When people are starting to work, they’re in the lowest tax bracket they’ll ever be in. They can make an after-tax contribution now and collect tax-free income, many years in the future.
Up to $4,000 (in 2005) might go into a Roth IRA (those 50 or older can contribute an additional $500). For many young people, Roth IRA contributions are made with dollars that have been taxed at only 15 percent or 25 percent. After age 59 1/2, all withdrawals will be tax-free, under current law.
With Roth IRAs, contributions will have many years of growth. In addition, first-time home buyers can take money out, tax-free, for a down payment.
The tax code permits anyone who hasn’t owned a home for two years to withdraw up to $10,000 from a Roth IRA without paying a penalty, if the money is used to buy a principal residence. Withdrawals of Roth IRA contributions are always tax-free but the tax exemption also applies to earnings, after the account has been open for five years (in some cases, less than four years because of the way the IRS treats the calendar). Thus, a young couple could tap a Roth IRA for $20,000 worth of housing costs while still investing for a distant retirement.
