I'm 21 years old, and 2009's total itemized deduction for me is $1,908. I'm going with the standard deduction, but next year seems like it has a lot of potential to save if I open up this IRA that mint.com/turbotax is offering.

Should I worry about an IRA at this age? Are there smarter investment options at this age?

What I want to know is:

  • Is there a certain amount I need to invest in an IRA in order to qualify for the deduction?
  • What kind of IRA should I get?
  • Would it be more advantageous to open one through my employer?
  • Is a 401K a better option?


One of the reasons I'm considering an IRA is because I'm learning about minimizing my taxes, and am making it a goal to pay as little to the IRS as possible.

I'm leaning toward whatever option will require me to pay the least in taxes.


There are lots of sub-parts to your question. Let's takle them one at a time.

Should I worry about an IRA at this age?
Absolutely! Or at least some form of retirement account. When you are young is the BEST time to start putting money into a retirement account because you have so much time for it to grow. Compounding interest is a magical thing. Even if you can only afford to put a very small amount in the account, do it!

You will have to put a heck of a lot less money into the account over your working career if you start now.

Is there a certain amount you need for the IRA deduction?
No. Essentially with a traditional IRA you can just subtract the amount you deposited (up to the contribution limit) from your income when calculating your taxes.

What kind of IRA should I get?
I suggest a ROTH IRA, but be warned that with that kind you get the tax breaks when you retire, not now. If you think taxes will be higher in 40 years or so, then the Roth is a clear winner.

Traditional IRA: Tax deduction this year for contribution; investment plus gains are taxed as income when you take the money out at retirement.

Roth IRA: Investment amount is taxed in the year you put it in; no taxes on investment amount or gains when you take it out at retirement.

Given the long horizon that you will be investing, the money is likely going to at least double. So the total amount you are taxed on over your lifetime would probably be less with the ROTH even if tax rates remain the same.

Is the 401K a better option?
If they offer a match (most do) then it is a no-brainer, the employer 401K always comes out on top because they are basically paying you extra to put money into savings.

If there is no match, I suggest a Roth because company 401K plans usually have hidden fees that are much higher than you are going to pay for setting up your own IRA or Roth IRA with a broker.


John's answer is great, the question, however, is complex enough that one can write a book on the topic. So, I'll take the liberty to add two observations. The matched 401(k) should be the priority, even before paying off one's credit cards if any. A dollar for dollar match combined with the extra years of compounding is worth a bit longer on the debt pay off.

To a younger person, the Roth (either Roth 401(k) or IRA) is a good choice while you are in a lower tax bracket. I recommend you look at the page at Fairmark to understand the tax brackets. It's easy to see how many people straddle that 15% line (at $68K taxable) and with a bit of planning, using Roth while in the 15% bracket and deductible accounts as you go above, you can tax-manage your affairs to avoid the higher rates.

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