Should I invest in an Roth IRA or Traditional IRA?

I am 24 years old and I want to begin investing in an IRA. Which is the better fund, Roth or Traditional? I am also thinking of using the IRA money later down the line to purchase a home under the first time home buyer program.

Firstly, make sure you meet the requirements to contribute to a Roth IRA. If you are single, your Modified Adjusted Gross Income will need to be $99,000 or less for you to contribute up to the full amount ($4000) in 2007.

Although not true for every person, most people are better off with the Roth IRA verses the Traditional IRA. If you can easily afford to pay the taxes this year, then by all means use the Roth version. The benefit of the Roth IRA is that your earnings are never taxed if you withdraw after age 59.5.

Yes, you can use up to $10,000 from your IRA towards the purchase of a first home. However, you will need to have held the IRA for 5 years or longer to do this. Also, I think you are taxed on the earnings, even in a Roth IRA, if you do this. You don't get hit with the 10% penalty tax, but I do beleive you are taxed on the earnings. You should check on this before you decide to use IRA money for the purchase of a house.

Also remember that when you take money out of an IRA, you severely restrict the ability of that money to compound for you. In general, IRAs are best for retirement only. If you want to purchase a home, it is usually better to store that money in a short-term bond fund or a money market account. There is no guarantee of what the stock market will do in the short-run, so it is better to stick your house money into a safe investment.

Might I suggest two good firms for Roth IRAs? Both of these have a good selection of low-cost, target-date retirement funds:

- http://www.vanguard.com
- http://www.fidelity.com