Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

The Beauty of the Roth IRA

By JLP | November 28, 2005

This was previously posted on my old blog. I’m in the process of moving the best of my old posts to this blog.

Personally, I think the Roth IRA is a wonderful gift from our government. To put it simply, if a person opened a Roth IRA at age 25 and put in $3,000 per year and received a 10% annual rate of return for 40 years, they could have over $1,400,000 by age 65. And, they could access this money tax free!

To put that in perspective, imagine taking withdrawals at a 5% rate ($70,000) annually starting at age 65. If this were taxable as income, a person might expect to pay taxes in the 20%* range, which would be $14,000, leaving $56,000 to live on. In other words, in a 20% tax bracket, a person would have to withdraw $87,500 in order to have $70,000 to live on. That’s the power of the Roth IRA.

That’s not it, in addition, there is also the flexibility of not taking a withdrawal if it isn’t needed. A person does not have this same flexibility with other retirement plans. With other retirement plans, the IRS insists that a person must take withdrawals beginning the year after the year in which they turn 70 1/2. The Roth IRA is MUCH less confusing.

I haven’t discussed all the intricacies of Roth IRAs. In a future article, I’ll talk more in detail about the Roth IRA and how it compares to other retirement plans. In the meantime, for those interested, they may want to read “The Retirement Time Bomb and How to Defuse it” by Ed Slott. It is an excellent resource for understanding IRAs and other retirement savings vehicles. Mr. Slott also has a website called IRAhelp.com.

*I used the 20% tax bracket for easy math. Individual brackets may vary from the one I listed.

Topics: IRAs, Retirement Planning, Roth IRA | 11 Comments »


11 Responses to “The Beauty of the Roth IRA”

  1. How To Be Poor Says:
    November 28th, 2005 at 4:43 pm

    How come all PF blogs (including yours, unfortunately) don’t give details about opening a Roth IRA, and more importantly, generating a 10% return? Could you elaborate, e.g., “I called ScotTrade, set up a Roth IRA, chose my favorite stocks, etc” ? Thanks!

  2. Not yet a Millionaire Says:
    November 29th, 2005 at 9:34 am

    Yeah… right! The $1.4mil number looks impressive today. As well as the $70K/year may be enough to live on in _today’s_ prices. Assuming a conservative annual cost of living increase of 3%, in 40 years $1.4mil would be an equivalent of about $430,000 of today’s purchasing power. So it’s not $70K but a little over $20K/year to live on.

    But this is very much in line with other silly things you write about here. I feel sorry for all those people getting financial advice from you.

  3. JLP Says:
    November 29th, 2005 at 10:43 am

    Not Yet…

    Thanks for your comment (except for the part where you called my blog silly). I have addressed inflation’s impact on retirement savings here and here.

  4. sam Says:
    November 29th, 2005 at 5:01 pm

    JLP, I don’t think that this blog entry or your blog are silly. I think that your blog and advice is valuable, which is why I keep coming back to read. I have a Roth IRA and would love to add to it, but unfortunately am unable to contribute any more to it because of the income limits.

    I would challenge “Not yet a Millionaire” to come up with a better way to save for retirement or to try and beat the cost of living. The money in a Roth IRA may lose some of it’s value because of inflation, but someone with $1.4 million in a Roth is still a darn sight better off than someone without a Roth. What does he/she plan to do instead? Rely on Social Security? Work until they drop dead? Hope to win the lottery? Live out of a shopping cart?

  5. Chris Says:
    December 15th, 2005 at 2:51 pm

    I have to agree with sam. Inflation is going to grind away at any investment over a long period of time. If you can prevent taxes from clipping off more, all the better. I would like to hear a better alternative for turning $3,000 a year into serious spending power (with reasonable risks) over 40 years.

    As for the 10% return, there are plenty of mutual funds out there with records good enough to cover that. Alternatively, do some homework and find the stocks yourself. It’s not a real hard number to hit.

  6. Sumar Says:
    December 14th, 2006 at 4:09 pm

    anyone here done a Qualified Retirement Plan Rollover like it says in this article, http://www.roth-ira-rules.com/ira-rollover-transfer.html

    A Qualified Retirement Plan Rollover occurs when an individual takes personal possession and responsibility of his IRA assets and does NOT do an IRA Transfer within 60 days. Once the IRA assets are distributed, the plan administrator will withhold 20% of the amount for tax purposes and 80% of the assets will be distributed to the IRA account owner. This complication makes Qualified Retirement Plan Rollovers a less attractive choice.

    how complicated did you find this task?

  7. Ralphy Says:
    February 6th, 2007 at 9:13 pm

    Hello, got your website through USNEWS and World Report Mag.

    I’ve read lots of articles, books, mags; they’re mention 1 type of individual, which is working for Check not Cash. They are infinite $$$doors open for this person but not for Cash income guy.

    If you know of a way how can a Cash man smoothly enter the IRA and Roth IRA it will be nice.
    Cash Man is bus boy, delivery guy, shoe repair guy, barber, hair dresser, cook in asian deli, just to name afew.

  8. Finding your investing niche - My Investing Blog Says:
    December 7th, 2007 at 7:33 pm

    [...] If you’re looking to invest in an IRA, know the different types of IRAs.  Maybe you can contribute to a SEP IRA and cut your taxes, or a SD-IRA invested in pretty much anything.  Maybe this could add some pop to your current Traditional or ROTH IRA setup – [...]

  9. New Roth IRA Contribution Limits in 2008 | The Guppie Life - for gay yuppies everywhere Says:
    January 13th, 2008 at 11:31 pm

    [...] This is very good news for us guppies who hope to one day roll in piles of money sipping fruity drinks on the beach. (J.D. at Get Rich Slowly has a great article about how to set up a Roth IRA.) [...]

  10. ezsnyder Says:
    February 12th, 2009 at 2:22 pm

    JLP says, I think the Roth IRA is a wonderful gift from our government.” The one thing in that statement that I agree with is the “gift” part. It might be wonderful for the participants but not for the well being of our country. As originally conceived, IRA’s were wonderful. The participants deferred gratification and the government piggybacked right along with them, giving up current taxes for greater tax revenue in the future. And certainly the government with all of its unfunded liabilities is going to need plenty of revenue in the future. The people that fund Roths are generally the ones who have too much income to fund deductible IRA’s, i.e. they are more well to do. They are the people that upon reaching retirement age would be financially more able to pay taxes. I think future generations are going to look back and say, “what the hell were they thinking?”

  11. manny with GeWealth Advisory Group Says:
    April 2nd, 2010 at 2:21 pm

    great read i enjoyed it very much

Comments