Be One with Roth

Good Afternoon Ladies and Gentlemen,

Today I have a very, very important post for you. In fact I will go ahead and say that for those of you aged 18 to 25, this might be the most important post you ever read regarding your future financial security. This is something that I take very seriously because I've realized how truly crucial this is. I need you to read this, I'm doing this for you. Yes reader, you. Do I have your attention?

Allow me to introduce you to Roth IRA. IRA stands for Individual Retirement Account. You may be familiar with the term 401(k) which is a retirement account provided by an employer that can be rolled over into a standard IRA if you ever leave that job. In a standard IRA you take pre tax dollars and invest the money in an account that you can't touch until you're 59 1/2 years old. Once you are ready to withdraw the money you are taxed on your withdrawals. Say you end up with $1,000,000 dollars in your IRA account and your tax rate is 30%. Each withdrawal you make from that account the government will take 30% of, so after all is said and done you are left with $666,000.00. This is where the beauty of a Roth IRA comes in.

A Roth IRA is very different from a IRA. Instead of being taxed when you withdraw the money upon retirement, you put already taxed dollars from earned income into a Roth IRA and over the years the money grows 100% tax free including when you take it out during retirement. Let me clarify.

Take money that you make from work now, put it into a Roth IRA, it grows tax-free forever, and you withdraw the money tax-free when you retire. Let me throw some numbers at you.

The Standard & Poor's 500 Index has grown at an average of 11.4% over the last 30 years. Let's say you take the following amounts, invest it in a mutual fund that models the S&P; 500 (I use T. Rowe Price's Equity Index 500 (PREIX)) and let's see what kind of numbers we get.

$1000 after 44 years = $114,597.49
That puts you at 65 years old if you're 21 now.

$1000 after 47 years = $159,810.01
Same thing, except starting at 18 years old. Shows the true value of starting early.

Let's say you have a lot more to invest, say you get a signing bonus from your first job offer.

$4,000 after 44 years = $462,389.95
That's a solid nest egg.

$4,000 after 47 years = $639,240.03
Once again, shows you the true value of starting early.

Now let's get to the big time. Keep in mind, the government only allows you to put $4,000 dollars into a Roth IRA every year. The deadline for past year is April 15th (tax day) of the following year. So you have until April 15th 2007 to make your maximum $4,000 dollar contribution for 2006. So let's say you put $4,000 dollars per year into the Roth once for last year (2006) and then once more for 2007.

$8,000 after 43 years = $830,143.54
Oh yeah.

$8,000 after 46 years = $ 1,147,647.16
You'd hit your first million the year before you retire.

Friends, let's keep in mind that all of these figures are calculated for if you never add a single cent to the IRA for the rest of your life after the initial deposit. As you make more money later in your career, you can continue to put up to $4,000 dollars in every year. Here's the exception. Once you start making over $99,000 dollars per year or $150,000 per year combined with your significant other if you're married, you are no longer eligible to contribute to your Roth IRA. Which is why it is so crucial that you do it now.

Let the power of compound interest, and this amazing gift from the Federal Government benefit you to the greatest of it's abilities. I would not be writing about this were I not doing it myself, nor would I be writing about this if I didn't believe in it and stand behind it 100%.