A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Monday, October 18, 2004

The Beauty of the Roth IRA

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

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