The Daily Dow
Tuesday, September 30, 1997
by Robert Sheard
LEXINGTON, KY. (Sept. 30, 1997) -- Perhaps the greatest incentive to save for young Americans that I've run across in my adult life is the newly created Roth IRA that will be available beginning in January. Finally, a plan young investors can really profit from -- an easy system for lifetime savings. Now if only Congress will leave it alone in the future rather than mucking it up with more complications...
Here's how the Roth IRA works. Single taxpayers whose Adjusted Gross Income (AGI) is under $95,000 (for couples, the cut-off is $150,000) may invest up to $2,000 per year in the Roth IRA. The contribution is not tax deductible, as some contributions are with a regular IRA (more on that in a second), but the earnings on the Roth IRA contributions are completely tax free as long as you keep the account open a minimum of five years and don't withdraw the money until you are age 59 and a half. (There are three exceptions to this. You can withdraw up to $10,000 for the purchase of a first home or if you become disabled. If you die, your heirs may withdraw the money.)
Let's look at how easy this plan makes retirement planning. If you sock away the $2,000 a year every year for 20 years and manage an 18% return (moderate by Dow Approach standards), you'd have a tax-free nest-egg of $346,000. If you and your spouse are both socking away $2,000 each year at this rate, you'd have almost $700,000. Simple as that. The compounding clown can dance and dance and you'll never have to pay taxes on the earnings. (You've already paid taxes on the $2,000 you invest each year.)
Of course, the earlier you start, the more this plan becomes astounding. The following chart shows how your retirement account would grow by investing $2,000 each year at an annualized rate of 18%. The "married" column is simply twice as much as the "single" column, assuming both you and your spouse invest $2,000 each year.
Years Single Married 20 $346,042 $692,084 30 $1,866,637 $3,733,274 40 $9,825,183 $19,650,366 50 $51,478,901 $102,957,802
That's right, saving only $2,000 a year, which anyone bringing home $20,000 a year or more should be doing, can grow to better than $51 million over a lifetime of savings. (If you start in your early 20s and work to your early 70s, this isn't as far-fetched as it sounds.) But even over 30 or 40 years, the savings growth is wonderful. No one with a job and some time has an excuse for not building a wonderful retirement fund now.
What's wonderful about the new rules is that you can keep adding even past age 70 if you like and can keep the account active in your retirement, pulling out what you need or want each year and still not incurring a tax liability.
The regular IRA is still a useful tool as well, however, for anyone who meets the requirements for deductible contributions. Investing $2,000 in pre-tax dollars gives you a leg-up over the $2,000 after-tax contribution in Roth IRAs, but with the regular IRA, you still have to pay taxes on the entire amount when you begin withdrawing the money at retirement. So if you qualify for deductible contributions, you'll have to do some detailed analysis to see which option is better for your particular tax and salary situation.
So many of us, though, are ineligible for deductible contributions in a regular IRA because of participation in an employer retirement plan, a 401(k), or 403(b). In that case, the Roth IRA is a no-brainer. And if you're relatively young and you already have a regular IRA but discover the Roth IRA is really better for you, you'll be able to roll your regular IRA over into a new Roth IRA by paying the accrued tax liability in your regular IRA.
Don't miss this opportunity, Fools. If you can save $2,000 a year and qualify for a Roth IRA, you have no excuse for not meeting me on the back nine come retirement time. Fool on!
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________
Stock Change Last -------------------- T -1 1/8 44.06 GM + 1/8 66.94 CHV -1 5/16 83.19 MMM + 3/16 92.50
Day Month Year
Day Month Year
FOOL-4 -1.18% 9.68% 16.17%
DJIA -0.58% 4.24% 23.22%
S&P 500 -0.64% 5.31% 27.88%
NASDAQ -0.55% 6.20% 30.57%
Rec'd # Security In At Now Change
1/2/97 153 Chevron 65.00 83.19 27.98%
1/2/97 179 Gen. Motor 55.75 66.94 20.07%
1/2/97 120 3M 83.00 92.50 11.45%
1/2/97 479 AT&T 41.75 44.06 5.54%
Rec'd # Security In At Value Change
1/2/97 153 Chevron 9945.00 12727.69 $2782.69
1/2/97 179 Gen. Motor 9979.25 11981.81 $2002.56
1/2/97 120 3M 9960.00 11100.00 $1140.00
1/2/97 479 AT&T 19998.25 21105.94 $1107.69
CASH $1167.51
TOTAL $58082.95