It’s never too late or too early to begin putting away money for retirement. The Roth IRA offers a convenient and practical savings tool. This individual retirement account debuted in 1997 with much fanfare regarding its non-penalty withdrawals. And though the Roth restricts the amount you can contribute each year and your taxable compensation has to meet certain requirements -- under $177,00 annually for married couples filing jointly and $120,000 for singles, according to the Internal Revenue Service -- depositing the maximum allowed will deliver returns.
Roth IRA Benefits
The Roth IRA permits maximum contributions of $5,000 each year up to age 50 and $6,000 per year after. You can continue making contributions to your IRA after age 70. Consider opening a Roth account through a brokerage company with low initial funding requirements. Brokerage firms also have the perk of allowing you to invest your Roth funds in securities, mutual funds, exchange traded funds and other instruments. Capital gains taxes apply, but you don’t pay until retirement age. The IRS.gov website outlines all the particulars on the Roth IRA, including taxes, withdrawals, deadlines to contribute and eligibility.
Starting Early: 20-Somethings
As a rule, young investors have time on their side. They can begin with little capital investment and through the power of compound interest, any savings account will expand and grow. Let's invent a 21-year-old who opens an IRA account with an initial deposit of $1,000. Every year she faithfully contributes $5,000. We’ll project a retirement age of 65 and a conservative annual rate of 5 percent. Lastly, we’ll put her in the 15 percent tax bracket. Now, we plug all this information into the IRA calculator at the Bankrate website. Here's the conclusion: At age 65 our 20-something will enjoy a balance in her Roth IRA of $824,715.
Saving in Your 30s
Perhaps saving money was not a top priority for you during your 20s. Now you’ve turned the corner into 30-something-plus land and you’re thinking it’s time to start socking away some cash. Let’s imagine a 31-year-old male posting an initial investment of $2,000. He continues making his maximum contribution until age 65. Let’s also put him in the 25 percent tax bracket. Even starting a little late, and with a 5 percent rate of return, he’ll still amass $479,766.
Get Serious in Your 40s
Investors who plan for retirement in their 40s can still reap the benefits of paying into an individual retirement account. They just need to deploy a disciplined approach. As an example, let’s calculate a 45-year-old, with a starting deposit of $5,000 and maximum yearly contributions to age 65. She’s in a 20 percent tax bracket with a modest 5 percent return. By age 65, she'd have $209,520. Remember that to get the tax-free withdrawal benefit, you need one Roth open for at least five years and you can’t start taking funds until you’re 59 1/2 years old.
Francesca Lee has more than 12 years of experience as a business writer, specializing in personal finance and education. Her articles have appeared online at Wave Newspapers, Turning Point Magazine and Facsnet. Lee studied political science at the University of California, Berkeley.