Roth IRAs
I just sent off checks for my wife and I to contribute to our Roth IRAs for 2006. I’ve been fully funding our Roth IRAs since they were first introduced about 7 or 8 years ago. For those of you unfamiliar with them they give you no current tax advantage, but the earnings will never be taxed, provided you follow the IRA rules about not taking anything out beyond the principle before your are 59 1/2. You can always take out the money you put in with out any penalty, but the earnings will only be tax free if you use them for retirement.
As with most investment things, to really win big you have to start when you are young. In my case I didn’t get started until I was about 35 or so. But I’ve been fully funding for several years now and between my wife and I we are approaching 70K in our Roth accounts. We are invested in the Vanguard S&P500 index fund, this has traditionally returned about 11% so thats ~7K next year tax free for retirement that will compound year after year to hopefully grow to something substantial over the next 20 years so that when we are finally ready to draw on it will be a big chunk. Let’s see assuming an 11% annual return with a 8,000 annual contribution for the next 10 years that amounts to ~650K in constant 2006 dollars when I reach 65 in 2029 if we’re still throwing off 11% that’s 70K of tax free money (constant 2006 dollars again) every year.
I also have a traditional IRA and non-IRA investments to supplement this so that if things don’t go as well as expected I should still be good. One of the great things about a Roth IRA is that it gives you a 3rd kind of account to draw on. By mixing withdrawls from a traditional IRA, roth IRA, and normally taxed accounts each year we should be able to minimize the pain of taxes eating away at our retirement funds in any given year.
Consider a Roth IRA or a Roth 401K, especially if you have kids as your taxes will go up once you can no longer claim them as deductions. Since my wife doesn’t work and we have 2 kids in grade school and a big home deduction we’re in about the lowest tax bracket we will ever be for our income level, this is the best time to Roth. Once the kids are grown we’ll want all those current tax deferals we can get.
April 23rd, 2007 at 4:51 pm
[…] Back in early March, I decided to fund our Roth IRAs for 2007. That’s right, this was not a late funding for 2006, I already did that back in december, this was early funding for 2007. By putting the money to work early we allowed it to begin compounding early. Given how well the market has been doing lately, I wondered how much that decision has been worth. […]