February 20, 2008
Wouldn't we all love to discover a surefire way to get wealthy? Investing in a Roth IRA when you're still a teenager might be the closest thing to it.
Here are some ground rules to understand:
- With Roth IRAs, you invest post-tax money and get no up-front tax break. But when you eventually withdraw your money, typically after age 59 1/2, it will be tax-free. So if you invest $10,000 in Target (NYSE: TGT ) in a Roth IRA, and over the coming 20 years, it grows at 12.4% -- the rate at which it grew, on average, over the past decade -- you'll end up with more than $103,000. If it were taxed at, say, 15%, you'd be forking over more than $15,000 to Uncle Sam. Since it's a Roth IRA, you'll keep all your money.
- You can sock money away in a Roth IRA, as long as you're doing so with earned income. Age does not matter. So if you earn $2,000 per year as a 13-year-old newspaper deliverer, you can contribute as much as $2,000 to your Roth IRA.
- As long as you meet certain income requirements, you can contribute as much as $4,000 for 2007 and $5,000 for 2008 into a Roth IRA. (If you're 50 or older, you can tack $1,000 onto those limits.)
Roth IRAs can be very, very powerful -- especially for young people. That's because time is on their side. Remember your simple little $2,000 contribution as a 13-year-old? Well, if you leave that money in your IRA and it grows at just the market's average of 10% annually, it will turn into $284,000 by the time you're 65. Just imagine what you'll end up with if you sock away money at age 14, 15, and 16, too ... It's hard not to grow wealthy if you have this kind of time.
And that's if you only get the market's average return. Many companies have done better. Companies like Qualcomm (Nasdaq: QCOM ) , Monsanto (NYSE: MON ) , Amgen (Nasdaq: AMGN ) , and Caterpillar (NYSE: CAT ) have all advanced at a better-than-10% clip for years.
Learn much more about IRAs in our IRA Center. And for lots of tips on retiring well, I encourage you to take advantage of a free 30-day trial of our Rule Your Retirement newsletter service.
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