En-Rothen Your IRA

IRAs can seem intimidating, but fear not, Fools -- whether you choose a Roth or traditional-flavored IRA, they're a great way to save for your retirement.

In my opinion, Roth IRAs make more sense for most people. Sure, traditional IRAs reduce your taxable income up front with every contribution, but you'll have to pay taxes on whatever money you eventually withdraw. In contrast, Roth IRAs give you no immediate tax break, but when you finally do withdraw those funds, in most cases the IRS won't be able to touch a dime of them.

The table below shows how your money would have grown in a select set of stocks over the past decade, including the recent stock market plunge:

Company

10-year avg. annual growth rate

In 10 years, $10,000 became:

Nike (NYSE: NKE  )

10.1%

$26,200

ExxonMobil (NYSE: XOM  )

9.5%

$24,900

Eaton Vance (NYSE: EV  )

15.2%

$41,300

Fastenal (Nasdaq: FAST  )

14.9%

$40,100

Landstar (Nasdaq: LSTR  )

22.6%

$76,900

If you'd held those Fastenal shares in a Traditional IRA, and you were in a 25% tax bracket when you withdrew the funds, you'd keep $36,000, sending a full $12,000 to Uncle Sam. With a Roth IRA, you'd get to keep it all. Nice, eh?

A conversion opportunity
Many of us already have traditional IRAs, some of which are quite hefty after years of growth. If you've long wished your traditional IRA were a Roth, you may be able to transform it via a conversion. If you qualify, you can turn it into a Roth by paying taxes on the converted amount. That's seemed problematic to many people -- if your IRA is worth $100,000, you could be looking at a whopping tax bill.

Fortunately, the stock market has paused in its pesky upward march, deciding instead to plunge a little -- and giving you a great opportunity. If your $100,000 traditional IRA is now worth $60,000, you're facing a significantly lower tax hit upon conversion. So think about it. You can learn more in this article and this one. Visit our Tax Center, too.

For detailed guidance on retirement planning, test-drive, for free, our Rule Your Retirement newsletter service. A free trial will give you full access to all past issues. It regularly offers recommendations of promising stocks and mutual funds, too.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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  • Report this Comment On January 14, 2009, at 11:09 AM, davidkubica1 wrote:

    Most IRAs can also be better diversified by putting your money into more asset classes. Investing 10% - 20% of your funds into managed futures accounts is a great example of this and is highly recommended by investment advisors. Most people when you ask them about investments will simply focus on the big 3: stocks, bonds, and cash. It is because this is all they know. I would recommend looking into researching managed futures if you would like to better diversify.

    If you are interested in managed futures, you can try www.managedfuturesdepot.com. They usually have some pretty good programs that they offer. This one: http://www.managedfuturesdepot.com/NDXShadrach1108.pdf had a return in 2008 of over 128% and has averaged a monthly return of over 8% since its inception 5 years ago. The nice thing about these performance sheets is that you know they are authentic. Managed futures returns are regulated vigorously by the CFTC and are all stated NET OF EXPENSES.

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