It's been around for more than a decade. But if you don't use it, you lose it -- and the savings are too good to miss.
The Roth IRA first came into being back in 1998, and plenty of investors have taken advantage of its unique characteristics to help them save for retirement. Although the amount of money in traditional IRA and 401(k) plans still dwarfs what people have in Roth IRAs, Roth IRAs enjoy something those other plans can't offer: completely tax-free growth.
A novel concept
Back when it was first introduced, the whole idea behind the Roth IRA was completely new. There were plenty of different ways the tax laws allowed people to save for retirement, but they were all based on the concept of deferred compensation -- you set money aside during one year for use in a later year. For tax purposes, the laws followed that concept, too. The benefit was that you wouldn't have to pay tax in the year you set aside the money; instead, you deferred the tax until the year you actually used it.
There's no denying that tax deferral is a valuable benefit in retirement saving. The Roth IRA, however, went one step better by providing tax elimination. Granted, it comes at a cost: You don't get the valuable tax deduction that so many IRA and 401(k) participants count on. But by giving up that one-time benefit, you earn a lifetime exemption from taxes on that money.
Still going strong
After more than 10 years, investors are starting to see some of the benefits of tax-free treatment for Roth IRAs. Back in 1998, you could contribute only $2,000 a year to your Roth IRA. But as you can see below, a decade of investment could have turned that $2,000 into a lot more, even after the losses from the bear market.
|
Stock
|
$2,000 in 1998
Is Now Worth
|
Potential Tax Avoided
Over Traditional IRA
|
|
Chico's FAS (NYSE: CHS )
|
$43,742
|
$15,310
|
|
Apple (Nasdaq: AAPL )
|
$36,676
|
$12,837
|
|
BHPBilliton (NYSE: BHP )
|
$30,045
|
$10,516
|
|
Adobe Systems (Nasdaq: ADBE )
|
$19,779
|
$6,923
|
|
Kinder Morgan Energy Partners (NYSE: KMP )
|
$14,082
|
$4,929
|
|
Amazon.com (Nasdaq: AMZN )
|
$13,226
|
$4,629
|
|
Starbucks (Nasdaq: SBUX )
|
$9,960
|
$3,486
|
Source: Yahoo! Finance. Returns as of Sept. 10. Assumes 35% tax on traditional IRA withdrawals.
And that's just the tip of the iceberg. Unlike traditional IRAs, Roth IRAs never force you to start taking withdrawals, no matter how old you are. That means that it's entirely up to you how much you take -- and how much you leave to grow inside your Roth IRA, for decades to come.
Double your fun
If you haven't made a Roth IRA contribution for 2009 yet, you have plenty of time -- but there's really no reason to wait. This year, you can contribute up to $5,000 -- more than double the original amount in 1998 -- to a Roth. In subsequent years, that limit will be indexed for inflation, further multiplying the potential savings. And if you're 50 or older, you can add another $1,000 on top of that limit.
So don't let another year go by without capitalizing on a great way to save toward retirement. In just a decade, the Roth IRA has revolutionized retirement savings -- and with everything the Roth has going for it, you can't afford to lose another opportunity.
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