If you're looking for ways to boost your retirement savings, there are lots of them. For example:
- Start saving and investing early.
- Get out of high-interest-rate debt before investing for retirement.
- Aim to delay starting to collect your Social Security (thereby making your checks bigger).
- Try not to borrow from retirement accounts.
Image source: Getty Images.
Here's a retirement savings move I think is particularly powerful: Make good use of a Roth IRA.
What's so great about it? Whereas traditional IRAs and 401(k)s give you an upfront tax break, shrinking your upcoming tax bill, Roth IRAs and Roth 401(k)s accept post-tax dollars and offer you a back-end tax break. If you follow the rules, you can withdraw money from your Roth account in retirement tax-free.
The table below shows how much you might amass over time and demonstrates how effective it is to start early, giving your money lots of time to grow:
|
Growing at 8% for: |
$6,000 Invested Annually |
$12,000 Invested Annually |
|---|---|---|
|
5 years |
$38,016 |
$76,032 |
|
10 years |
$93,873 |
$187,746 |
|
15 years |
$175,946 |
$351,892 |
|
20 years |
$296,538 |
$593,076 |
|
25 years |
$473,726 |
$947,452 |
|
30 years |
$734,075 |
$1,468,150 |
|
35 years |
$1,116,613 |
$2,233,226 |
|
40 years |
$1,678,686 |
$3,357,372 |
Calculations and chart by author.
Returning to your new friend the Roth account, revisit the table above and imagine that you amassed $600,000 in your account over 20 years. If it was in a traditional IRA or 401(k), you'd likely be taxed on withdrawals at your ordinary income tax rate. So withdrawing $20,000 in one year might get you a 22% tax hit, costing you $4,400. And that's just for one year.
With a Roth account, that $20,000 withdrawal could cost you... $0.
Yes, you forego upfront tax breaks with Roth accounts, but come retirement, when every dollar may be more precious, it should feel pretty good not paying taxes on all that you amassed in your account.
