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.
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