Twenty years ago the Roth IRA was born, as a product of the Taxpayer Relief Act of 1997. Unlike traditional IRAs, you don’t get a tax deduction for your contribution to a Roth IRA. But all the money in the account, including gains, can be withdrawn tax-free at retirement. (And unlike traditional IRAs, there is no rule requiring withdrawals at age 70-1/2, so you can pass on this money to your beneficiaries if you don’t need to use it.)
If only you had jumped in to a Roth IRA at the beginning, you would have a small-tax free fortune today!
Here’s the hypothetical result if you were to contribute $5,000 every year for the next 20 years. If you earned the average stock market historical return (S&P 500) of roughly 10 percent per year, with dividends reinvested, in 20 years your Roth IRA would be worth $312,000.
Note: When Roth IRAs first became available in 1998, you could invest only $2,000 a year, but that limit was gradually raised to the current $5,500 — unless you are age 50 or older, in which case you can contribute $6,500 each year.
Now, the only question is where you will find the money to invest over the next 20 years. In hindsight, you can certainly see the opportunities that you missed in the past. Was that vacation worth the money, or would it have been more rewarding invested in a Roth IRA? That closet of outdated clothes? The fashion handbag that you simply had to have? All consumed your future!
Or start with your paycheck stub. There’s a little box with a big deduction marked FICA. It stands for Federal Insurance Contributions Act — better known as Social Security. With every paycheck you’re making a rather large contribution to the Social Security checks now being paid to baby boomers.
It’s not an optional “contribution.” This is money taken out of your paycheck — before you see it and spend it. In 2018, you will contribute a maximum amount of $7,960.80 to Social Security (and Medicare) — up to $128,700 of earnings. And, sorry to report, millennials and younger workers are likely to see very little of value from those contributions.
But the point is clear. You’ve already “found” a way to contribute quite a lot of money to the future — of others. Don’t you think you owe it to yourself to make an equal contribution in your own Roth IRA?
The secret is that automatic feature, where it never becomes a savings-vs.-spending decision. And you can do that with a Roth IRA, simply by going to a place like Vanguard.com or Fidelity.com (or calling their toll-free numbers 1-800-VANGUARD or 1-800-FIDELITY) and opening your own Roth IRA in their S&P 500 stock index fund. The process is a simple one. You give them your banking information and direct them to automatically debit your checking account every month and put it into the stock index fund.
Then, don’t look! Yes, the stock market will have its ups and downs. Just stick to the plan. Your Roth IRA is designed to grow over time, and you won’t be using it until retirement. It’s a good bet that your Roth IRA account will come out ahead of your Social Security contributions in the long run!
There are some contribution limitations for a Roth IRA. First, the money to be contributed must come out of “earned income” — not out of dividends or pension payments. Second, you must fall within certain income limits.
If you are married, filing jointly, for 2018 the combined income limit before the contribution phases out is $189,900. And if you are single, you can only make the full $5,500 contribution ($6,500, if 50 or older) if you earn less than $120,000. You can find all the details and rules for opening and contributing to a Roth IRA at www.RothIRA.com.
Now, all you must do is ask yourself: Won’t my life be better with a tax-free Roth IRA retirement account instead of depending on Social Security? The answer is YES. And that’s The Savage Truth.