Saturday, March 17, 2007

Tax Returns: Roth IRA

OK, so I just got the first part of my tax return (Federal) directly deposited into my checking account this week. It's a good amount of cash and while I am tempted to go out and spend it all on fab baubles and beads, my conscience (aka Guerilla Father) is telling me to invest it in a Roth IRA. This year the maximum investment for those of us youngsters, aged 49 and below, is $4,000. But I'm no finance expert, read the following article for a better explanation than I could ever provide:

Decision Center
Why you need a Roth IRA -- now!
This account is essential if you are just starting out. Savings grow tax-free and you can invest in almost anything.

By Kiplinger's Personal Finance Magazine

One of the smartest money moves a young person can make is to invest in a Roth IRA. Follow the rules and any money you put into one of these retirement-savings accounts grows absolutely tax free -- you won't owe Uncle Sam a dime as you let your savings accumulate, or when you cash it out in retirement. Plus, an IRA is more flexible than a 401(k) and other retirement plans because you can invest it in almost whatever you want, from stocks and mutual funds to bonds and real estate.

If you haven't yet opened this gift from Uncle Sam, do it now. You have until your tax return deadline -- April 17 this year -- to set up and make contributions for the previous tax year. The government sets a limit on how much you can contribute to a Roth -- currently up to $4,000 annually. That means you can invest $4,000 right now for 2005 and stash another four grand throughout 2006, giving you a solid start to your savings. The contribution limit rises to $5,000 in 2008.

The idea of saving on your taxes may seem a tad obscure, but it really can pay off big. If a 25-year-old contributes $4,000 each year until she retires and makes an average annual return of 8% on her investment, she'll have more than $1.1 million saved by the time she retires at age 65. And the money is all hers -- she won't have to give the IRS a cent of it if she waits until retirement to cash out.

If that same 25-year-old invested that same $4,000 a year in a regular taxable account earning the same 8% return, she'd only have about $802,000 after 40 years if her earnings were taxed at 15%. That's more than one-fourth less money than if she'd gone with the Roth.

No comments: