Instead of making resolutions for 2010 , how about just making a few smart money moves that will have HUGE impacts on your future. For example , starting a ROTH IRA! You already know you need to start putting asidemore for your retirement (or perhaps you’re one of the millions who need to start putting aside something!) , and there is no time like the present. So here are 10 reasons to start a ROTH IRA in 2010:
1. The sooner you start , the more you’ll have. Let’s start with a no-brainer , the longer you put money aside for retirement , the more money you will have when it’s time to retire (duh). It just takes common sense and simple math to figure that one out. What may surprise you though is the staggering difference in your savings amount for every five years you put off starting a ROTH. Let’s take a nice easy number like $100 per month. Depending on your age when you start , here are your ROTH account balances at age 65 (assuming 8% average interest/year):
Starting Age 20 = $530 ,000 at age 65
Starting Age 25 = $351 ,000 at age 65
Starting Age 30 = $230 ,000 at age 65
Starting Age 40 = $95 ,000 at age 65
Don’t beat yourself up if you’ve been waiting and now you see the impact it’s going to have on your retirement account. There’s helpful news for late-starters in reason number 7.
Starting Age 20 = $530 ,000 at age 65
Starting Age 25 = $351 ,000 at age 65
Starting Age 30 = $230 ,000 at age 65
Starting Age 40 = $95 ,000 at age 65
Don’t beat yourself up if you’ve been waiting and now you see the impact it’s going to have on your retirement account. There’s helpful news for late-starters in reason number 7.
2. Taxes are bad; tax free retirements are good. Taxes obviously play an important part in funding our country’s government and military , but as far as retirement is concerned , taxes are a very bad thing. In fact , taxes are one of the top wealth stealers that individuals face today. Fortunately , ROTH IRAs are completely tax free during retirement because you are using after tax dollars to fund your account. Thanks for the tax break , Uncle Sam! If all of your retirement is sitting in your employer sponsored plan , you need to plan on losing about 1/3rd of your money to taxes when it is time to retire. I know you’ve heard that you’ll be in a lower tax bracket at retirement so you won’t have to pay as much in taxes on your retirement accounts , but here are a couple of things to chew on regarding that little fib people have been feeding you:
1. Taxes have historically gone UP , not down. With trillions of dollars in debt , increased war spending , a new government health plan and the many stimulus programs that need to be repaid it is only logical that everyone’s taxes will go up in the future. Some experts believe top tax rates will reach 45-50% over the next 10-15 years.
2. Assuming tax rates do not go up (highly unlikely) , why would you WANT to be in a lower tax bracket? Being in a lower tax bracket in retirement means you are making less money. Correct me if I’m wrong , but don’t most people want to have the money necessary to travel and live it up during their golden years? Estimates show retirees require 80% of their pre-retirement income just to maintain their current lifestyle , and 100% if they plan on traveling and enjoying new hobbies!
1. Taxes have historically gone UP , not down. With trillions of dollars in debt , increased war spending , a new government health plan and the many stimulus programs that need to be repaid it is only logical that everyone’s taxes will go up in the future. Some experts believe top tax rates will reach 45-50% over the next 10-15 years.
2. Assuming tax rates do not go up (highly unlikely) , why would you WANT to be in a lower tax bracket? Being in a lower tax bracket in retirement means you are making less money. Correct me if I’m wrong , but don’t most people want to have the money necessary to travel and live it up during their golden years? Estimates show retirees require 80% of their pre-retirement income just to maintain their current lifestyle , and 100% if they plan on traveling and enjoying new hobbies!
3. New ROTH rules in 2010 for high earners. Beginning in 2010 , the income restrictions to convert your 401(K) or traditional IRA to a ROTH will be removed thanks to a change in the tax laws passed way back in May of 2006. For the first time ever , individuals who earn more than $100 ,000 per year can take advantage of a ROTH conversion. If you convert an account to a ROTH IRA you must pay taxes on the conversion at your normal tax rate , but for those converting in 2010 you’ll have a special opportunity to spread those taxes over a two year period – 1/2 due in 2011 and 1/2 due in 2012.
4. You have more control over a ROTH than your 401(K). Most employer sponsored retirement plans are very limiting with the investment options; on average there are 15 funds to choose from. In comparison , ROTH IRAs are virtually limitless in where you can invest your money. There are 1 ,000’s of mutual funds , bonds and annuities available in a ROTH IRA , while most employer plans have a maximum of 30 or 40 choices available. When it comes to your money and your investments , options are always a good thing. IF you’re one of the millions who watched their 401(K) become a 201(K) last year , part of the persoalan could have been a lack of alternative investment choices. For example , individuals who made the move the government securities and corporate bonds in 2008 actually saw their account values go up.
5. Penalty free withdrawals for emergencies. Since your ROTH is funded with money you’ve ALREADY paid taxes on , you can access your account in case of an emergency with no penalties or fees (up to your contribution amount). Obviously this should be avoided if at all possible , but if you were 10 years into your contributions and you found yourself out of work for an extended amount of time you would have a safety net within your ROTH IRA to help get you through.
6. Remove the taxes on your savings accounts. If you are setting money aside each month and just keeping it in your savings account or a CD , you’re getting hit with a tax bill on the growth (however small your savings account growth is) at the end of each year. Any interest earned on your bank accounts is reported to the IRS through a 1099 at the end of each year. So if you put $5 ,000 into a savings account and it earned $250 in interest for the year , you would be responsible for taxes on that interest. Contrast that to a ROTH IRA where the same $250 would go untouched , and you’ve just lowered your tax bill ,AND more importantly , allowed your money to continue to grow without being reduced by taxes. It might not seem like a big deal , but over a 30 year period a non-taxable account (like the new ROTH IRA you’re about to start) would have an additional $215 ,000 compared to your TAXABLE savings account and CD’s.
7. Because you’re not young anymore. So you’re no longer a spring chicken , and starting early to allow your retirement account plenty of time to grow is no longer an option (as discussed in number 1). You are allowed a special “catch up” provision if you are age 55 or over to get as much savings into a tax free retirement account as possible. When you were younger , you probably did not have your finances figured out in order to contribute the maximum allowed to your account. However , now that you’re a little bit wiser and a better manager of your money , you can contribute $6 ,000 to your ROTH during 2010. If you’re married , your spouse can do the same. How does that add up for your retirement? I’m glad you asked! If you and your spouse each put away your maximum allowed limit , you could have almost $200 ,000 waiting for you at age 65 and $250 ,000 if you wait until age 67 (assuming 8% average interest per year).
8. It’s easier than working after retirement. Let’s face it , for most people the thought of giving up money that you could be spending now is a tough decision (especially in a struggling economy). But i promise you giving up a little money now is a whole lot easier than trying to live for 30 years in your retirement WITHOUT the money you’re setting aside! The next time you are in McDonalds and a 70 year-old takes your order , ask him if he’s there because he wants to be , or because he HAS to be. Statistics show that a surprisingly small number of retirees have enough set aside to meet their income needs. In fact , the average retiree has has to live on just 58% of their pre-retirement income due to a lack of savings. Unless downgrading your retirement and giving up your golden years for working at the golden arches sounds like a good idea , a ROTH IRA is your easier choice.
9. No required minimum distributions. All traditional IRAs and employer sponsored plans (ie. your 401(K)) have required minimum distributions that begin at age 70 1/2 , even if you don’t need the money. You see , Uncle Sam needs to to retire too , and taxing your retirement account is how the IRS is planning to fund their retirement. ROTH IRAs do not have a minimum required distribution , so if you do not need to use the money you are free to leave them in the ROTH forever. If you only need a small amount , there are no rules requiring you to take more than you need.
10. Because ROTHs make you more attractive to the opposite sex. O.k. , I threw this one in to make sure you were paying attention. Although a ROTH may not make you more attractive , having a plan for retirement and the ability to be a financial contributor will probably make you a more appealing catch. After all , when was the last time you heard someone say “wow , I hope I can meet and marry someone who will be broke when they retire so we can both stay home , skip out on traveling , give up our hobbies and struggle for 30 years.”? Yeah , it’s been awhile since I’ve heard it too!
Enough talking , it’s time for action! Get a hold of your financial advisor today and make an appointment to start your ROTH. In less than 30 minutes you’ll have an account you can set on auto-pilot that will make your retirement better and brighter. There is not time like the present to get it done.