It’s that time of year once again. While tax season can bring a great deal of anxiety, there are some things you can do to make it pay off for you.
One of them is to open a Roth IRA, which is a little different than a standard IRA. The crucial distinction is that contributions to standard IRAs are pre-tax, while Roth IRA contributions are after tax. There are a few other differences with regard to withdrawals, but rather than focus on all of that, let us look at 4 reasons you must consider funding a Roth Individual Retirement Account this year.
You Can Double Your Annual Contribution
If you open a Roth IRA by April 15, you get a wonderful opportunity – you are still allowed to make a contribution for the previous (2013) tax year.
The most you can contribute in 2013, depending on your income and declaring status, is $5,500 if you are 49 years old or more youthful in 2013. However if you are 50 years of ages or older in 2013, then you are enabled to contribute an extra $1,000, bringing your total to $6,500.
But that’s just for 2013.
In 2014, you can contribute another $5,500 if you are 49 years of ages or more youthful in 2014. Likewise, if you are 50 years old or older in 2014, then you are allowed to contribute an added $1,000 – once again bringing your total amount to $6,500. (Check out the IRS page for more details on contribution limits.)
This implies that this year, you can possibly put a total amount of $13,000 towards your Roth IRA to develop a financially secure retirement.
Do not think that the additional $5,500 for 2013 will make a huge distinction?
If you put the $5,500 in a financial investment that grows 7 % each year, then in 30 years it will be worth over $41,800. Most importantly, if you obey the policies in withdrawing the cash, you get to remain all of it and will not have to pay any taxes.
What could you do with an extra $41,800?
You’ll Have Better Financial investment Options
A great deal of people have employer-sponsored retirement plans, such as a 401(k). Many, nonetheless, grumble that the investment fund options offered to them are bad. Specifically, these funds tend to have high cost ratios, which are the charges that go toward managing the fund.
Even though all funds have these costs, they tend to be much higher in company plans. With a Roth IRA, on the other hand, you can invest with a business that offers funds with much lower costs.
For instance, it’s not uncommon that funds from employer plans cost around 0.9 % each year. If you open a Roth Individual Retirement Account, however, you can invest with a company that provides funds that cost about 0.2 % each year.
That small amount makes a big distinction with time.
Let us state you invest $5,500 each year in a fund that grows by 7 % each year. If the fund costs 0.9 %, in 30 years you’ll have just under $439,000. That’s fair.
On the other hand, what if you invest in a lower-cost fund? If you invest $5,500 each year in a fund that grows by 7 % each year, but that fund costs just 0.2 %, then in 30 years you’ll has more than $499,000.
In other words, a distinction of over $60,000. Just how much would it hurt you to lose $60,000?
You’ll Have Tax-Free Money
With a Roth IRA, you contribute money that’s already been taxed. But if you follow the withdrawal policies (the main one being to wait up until you are 59 ½ years of ages), then you get a big benefit. That advantage is the pleasure of spending the cash – consisting of the cash earned by means of financial investments – without paying taxes.
Let us state you invest $5,500 in a routine, taxable financial investment account each year, and your money grows by 7 % each year. If you are in the 25 % tax bracket, in 30 years you’ll have just under $402,000.
But if you contribute $5,500 in a Roth IRA each year, and your cash grows by 7 % each year, in 30 years you’ll has more than $555,000. (Have a look at this calculator to run your very own numbers.)
In other words, taxes would eat up over $154,000 of your retirement money.
You’ll Have Emergency Access to Your Money
Lastly, your contributions (that is, the money that you put into your Roth) can be gotten at any time, free of taxes and penalties. This isn’t real, nonetheless, of earnings on your contributions, which have more intricate guidelines.
Of course, because this a retirement account, you must only do this in case of a real emergency. But it’s good to understand that some of your money is available if you actually need it. This isn’t the case for most other retirement investments you can put your money in.
Remember, tax time doesn’t need to be connected only with stress. With opening a Roth Individual Retirement Account, there’s a bright side to the season.
What other reasons for opening a Roth IRA can you think of?