Late Starters' Journey to Financial Freedom

Personal finance topics including budgeting, saving, shopping, housing, investment and career developement.

Contact US
Categories
Recent Comments
Other things
Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Duis ligula lorem, consequat eget, tristique nec, auctor quis, purus. Vivamus ut sem. Fusce aliquam nunc vitae purus.
Monday, March 19, 2007
Roth IRA, a must-have tax benefit for graduate students and young professionals!
One common enemy on wealth accumulation for busy young fellows is not to start now. A few years ago, I started to work on my financial plan. The first thing I realized was how much I had missed by not using Roth IRA.

IRA is the abbreviation for individual retirement account. There are two types of IRA, traditional IRA and Roth IRA, sharing the same annual quota ($4000 for 2006) set by the Congress. For a traditional IRA account, you take a tax deduction up front for the money you put into the account, the contributions and earnings are not taxed until its distribution after retirement, which is called tax deferment. For a Roth IRA account, you put in after-tax money as contributions, your contributions and earnings grow tax-free even when it is distributed after your retirement.

For young professionals and poor graduate students, Roth IRA is better for the following reasons:
1. You will be likely in a higher tax bracket at your retirement compared to your tax brackets now. Most graduate students on a stipend are in the tax bracket of 15%. Compared to a 25% plus tax bracket with a real salary, Roth IRA is a big saving. Also, if you are an optimist believing in brighter future and higher earnings down the road, or if you are a pessimist believing in increasing Federal tax rates, you should contribute to Roth IRA instead of traditional IRA. Of course, if you are extremely pessimistic and worried about the Congress removing the tax benefits of existing Roth IRA in the future, you probably should store up gold and avoid investing.

2. It is more flexible. You can have early withdraws any time up to the total contributions without penalty. Of course, you won't be able to put them back in later. So it's NOT recommended. However, it was really attractive to me when I started as I was considering graduation and buying a house after getting a job.

3. No mandatory age-based distribution schedule like other tax-deferred retirement accounts. This allows you to manage your income stream after retirement, and enable you to pass all the dough to your descendants even.

4. You contribute more with Roth. Because the quota is applied on your after-tax contributions, $4000 in a Roth IRA is really worth more than the pre-tax $4000 in a traditional IRA. Therefore, it's very attractive to a late-starter who is trying to catch up with the retirement contributions.

Now let's see how much you can accumulate with Roth IRA only. Assuming an annual contribution of $4,000.00 in 2006 and 2007, and $5000 afterwards (the limit will be increased to $5000 in 2008), you will see $1,049,385 in 2041 if the annualized rate of return is 9%. Assuming you start at the age of 30, more than 1 million dollars will be there for you at the age of 65 tax-free. After considering an annual inflation rate of 3%, it's still worth $544,822 of current dollars. Half a million in today's dollar is probably worth more than most people's equity in their house after they have paid off a thirty-year mortgage. Find a soul-mate and do it together? That will be even sweeter!

So if you haven't taken advantage of the Roth IRA, I highly recommend you to do it. The deadline for 2006 contributions is 04/16/2007. You've still got time!

Labels: , , , , ,

posted by Yannick @ 3:07 PM   |

Links to this post:

Create a Link

20 Comments:
  • At March 21, 2007 at 9:34 PM, Blogger Yannick said…

    Roth IRA is certainly my favorite. Just came across the following article on morningstar Tips for Managing Your Roth IRA. I was first surprised to learn that you could claim loss with Roth IRA, however, later found out it can only be claimed when you take out all contributions, which makes it almost never a good decision. The loss can not be carried over.

     
  • At July 20, 2008 at 7:19 AM, Blogger Daniel said…

    Hi, I am a international student from Singapore on an F-1 visa. I am looking into doing investing in the States, but it seems that I'm not eligible to do much in the way of long term interest bearing accounts.

    A Roth IRA is something that I have considered, but since I am still in undergrad studies, I gather that I'll have to wait till I actually find longer term employment in the States before I become eligible to invest in the Roth?

    And if you don't mind, just how can I build up a portfolio in the States as an F-1 student? I don't want to simply leave my money in a deposit account in Bank of America or something.

    Thanks!

     
  • At February 16, 2013 at 10:02 AM, Anonymous Anonymous said…

    Excellent blog here! Also your site loads up very fast! What host are you using?
    Can I get your affiliate link to your host? I wish my site loaded up as fast as yours lol

    Here is my website; gesundheitslexikon

     
  • At February 21, 2013 at 8:39 PM, Anonymous Anonymous said…

    Paragraph writing is also a excitement, if you be acquainted with after that you can write otherwise
    it is complex to write.

    Look at my webpage :: Was ist das besondere an der Diät ohne Gluten

     
  • At March 1, 2013 at 7:39 AM, Anonymous Anonymous said…

    If you want to get much from this piece of writing then you have
    to apply such strategies to your won website.

    Also visit my web page ... high carb diet

     
  • At March 1, 2013 at 1:22 PM, Anonymous Anonymous said…

    It's going to be finish of mine day, but before ending I am reading this wonderful piece of writing to improve my know-how.

    My web-site ... kaufmannische berufe

     
  • At March 1, 2013 at 7:22 PM, Anonymous Anonymous said…

    It's awesome to pay a quick visit this web site and reading the views of all colleagues about this post, while I am also zealous of getting familiarity.

    Feel free to surf to my blog post - gewerbesteuer
    Also see my web site - gebühren steuerberater

     
  • At March 2, 2013 at 8:59 AM, Anonymous Anonymous said…

    I visited several sites however the audio feature for audio songs present at this
    website is really superb.

    Take a look at my web-site ... Thai Massage Wiesbaden empfehlung

     
  • At March 3, 2013 at 11:03 AM, Anonymous Anonymous said…

    Nice response in return of this matter with firm arguments and describing the whole thing about
    that.

    Feel free to surf to my homepage: quick weight loss

     
  • At March 4, 2013 at 4:29 PM, Anonymous Anonymous said…

    Attractive section of content. I just stumbled upon your
    website and in accession capital to assert that I get
    actually enjoyed account your blog posts.
    Any way I'll be subscribing to your augment and even I achievement you access consistently fast.

    Also visit my web-site - getreide gesund oder ungesund

     
  • At March 4, 2013 at 5:19 PM, Anonymous Anonymous said…

    We stumbled over here coming from a different website and thought I
    might as well check things out. I like what I see so now i am following
    you. Look forward to checking out your web page repeatedly.


    Here is my web-site ... Thai Massage Wiesbaden finden

     
  • At March 5, 2013 at 2:00 PM, Anonymous Anonymous said…

    It is in reality a great and useful piece of information.
    I'm happy that you just shared this helpful information with us. Please keep us informed like this. Thanks for sharing.

    Here is my site; wordpress video kurs

     
  • At March 7, 2013 at 7:22 PM, Anonymous Anonymous said…

    Hello to every one, it's really a nice for me to pay a visit this web page, it contains helpful Information.

    Here is my site :: rezepte steinzeitdiät

     
  • At March 8, 2013 at 1:52 AM, Anonymous Anonymous said…

    Howdy! Do you know if they make any plugins to safeguard against
    hackers? I'm kinda paranoid about losing everything I've worked
    hard on. Any tips?

    Here is my blog käufer zahlt nicht was tun

     
  • At March 8, 2013 at 9:24 AM, Anonymous Anonymous said…

    Really no matter if someone doesn't be aware of afterward its up to other visitors that they will help, so here it happens.

    Here is my weblog symphony beach

     
  • At March 8, 2013 at 1:03 PM, Anonymous Anonymous said…

    What i don't understood is in reality how you're not actually a lot more well-appreciated
    than you might be now. You're so intelligent. You understand therefore considerably with regards to this topic, produced me personally believe it from numerous varied angles. Its like women and men are not interested until it is one thing to do with Lady gaga! Your individual stuffs excellent. At all times deal with it up!

    Here is my site ... diets
    My web site: beilagen low carb

     
  • At March 8, 2013 at 2:27 PM, Anonymous Anonymous said…

    Right here is the right web site for anyone who would like to understand this topic.
    You realize so much its almost tough to argue with you
    (not that I really would want to…HaHa). You definitely put a new spin on a topic which has
    been discussed for decades. Excellent stuff, just
    excellent!

    Also visit my web-site - Steinzeit-Diät Erfahrungen

     
  • At March 10, 2013 at 10:36 PM, Anonymous Anonymous said…

    Useful info. Lucky me I discovered your site
    accidentally, and I'm surprised why this twist of fate did not happened in advance! I bookmarked it.

    My web page - wordpress travel themes

     
  • At March 11, 2013 at 5:37 AM, Anonymous Anonymous said…

    I was recommended this blog by my cousin. I am not sure whether this post is
    written by him as nobody else know such detailed about my problem.

    You are wonderful! Thanks!

    Feel free to visit my web blog wordpress installieren

     
  • At May 25, 2013 at 10:18 AM, Anonymous Anonymous said…

    Types of set - some children are naturally inclined towards machines, whilst some
    move towards buildings or a combination of both. In 1947, together with his son Godtfred,
    Kristiansen obtained samples of interlocking plastic bricks produced by Kiddicraft.

    But are you aware that Lego also produce electric toy trains and that they not only have trains,
    but also locomotives, track, rolling stock, train stations, signal houses and a
    whole load of other track side buildings and they all have the logo construction theme running
    through them.

    Feel free to surf to my web blog :: lego spiderman

     
Post a Comment
<< Home
 
About Me

Name: Jacqui
Home:
About Me: I am a 30 something, married woman, no kid yet. My husband and I are late starters, on jobs, on personal finance, on blogging... But we believe that we will catch up!
See my complete profile
 Subscribe to Us
Top Posts
Recent Posts
Archives
Links