Think
of the last time you bought something that made you very
happy.
Maybe
a car, a new pair of shoes, the snowblower that kept you
from having a heart attack this winter. Whatever the
item, it gave you instant gratification. You glanced at
it and you smiled to yourself, thinking: "Wasn’t
I smart to get this?"
Now,
I want you to think of another purchase that will make
you smile, but probably not instantly. This one needs to
age — even more than a bottle of scotch. But when it’s
properly aged, it could be even better than getting two
cars for the price of one.
I’m
talking about individual retirement accounts, because
this is the season to indulge in this truly great deal.
If,
for example, you are 30 and put $1,000 into an IRA
before April 15 and invest it in a stock market mutual
fund, it’s likely to turn into about $45,000 by the
time you use it for retirement. In other words, it’s
like seeing this sign in a store: "Get $45,000 for
the price of $1,000."
If
you can somehow come up with the maximum of $5,500, it
could turn into almost $250,000, or if a 30-year-old
stashes away $5,500 a year, it could become about $2.6
million. That’s one great deal.
You
might have heard that there are traditional IRAs and
Roth IRAs and not know which is best for you.
Let
me reassure you: Whether you choose a traditional IRA or
a Roth IRA, you won’t go wrong. Both will grow your
money nicely for retirement because the two accounts are
set up to keep Uncle Sam away from your money during the
years you will be saving. Without having to pay taxes,
the money grows powerfully. That’s unlike savings
accounts and brokerage accounts, which are taxed every
year at tax time, so the sum can’t grow as well as in
an IRA. But if you are undecided, this will help you see
whether an IRA or Roth makes more sense for you.
THE
TRADITIONAL IRA: The traditional IRA is ideal for people
who don’t think they can scrounge up enough money to
save. That’s because each year when you plop money
into the IRA, the government gives you a tax break that
year. So if you put $1,000 into an IRA, in effect it
will cost you only $750 because of the tax break you’ll
get. This assumes you are in the 25 percent tax bracket,
although the tax break could be higher or lower based on
your income.
Make
sure before opening an IRA that your income qualifies
for the tax deduction. If you don’t have a 401(k) or
other retirement savings plan at work, you don’t have
to worry about income limits. If you do, the cutoff is
$69,000 of modified adjusted gross income for singles
and $115,000 for couples. See
.
THE
ROTH IRA: Let’s say you are in the opposite situation
as the person struggling to come up with savings for an
IRA. Your income is solid, and you are looking forward
to it climbing nicely over your lifetime. You are
starting to worry about paying high income taxes down
the road because you know the federal government is
running a massive deficit and is likely to increase
taxes to fund it. Then, the Roth is one sweet deal
because no matter what you accumulate, you won’t have
to pay taxes on it.
People
can open Roth IRAs only if their incomes are below a
certain level: For 2013, that’s $188,000 of modified
adjusted gross income for couples and $127,000 for
singles. So if your income is creeping close to those
levels, make haste and save the maximum $5,500 now —
or $6,500 if you’re over 50.
ROTHS
AND TRADITIONAL IRAS CONTRASTED: Remember, the beauty of
both accounts is that during your working years, you
earn money in either account free of taxes, so the money
can mushroom. The difference comes either on the front
end or the back end of your saving years. With the
traditional IRA, you get a special tax break each year
when you plop money into the IRA. But when you retire,
you have to pay taxes on withdrawals.
With
the Roth, there’s no tax break when you plop money in,
but in retirement you don’t have to share a cent with
Uncle Sam.
To
open either, go to a mutual fund company or brokerage
firm. An easy starter mutual fund would be known as a
"balanced fund."
