The best savings vehicle you might not be using
A single $---- contribution into a Roth this year, instead of a taxable investment account, nets you an extra $---- at age 80. This is equivalent to saving an extra $---- this year.
A Roth IRA is a tax-advantaged account for retirement or long-term savings.
A Roth IRA has the following properties:
You generally can't use the money until you're 59 ½ years old, though there are some exceptions if you do need it sooner.
In general, Roth IRA money is money you often want to use LAST when you're in retirement, because it has the best properties for bequest. Learn more about what order you should drawdown accounts in retirement
Learn more about tax-advantaged and tax-deferred accounts.
The primary value of a Roth IRA over a normal investment account is that you don't pay taxes on dividends each year in a Roth IRA (your computed tax rate is ----%), and you don't incur tax costs if you want to rebalance assets.
We estimate you making a single Roth IRA contribution of $xxxx this year is worth $---- to you, just based on the dividend tax savings. You can read about our methodology here
Compare the value of your single Roth IRA contribution vs investing the same money in a normal investment account. Note that this is all in today's dollars!
This doesn't even include the savings from not paying capital gains when you sell your Roth IRA assets.
You can contribute to a Roth IRA if you have earned income.
If you're married, your spouse can contribute to an IRA even if she doesn't work, using your income as hers for this purpose. This is sometimes called a spousal IRA.
Note that you can never contribute more than your total earned income for the year.
Looking at it another way, you can see how much you save cumulatively just from this one Roth IRA contribution in today's dollars
All of these numbers are inflation-adjusted, so the ending value and savings are in today's dollars.
With your higher income, you can still contribute to a Roth IRA, but it's likely you'll need to make what is called a Backdoor Roth IRA contribution.
The key thing to know is you shouldn't have funds in regular IRAs. If you DO have money in regular IRAs, you should roll those funds into a 401k.
Once you've taken care of any money in regular IRAs, you make a standard IRA contribution, then do a "conversion" to Roth IRA.
This article from Physician on Fire does a good job explaining how you do this using Vanguard.
The net effect is the same as making a Roth IRA contribution directly, though it does create a little more hassle. For the savings, it should be well worth it!
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