Investment Tip

Whether a Roth IRA or a Regular IRA has the Most Advantage to You

Contributions to Roth IRAs are made with after tax dollars and you will owe no further taxes on your original investment or the money that grows from it-IF you leave it invested for at least five years. Regular IRA contributions are made with pre-tax dollars, which makes them easier to fund now but you WILL pay taxes when you begin to draw the money out later. Let's see what the difference would be in the amount of money available to you for your use.

The example below uses a monthly investment figure of $200 which most of us could probably manage without destroying our life style too much. It also uses the long term average return (10%) from stock market investment and a long time frame (50 years) for the purpose of magnifying the difference between the two types of IRAs. We'll start with two people who are both 22 years old who invest $200 per month and leave the money invested until age 72 at which point the law requires a person to begin drawing out IRA funds.

• Both people will have an ending balance of $2,793,000 at retirement.
• Assuming a 25% federal income tax rate for both:
  • The person with the Roth IRA will have paid a total of $40,000 in taxes and will have the whole $2,793,000 available for his or her use in retirement.
  • The person with the Regular IRA will have to pay $698,250 to the Internal Revenue Service (paid out as the money is withdrawn) leaving 2,094,750 for funding retirement.
• In this example, the Roth IRA is nearly three quarter of a million dollars better.
• So, in my view, everyone ought to fully fund Roth IRAs for self and spouse before funding Regular IRAs.