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How
to make $1 million with an IRA
By
Stephen Chiger
So,
you'd like to be a millionaire? Start planning now, and we guarantee
you can - it just might take a while.
The
Roth Individual Retirement Account, or Roth IRA, will net you
hundreds of thousands of dollars by the time you retire, and the
younger you are when you start it, the more you'll make!
Picking
an IRA:
Though
there are nearly a dozen types of IRAs out there, the Roth is
probably the best choice for a young investor, says H&R Block
Account Service Associate Tim Jansen. The way this particular
account is set up, you'll save the most if you're in a higher
tax bracket when you reach your 60s than you are now. Most of
us are hoping for that, right?
"Personally,
I'm 23 and I've been doing this for three years now," Jansen says.
"I think it's one heck of a deal."
Here's
why it works:
•
When
you put money into a Roth IRA, it accumulates tax free, unlike
the money you have in the bank (see our calculator
in the interactive section if you don't believe me)
•
Though tax-free accumulation doesn't sound like a big deal,
it adds up over the years. Let's say your money accumulates at
10 percent a year. That means it will double about every 7 years.
The younger you start, the more chances your money has to double!
Of
course, you can't just put your entire life savings into this
account. (Nice try, though.)
The
current maximum IRA contribution is $3,000, but it will increase
to $5,000 by 2008. After that, the maximum contribution will adjust
in $500 increments to match inflation.
There's
also a penalty if you withdraw money before you're 59 ½, and there's
a limit on how much you can add each year.
The
Cold Feet Example:
Let's
say you're 20 years old. You put $3,000 in a Roth IRA this year
and never invest again. If your money makes 10 percent return,
you'll have about $192,000 by the time you're 63.
The
Hot to Trot Example:
Alright,
maybe you're little more aggressive than that. Let's say you're
20 now and put in $3,000 this year. And, since you're hot-to-trot,
let's say that you also invest the maximum amount allowed every
year and that your investment makes an average 10 percent return.
You'll have an estimated $3.4 million dollars in your account
by the time you're 65!
The
down side:
Putting
money into a Roth ties it up for a little while. Though you can
always withdraw the original amount that you invested, the penalties
for early withdrawal of your earnings are fairly hefty.
Also,
you might want to check to see if your employer is offering a
more lucrative 401(k) plan before investing here. But even if
they are, it doesn't hurt to have two accounts.
How
to do it:
To
get an IRA started, you'll want to find a discount broker. Pay
close attention to what annual fees they charge, and how much
commission they make when they handle your account. It helps to
shop around.
An
IRA can be invested in any number of things, but if you're an
inexperienced investor, you might want to consider an index fund.
Index funds mirror the general state of the stock market and historically
have made that 10 percent gain that I mentioned earlier.
Ultimately,
you'll want to create an account like this with the careful help
of a financial advisor. No matter what, planning for retirement
now - as far off as it (unfortunately) seems - will payoff big
in the long run.
And
you can take that to the bank.
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