Imagine saving the maximum into a Roth IRA of $5500/year ($458/month) from age 25 to age 60, successfully saving $192,500. Now imagine that the account was invested and earned an average of 8 percent annually… that account would have grown to $1,023,563. Wow, that is $831,063 more than you invested, and it is all tax-free in retirement!

Why investing tax-free could be a big advantage when you retire.
It seems an undeniable fact that our government will have to finance severely underfunded Social Welfare programs of Medicare, Medicaid, Social Security, etc. in our future. If we are in historically low tax brackets now, and the government has to fund these burgeoning programs along with the annual and overall budget deficits…where do we think future tax brackets will be? It may be better to earn our wages now, pay the taxes and then fully fund a Roth IRA with the savings. We will grow money until we are at least 59 and a half, then have the ability to distribute the money as tax-free income in retirement!

Who is eligible to fund a Roth IRA?
This plan is not available to individuals or couples who make too much annual income. For 2013, you can contribute up to $5,500 to a Roth IRA ($6,500 if you are age 50 or older by the end of the year) if you are single or the single head of a household and your modified adjusted gross income (MAGI) is less that $112,000. Or, if you are married filing jointly, you can contribute the max if your income is less than $178,000. Non-working spouses can contribute the max as long as the working spouse earns enough to contribute to both accounts, and that they are below the income limits above. Ideally, a married couple can contribute $5,500 each (even if only one spouse works), and you have now doubled the $1,023,563 result above, again tax-free!

So, I just showed you a way to potentially have $2 million in retirement savings… but even if you are not this young, or cannot save this much, the principal and advantage of investing into a Roth IRA should motivate you to open this account up and start to fund it.

Should I fund my 401k plan first?
I do recommend you participate in your 401k/403b or other sponsored plan… if they provide a match of at least 33 percent on your contributions. So, for example, if your employer will match 50 cents on every dollar you invest up to 5 percent of your salary, then you should sign up for the 5 percent contribution… but don’t do any more. That is when you use your potential savings toward the Roth IRA because Roth eligibility is not affected by coverage by an employer plan… so you can do both! If your employer offers a 401k, but no match, you should strongly consider fully funding a Roth IRA for you and your spouse first before starting to fund the 401k.

How do I start a Roth IRA?
Many financial institutions offer Roth IRAs. Dave Ramsey recommends using an experienced financial advisor to help you set up the account, choose the right investment for your risk profile and help you review and monitor the account. A financial advisor will also help you assess the rest of your financial planning from budgeting, insurance, planning for college and making prudent financial decisions in multiple areas of your life. So use a professional planner if you would like help with the Roth IRA.

If you have not thought about a Roth IRA before now, it is to your advantage to do so. Remember you can still fund a Roth IRA for last year ($5,000 or $6,000 if you were age 50 or older) until April 15th of 2013, and those funds will be there the longest to grow and earn. Each year you wait before deciding to contribute to a Roth IRA, you will have less money in your retirement. With the tax and other benefits of a Roth IRA, it is well worth your efforts to start one today.

Please call Jeff if you would like counsel on how to set up a Roth IRA. Jeffery Masters, President of Jeffery W. Masters & Associates Securities offered through LPL Financial, member FINRA/SIPC Investment Advise offered through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Jeffery W. Masters & Associates are not affiliated with LPL Financial. Jeff is a Locally Endorsed Investment Advisor by Dave Ramsey. Email Jeff at: [email protected].