How much of a difference can a ROTH IRA make for you?

How much of a difference can a ROTH IRA make for you?

When you are planning for retirement, you have to try and take advantage of all the tax strategies out there. One of the newest tools is a ROTH IRA account. Much like a traditional IRA, a ROTH IRA lets you contribute over the years. But the difference is that you contribute after tax dollars, which means you don’t pay any taxes when you make withdrawals in the future.

While I don’t think that ROTH IRAs are a one-size-fits-all solution for retirement planning, I don’t see anything wrong with their being PART of your plan. And if you can avoid paying taxes on future withdrawals, then that means you will have a better idea of how much buying power you are really setting aside. 

Here is an interesting paragraph from an article on the subject:

Roth 401(k)s are much like your garden variety 401(k). The big difference is that you contribute after-tax money, not pre-tax dollars like with the standard 401(k). Later in life when you want to tap that Roth money you won't pay income tax on it — not a penny, as long as you've held the account for five years and are 59 ½…

An analysis by T. Rowe Price found that a 30-year-old saving in a Roth 401(k) would have 17 percent more spendable income in retirement even if his pre- and post-retirement tax rates were the same. If his retirement tax rate is 5 percentage points higher, the Roth 401(k) will generate 25 percent more income than the after-tax money from a traditional 401(k). A future tax rate 10 percentage points higher will generate nearly 35 percent more spendable income in retirement compared to the traditional, courtesy of the time factor of tax-free (not tax-deferred) compounding.

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