The Real Benefit of a Roth IRA in Dollars

The Real Benefit of a Roth IRA in Dollars

Hey Everybody!

I know I just did a post about Roth IRAs, but I didn’t want anyone to think I was against them so I wanted to do a follow-up post.  While I did just prioritize my short term cash over tax savings in retirement, I did so for something that will potentially help me to earn more money for the rest of my life.

In my last post, I went into the tax savings of one year of contributions.  In this one, I want to get into the real benefits in dollars of saving money in a Roth IRA, especially if you are younger.  For the purpose of this exercise, I created a calculator I’ve linked to below, feel free to enter your own circumstances in the orange cells and it will calculate your benefit.

Okay, so you know that I am for retirement savings and believe that the Roth IRA is a valuable tool, but how much can you save.  Let’s look at a scenario:

Susan is 22 and just graduated from college, she is living at home and making good money so she is able to contribute to 401k, but she knows how important saving is so she also wants to max out her Roth IRA.  She decides that on January 1st of every year she will fully fund that years’ Roth with $5,500.  She does this every year until she is 60.  Let’s look at the numbers:

  • Savings: $209,000
  • Interest Earned (5%): $413,023
  • Account Value: $622,023
  • Taxes saved by using the Roth: $103,256

You can see that the Roth is great vehicle to save money in and reduce your tax liability when it is time to access those savings, there are other savings vehicles that are just as good (if not better), and we’ll look into how much pre-tax retirement accounts can save you in the next week or so.

Roth IRA Calculator (Google Docs)

-TRI

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