Roth vs Traditional
Picking where to stash your retirement money for the best tax-advantaged growth
[updated December 24, 2019]
Are you setting aside money for your retirement? One of the most powerful ways to save for retirement is the Roth IRA (and its 401K cousin, the Roth Account). Every year you can set aside a fixed amount: $6,000 this year (2020) or $7,000 for those age 50 and older. This amount grows tax-free until you need it, sometime after age 59½.
The magic part comes with compounding over a long long time. With compounding, you make not only interest but interest on your interest. The earlier you start, the better the compounding. This is also referred to as the Time Value of Money. In your twenties and thirties, retirement may seem like a long way off (especially if you are still struggling to pay off those college loans!), but even a small amount set aside can pay big later
How to make (almost) a cool million
Let’s say you set aside $6000 every year for 30 years and are a “moderate” investor making around a 6% annual return. To calculate compounding google “amortization calculator” or “time value of money calculator” or go old school and pull out your Hewlett-Packard scientific calculator. You’ll be calculating the “Future Value” (FV)…
