Ask Harry: In this case, Roth IRA has edge

DEAR HARRY: For a number of reasons, I chose not to go to college. I have had a few jobs since I was graduated from high school five years ago. My latest one is just made for me. I'm doing what I love, and my bosses like me. There's even a promotion that I should get at the end of the year when my immediate supervisor retires. Meantime, my salary for this year will be $30,000. Since I am single, my father has been urging me to use some of my savings to get an IRA. Is it better for me to get a Roth IRA or a regular IRA?

WHAT HARRY SAYS: For a youngster like you, thinking of your long-term future is wonderful. Living beneath your means is the way to a secure future. Let me assume some numbers and see how we come out: that you're able to put aside $4,000 a year, the interest rate on your investment will average 4 percent and you have 40 years to retirement. At your present tax bracket of 15 percent, a contribution to a regular IRA will save you $600 a year, which you presumably invest elsewhere.

In 40 years you'll have $380,100 in the IRA and $57,000 from the investment of the tax saving. The IRA money will then be taxable. In the Roth deal, there is no current deduction, so we'll have only the $4,000 to accumulate to that $380,100, but withdrawals will be tax-free. If the tax rates at withdrawal time are still 15 percent (very unlikely), your net will still be the $380,100. With the regular IRA, your net from the IRA after taxes will be $375,135 (85 percent of [$380,100 + $33,000 interest on the $57,000] plus the $24,000 investment). Assume higher taxes in the future, and the Roth has an even greater advantage.


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