Younger people have an advantage when investing in a Roth individual retirement account (IRA) over older Americans who have not taken advantage of this retirement opportunity. (By the way, you don't have to be an American citizen to set up a Roth IRA, but the funds you contribute to a Roth IRA must be earned from United States employment. If you're not an American citizen, you must meet certain guidelines to participate in a Roth IRA.) Think about it-- a 25-year-old can contribute a maximum of $5,000 annually to a Roth IRA. This has the potential to grow significantly over the years. If that same 25-year-old only invested $5,000 one time and made 8 percent annually on the money, he or she would have $7,346.63 after 5 years. Here is what the money would look like over a 10-year period of earning percent interest on an initial investment of $5,000:
$5,000.00 @ 8.0% = $5,400.00 $5,400.00 @ 8.0% = $5,832.00 $5,832.00 @ 8.0% = $6,298.56 $6,298.56 @ 8.0% = $6,802.44 $6,802.44 @ 8.0% = $7,346.63 $7,346.63 @ 8.0% = $7,934.36 $7,934.36 @ 8.0% = $8,569.11 $8,569.11 @ 8.0% = $9,254.64 $9,254.64 @ 8.0% = $9,995.01 $9,995.01 @ 8.0% = $10,794.61
It seems simple, doesn't it? Imagine how much that initial $5,000 investment will make over the 34 years it will take to reach maturity. Oh, the power of compounded interest!
This is not to say that senior Americans don't benefit from contributing to a Roth IRA-- they certainly do. In fact, Americans who are at least 50 years old can contribute $6,000 annually to a Roth IRA as opposed to the $5,000 contribution limit for those who are under the age of 50. Let's look at the same scenario for someone who is 50 years of age. This person contributes $6,000 to a Roth IRA one time, and at an 8 percent rate of return this is what it looks like over a 10-year period:
$6,000.00 @ 8.0% = $6,480.00 $6,480.00 @ 8.0% = $6,998.40 $6,998.40 @ 8.0% = $7,558.27 $7,558.27 @ 8.0% = $8,162.93 $8,162.93 @ 8.0% = $8,815.96 $8,815.96 @ 8.0% = $9,521.24 $9,521.24 @ 8.0% = $10,282.93 $10,282.93 @ 8.0% = $11,105.56 $11,105.56 @ 8.0% = $11,994.00 $11,994.00 @ 8.0% = $12,953.52
The initial investment more than doubles! Chances are this is not enough for anyone to retire on alone, but if that same 50-year-old contributed $6,000 every year for 10 years, there would be a substantial amount of money available.
Another benefit of contributing to a Roth IRA is that there's no mandatory withdrawal date. This is very important when looking at investment options for yourself. Most retirement investment programs require you to begin making withdrawals on your investment when you reach 70 ½ years of age. The Roth IRA has no such requirement. In fact, you can contribute to your Roth IRA with no intention of ever making withdrawals, and your beneficiaries can inherit the account with no penalties attached. Just imagine how much the 25-year-old's initial $5,000 Roth IRA investment would have grown after 60 years of earning potential. Try out this Roth IRA calculator to learn more.