# Roth-like ways to save for retirement

summertime2006July 14, 2007

I'm self employed and I do not make a lot of money.

Since I'm in a low tax bracket paying taxes now and then not having to pay them ever again is ideal for me.

But I'm limited to just \$4,000 per year that I can put into a Roth.

Just wondering if anyone knew if there is any other options for someone self employed to save additional money on top of a Roth IRA for retirement. With the same idea as a Roth IRA of pay taxes now and never again?

Thanks

Jim

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juneroses Z9a Cntrl Fl

Jim: I thought as you do - Roth my retirement funds now and forget about future taxes. And I did do that for several years. Then I did a spreadsheet to play with how much I would be ahead. I was shocked to find that it was better NOT to Roth now.

For example:

Assume you have \$5,000 per year to invest in some way
Assume any investment realizes 12% gain each year
Assume your current tax rate is 15%
Assume at the end of 30 years you pay taxes on all tax deferred funds
Assume your tax rate after 30 years is 35%

For simplicity, IÂve applied calculations to year end totals only

Tax-deferred account: If you put \$5,000 at the end of each year into a tax deferred account for 30 years, at the end of 30 years youÂll have \$1,206,663 (remember, at the end of year one you had just put \$5,000 into the fund, so you didnÂt have any cap gains for that year). After 30 years, when you pay taxes of 35%, you have a net of \$784,331.

Roth account: With the same \$5,000 to invest each year, \$4250 of that money actually goes into the Roth account, and the \$750 difference pays the taxes. At the end of 30 years, your Roth balance, which is tax free, is \$666,682.

Net: You have a larger nest egg (\$117,650 more) after taxes are paid, by having put your funds in a tax deferred account.

IÂve played with various annual contributions and tax rates. The net results always favor making yearly contributions to a tax deferred account and paying taxes "later", even if the tax rates then are higher. ItÂs the power of compounding.

Google "retirement calculators" and youÂll find many sites that let you play "what-if". DonÂt forget to consider that when you make a Roth contribution, you essentially pay income tax on that money now. The capital gains and compound growth you might otherwise realize on those dollars paid in taxes is a "cost" to you.

June

August 24, 2007 at 10:28PM
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juneroses Z9a Cntrl Fl

Jim: PLEASE IGNORE MY EARLIER POST. I believe there is a glitch in my spreadsheet.

My apologies to all - June

September 2, 2007 at 2:54PM
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