BOO BOO ON IRA's
My colleague and his friend had asked me about IRA limits for our age and salary levels sometime last week, IIRC. They'd read that the maximum contribution limit between both a traditional and Roth IRA was $4000 annually. I'd read that it was $4000 for *each* type of IRA account.
Man, I was completely wrong! My colleague was right! This is how the IRA formula *should be*:
Annual Roth IRA contribution + Annual Traditional IRA contribution = $4000.
Also, it appears that only those making < $95,000 may legally contribute to Roth IRA's! I really need to read more about this, but what seems to hurt married couples is 1) AMT @ roughly ~$161,000 or so, and 2) apparently married couples can't Roth-IRA-contribute if joint income is around that $160,000 mark.
This whole IRA quagmire is becoming much more complicated than I originally imagined it to be.
Need major sleep. Hopefully, I'll have a better understanding of all this in the next few days.
-------------------------------
OK, one quick thought: How the heck is any average young worker in the US supposed to retire on the $4000 - $5000 / year retirement contribution, even over 30 years? That's only a total of $150K of principal! And, that's not even $150K that had 30 years' worth of investment growth opportunity, either-- only *after* 30 years, is one able to save away $150K.
If a ~10%-interest account was,say, opened with a ~$150K deposit, which then had ~30 years to grow, even so, that's only at most $650K total value after 30 years. This is the best case scenario.
Seldom will be the case that a complete working stiff has $150K to start with, with 30 years of asset appreciation ahead of them, and with the consistent fortitude of earning 10% / year.
2 comments:
I think you might need a better calculator, or at least a look at the effect of compounding over time. A lump sum $150k investment for 30 years at 10% will net you $2.6 million and change. Your yearly $4000 contributions over those same 30 years at 10% will get you $650k and change.
The $64,000 question: would that be enough? Depends on your lifestyle, of course. For some it'd be plenty, for others it'd be gone in a few years.
But there's absolutely nothing stopping you from having retirement funds outside of IRA/401k/etc accounts. They just won't enjoy the same tax advantages that those accounts offer, so you'd need to do a little extra planning for where certain investments would be held.
You're right. My numbers were off. A mental note to myself: never post when exhausted.
Where I erred was hastily yet incorrectly using the rule of 72 to roughly approximate doubling rate of appreciation.
Therefore, my mistake was taking $150,000 x (30 years / (72/10 percent interest)) = $625,000 when the correct way of applying this would've been $150,000 ^ (30 years / (72/10 percent interest)) = around $2.7 million.
There's also a whole host of questions I'm raising in between the lines of my entry. Sure, there's taxable ways of planning retirement savings beyond tax-deferred accounts, but a middle-class earning young couple will likely run into AMT which ransacks their potential savings by means of taxation.
Also, $2.6 million might have sounded more than plenty ten years ago, but due to inflation and CPI increases, could really be just enough for many families. In 30 years, who knows-- $2.6 million might become your children's annual salary. Sounds far-fetched? So did $100,000 / year -- an annual salary which once sounded grand, even just 10 years ago.
Post a Comment