Economics: Today and Tomorrow © 2008

"The Value of a Roth IRA"

Introduction
Individual Retirement Accounts (IRAs) are long-term, tax-sheltered time deposits that provide a way for Americans to save tax dollars when they save for retirement. The Taxpayer Relief Act of 1997 added the Roth IRA, a "back-loaded" IRA, which has many features that investors want. Young people, who may be in a lower tax bracket now than when they're older, find the Roth especially attractive since the taxes they pay on contributions are lower than the taxes they would have paid on withdrawals later. Log onto the Roth IRA Web Site Home Page to read about the Roth IRA and why this investment tool can be a valuable addition to a retirement portfolio.

Destination Title: The Roth IRA Web Site Home Page

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Directions
Start at the Roth IRA Web Site Home Page.

• Scroll through the information, clicking on any topic that you choose.
• Read through the site, taking notes as you go.

1			What kind of investments can comprise a Roth IRA?
2			Who is not eligible to convert or contribute to a Roth IRA?
3			What two requirements must be met in order for distributions from a Roth IRA to be completely tax-free?
4			How does a Roth IRA differ from a conventional IRA, and what does the term "back-loaded" mean?
5			To understand the value of time and the impact of tax-free earnings upon your retirement savings, go to State Farm Insurance's "Traditional vs. Roth IRA Calculator." Type in the retirement age of 60 years, and complete the rest of the blanks as follows: $600.00 yearly contribution, contribute for 20 years, 8% rate of return, and 27% tax rates. Click on the "Calculate" button. How does the total in the Roth IRA compare to that in the traditional IRA? What percent of the traditional IRA is taxable? What does this tell you about the influence that tax-free earnings have upon investment growth?
6			Recalculate the figures with the assumption that you do not start saving until the age of 30, (all other figures stay the same). What happens to your retirement savings? What impact does time have upon your investment? Prepare a brief summary, illustrating how the four figures from your calculations would impact potential retirement savings. The summary should explain the difference between saving now and waiting until you are 30 years old.