Many people with lower incomes believe that is impossible for them to become wealthy and live a decent retirement. Becoming wealthy and living well only seems to happen to those who have the best jobs – professional athletes, corporate executives, and maybe those who win the lottery. But, using the power of time and a wise and consistent contribution to a type of retirement account, called a Roth IRA, one can easily retire with all the money he or she needs and plenty of extra dollars to use for whatever he or she desires.
Basically, if one saves about $3,000 per year beginning after college and does not touch the money for forty years, and assuming the money grows at a market average of 10% per year, he or she can expect to retire with approximately $1.46 million if he or she retired at the end of the forty year mark and did nothing else to produce income for the rest of his or her retirement! This is more than enough money, and if one is wise about the way he or she spends money during his or her lifetime, $3,000 per year is a very reasonable and easy amount to save, and one will have plenty of money to provide for all the other needs and costs of life. Using the power of time through compounding investments is the surest way to financial freedom.
The reasons that a Roth IRA is best to use are many. The first, and most important reason, is that Roth IRA contributions are made on an “after-tax” basis, which means that all the dollars that go into a Roth IRA are retained by the person making the contribution. Further, one is not required to withdraw from a Roth IRA at any point, and when one does make withdrawals, the money that is withdrawn is done so tax-free! Contributions can also be made at any age, which gives the Roth IRA a tremendous amount of flexibility. Also, if the person has realized that he or she has made a mistake and contributed too much money to a Roth IRA, or if an emergency arises, he or she can withdraw any contributions (not earnings, which can be penalized) from the Roth IRA at any time and for any reason!
The Roth IRA has an incredible amount of flexibility that is unmatched by any other plan! Another reason that Roth IRAs are superior to 403(b) and 401(k) plans (although one should take advantage of any employer match that is offered) is that these types of retirement plans are often hit with management fees that drain the life out of the power of compounding over time that was discussed earlier.
So, what does it take to set up a Roth IRA? Roth IRAs are the retirement option designed for those with lower incomes, and while they do come with a small amount of work, the reward they offer in return for the small amount of work required is very well worth it. The first thing to know is that the maximum contributions that a person under 50 can make in one year is $5,000 (for those over 50 it is $6,000), and penalties do exist for those who exceed the maximum amount. The next thing to know is that anyone who is single and has an annual income of under $105,000 can make the full contributions allowed for their age, and once their income reaches the $105,000 level, the amount they can contribute slowly reduces until it hits 0 (the same applies for those married and filing separately). For those who are married and filing jointly, the limit is $166,000. These limits are all current as of 2009, and the limits will slowly increase in order to accommodate inflation in future years.
The one downside of a Roth IRA is that it requires some work. One good way to establish a Roth IRA is through stocks or no-load mutual funds (mutual funds are preferred because they do not have the same level of risk as stocks and require less time for the individual to manage). One will have to consult a financial professional or learn a little bit about mutual funds and stocks in order to have a healthy retirement. However, nothing in life is free, and the small amount of work required in order to attain the reward at the end is a very small drawback.
Without a doubt, the Roth IRA is far and away the best option for those of lower and middle incomes. One can become incredibly wealthy simply by saving a fairly small amount each year and then living within his or her means during his or her lifetime. Then, when retirement hits, one is free to do almost whatever he or she wants because he or she has lived so wisely in his or her lifetime!