Show Me The Money: Invest In Your Retirement

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420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
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BOSTON (CBS) – Retirement planning should start with your first job but it doesn’t for most people! Retirement planning is usually the one thing people put off because retirement seems so far away. If you are guilty of slacking off, use your tax refund to increase your retirement savings.

Increase your contribution by the amount of the refund to your retirement plan at work that would be your 401(k), 403(b) or 457 deferred comp plan, if you work for the state. Use the refund money to make up the lost income over the remainder of the year.

If you don’t have a retirement plan at work consider using an IRA for retirement savings. If there is no plan at work your IRA will be deductible. You can contribute up to $5,000 this year and if you are over 50 there is a catch up provision and you can add an extra $1000 to the account.

Consider starting a Roth IRA with the tax refund. Limits are the same for all IRAs, $5000 for this year and $1000 if you are over 50. But with a Roth IRA there is no upfront deduction. But when you withdraw the earnings in retirement there will be no income taxes due.

There are income limits for a Roth IRA; if you are married and filing jointly and earning more than $166,000 the amount you can contribute begins to be phased out and is gone once you reach $176,000. If you are single, you can contribute the full amount if you earn under $105,000 and the contribution is phased out as you reach $120,000.

A $3,000 addition to your retirement account at age 40, assuming an 8% return by the time you’re 67, could be worth almost $24,000. Do that every year for the next 27 years and you could have over a quarter of a million dollars ($286,000).

What about helping your kid set up her IRA? If she has earned income for this year, offer to match her savings if she sets up an IRA. Match her dollar for dollar and show her what her nest egg could look like in the future. Use a Roth IRA for she doesn’t need a deduction.

A twenty-year-old contributing $2,000 a year for 47 years could be a millionaire when she retires.

Spousal IRAs: This is an IRA funded for a spouse with little or no income by a spouse with income. The combined income of the spouses must be at least equal to the amount contributed. A Roth IRA may also be used for the spousal IRA. If you are an at home spouse you may want to consider using the refund to set up a spousal IRA.

Assumptions:
Rate of return (%) 8
Age Contribution Value Contribution Value Contribution Value
——— ———- ———- ———- ———- ———- ———-
17 2,000 2,000
18 2,000 4,160
19 2,000 6,493
20 2,000 9,012
21 2,000 11,733
22 2,000 14,672 2,000 2,000
23 2,000 17,846 2,000 4,160
24 2,000 21,273 2,000 6,493
25 2,000 24,975 2,000 9,012
26 2,000 28,973 2,000 11,733
27 2,000 33,291 2,000 14,672
28 2,000 37,954 2,000 17,846
29 2,000 42,991 2,000 21,273
30 2,000 48,430 2,000 24,975
31 2,000 54,304 2,000 28,973
32 2,000 60,649 2,000 33,291 2,000 2,000
33 2,000 67,500 2000 37,954 2,000 4,160
34 2,000 74,900 2000 42,991 2,000 6,493
35 2,000 82,893 2000 48,430 2,000 9,012
36 2,000 91,524 2000 54,304 2,000 11,733
37 2,000 100,846 2000 60,649 2,000 14,672
38 2,000 110,914 2000 67,500 2,000 17,846
39 2,000 121,787 2000 74,900 2,000 21,273
40 2,000 133,530 2000 82,893 2,000 24,975
41 2,000 146,212 2000 91,524 2,000 28,973
42 2,000 159,909 2000 100,846 2,000 33,291
43 2,000 174,702 2000 110,914 2,000 37,954
44 2,000 190,678 2000 121,787 2,000 42,991
45 2,000 207,932 2000 133,530 2,000 48,430
46 2,000 226,566 2000 146,212 2,000 54,304
47 2,000 246,692 2000 159,909 2,000 60,649
48 2,000 268,427 2000 174,702 2,000 67,500
49 2,000 291,901 2000 190,678 2,000 74,900
50 2,000 317,253 2000 207,932 2,000 82,893
51 2,000 344,634 2000 226,566 2,000 91,524
52 2,000 374,204 2000 246,692 2,000 100,846
53 2,000 406,141 2000 268,427 2,000 110,914
54 2,000 440,632 2000 291,901 2,000 121,787
55 2,000 477,882 2000 317,253 2,000 133,530
56 2,000 518,113 2000 344,634 2,000 146,212
57 2,000 561,562 2000 374,204 2,000 159,909
58 2,000 608,487 2000 406,141 2,000 174,702
59 2,000 659,166 2000 440,632 2,000 190,678
60 2,000 713,899 2000 477,882 2,000 207,932
61 2,000 773,011 2000 518,113 2,000 226,566
62 2,000 836,852 2000 561,562 2,000 246,692
63 2,000 905,800 2000 608,487 2,000 268,427
64 2,000 980,264 2000 659,166 2,000 291,901
65 2,000 1,060,685 2000 713,899 2,000 317,253
66 2,000 1,147,540 2000 773,011 2,000 344,634
67 2,000 1,241,344 2000 836,852 2,000 374,204
Total 102,000 92,000 72,000
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