In 2024, the Roth IRA contribution limit is $7,000. For those over the age of 50, there is an additional $1,000 catch-up contribution allowed bringing the total to $8,000.
The incredible tax benefit of a Roth IRA is that in exchange for foregoing a tax deduction on your contribution the account becomes tax free as long as the holding and age requirements are met.
This means that given the power of time and compounding your $7,000 contribution can grow to become a substantial sum of tax free money in the future.
How much could your $7,000 contribution be worth over time?
| Years | Value |
| 5 | $11,273 |
| 10 | $18,156 |
| 20 | $47,092 |
| 30 | $122,145 |
| 40 | $316,814 |
| 42 | $383,345 |
A 22 year old college graduate who makes the commitment to max out their Roth IRA the year they graduate would see just that years contribution grow to over $383 thousand dollars by the time they reach 65.
Once you have built the habit of saving and investing it is much easier to continue doing so.
What would the future value of funding your Roth IRA every year until retirement be worth?
| Years of Maxing Roth IRA | Value |
| 5 | $42,735 |
| 10 | $111,561 |
| 20 | $400,925 |
| 30 | $1,151,458 |
| 40 | $3,098,147 |
| 42 | $3,763,458 |
The same 22 year old from our earlier example could make the commitment to fully fund their Roth IRA every year and reach age 65 having accumulated over $3.7 million in tax free money.
If we were to assume they saved only this money for retirement, we can assume they’d be able to safely withdraw about $150 thousand per year using the 4% rule. If we assume they would receive another $50 thousand per year from Social Security that would give them a total of $200 thousand per year for spending.
What is the purchasing power of $200 thousand per year in 42 years?
Inflation erodes away purchasing power because the cost of a basket of goods tends to go up over time. The amount of stuff you can buy for the same dollar amount goes down.
If we assume an inflation rate of 2.5% the purchasing power of the $200 thousand would be equivalent to $70,897 in today’s dollars. Not a shabby amount but depending on the lifestyle one is accustomed to could be a significant downgrade to their preretirement spending.
Whenever we run future value calculations it is very important that the impact of inflation on that dollar amount be considered. While $3.7 million is a lot of money to use in retirement in today’s dollars it will get you significantly less in 42 years.
This is where proper financial planning comes into play. Obviously, one focused on saving wouldn’t just fund a single account type and nothing else. Building a diversified pool of assets across different tax buckets provides for flexibility in spending and control over taxes. Many individuals receive a 401(k) match to take advantage of alongside other employer benefits.
*Assumption: 10% for investment returns
Disclosure: Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. This is a hypothetical example for illustration purpose only and does not represent an actual investment. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
