A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE ADVANTAGE OF INVESTING
THROUGH 
AN 
IRA 
TAX-
DEFERRED 
VS. 
TAXABLE
INVESTING OF $5,000 A YEAR

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Source: Adapted from John J.
Brennan, 
Straight Talk on
Investing
.
This chart compares the final values of two hypothetical
accounts, one tax-deferred and one taxable. In both accounts,
the investors contributed $5,000 annually for forty-five years
and earned annual returns of 8 percent after expenses.

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IRAs are also scheduled to get better over time. The
contribution limit is now indexed to inflation. Moreover, for
those individuals who neglected to save early in life and must
now play catch-up, the limits are even higher, as shown in the
table 
Annual Contribution Limits for IRAs
.
ANNUAL CONTRIBUTION LIMITS FOR IRAS
Tax Year
Under Age 50
Age 50 or Over
2010
$5,000
$6,000
Later
Indexed to Inflation
Roth IRAs
Investors may also choose another form of individual
retirement account called a Roth IRA. The traditional IRA
offers “jam today” in the form of an immediate tax deduction
(provided your income is low enough to make you eligible).
Once in the account, the money and its earnings are taxed

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only when taken out at retirement. The Roth IRA offers “jam
tomorrow”—you don’t get an up-front tax deduction, but
your withdrawals (including investment earnings) are
completely tax-free. In addition, you can Roth and roll. You
can roll your regular IRA into a Roth IRA. You will need to
pay tax on all the funds converted, but then neither future
investment income nor withdrawals at retirement will be
taxed. Moreover, there are no lifetime minimum distribution
requirements for a Roth IRA, and contributions can continue
to be made after age seventy and a half. Thus, significant
amounts can be accumulated tax-free for the benefit of future
generations.
*
The decision of which IRA is best for you and whether to
convert can be a tough call. Fortunately, the financial services
industry offers free software that lets you analyze whether or
not conversion makes sense for you. Many mutual-fund
companies and brokers have Roth analyzers that are
reasonably easy to use. If you are close to retirement and
your tax bracket is likely to be lower in retirement, you
probably shouldn’t convert, especially if conversion will
push you into a higher bracket now. On the other hand, if
you are far from retirement and are in a lower tax bracket

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now, you are very likely to come out well ahead with a Roth
IRA. If your income is too high to allow you to take a tax
deduction on a regular IRA but low enough to qualify for a
Roth, then there is no question that a Roth is right for you,
since your contribution is made after tax in any event.
Pension Plans
A variety of pension plans are available from your
employer. In addition, self-employed people can set up plans
for themselves.