Paul Meloan – Vested Interest

First, for all of the rules, go to IRS Publication 590.  Turn to page 60.

If your adjusted gross income for 2012 was $125,00 or less (single) or $173,000 or less (married filing jointly), you are eligible to make a Roth IRA contribution up to $5,000.  If your earned income (wages or self-employment) was less than that, then that lower number becomes the contribution limit.

Yes, there is some fine-print, but not much.  Read the Pub for all the boring details.

Doing this may be one of the single best investments you ever make.

Roth IRAs are awesome because they grow tax free.  Not tax-deferred, but tax free.

If you can’t put the money in because you earn too much, you probably have someone in your life (child, sibling) who earns under the threshold and would receive an incredible benefit.

Like most other miracles of compounded returns, this one just gets better the longer you let it sit.

My daughter (who is 19) earned $2500 working part-time at school last year.  That $2500 invested today at 7% (still a decent long-term average return) will be worth just under $79,000 in the year in which she turns 70.

Here is another stupid math trick: if she repeats that investment each year for the next 10 following, and never makes another investment again, at the same 7% on her 70th birthday the account will be worth $670,000.

If she could contribute the current max ($5,500 beginning in 2013) then the final amount would be $1.21 million.  All tax free.

Of course, $1.21 million will not be worth the same as it is today, but that would be the worst reason on earth not to do this.

The best reason is that compounded returns are one of the most powerful forces in the universe, and you should make them work for you whenever possible.  Taxes are among the biggest drags on growing wealth, just ask all the multi-millionaires who haven’t been paying much of them in the past decade or two.  This investment combines the best of those worlds, and it does it for working, middle-class people.

Act now, 10 days remain.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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