How to Get More Out of Your Individual Retirement Account

Kevin McCormally: I am Kevin McCormally of Kiplinger's, I am here with Janet Bodnar, Deputy Editor of Kiplinger's Personal Finance magazine. Janet let's talk about Individual Retirement Accounts, I know Kiplinger has always been a big fan of IRAs, why? Janet Bodnar: They are really great retirement investments, first of all they travel with you, they are not tie to your employer, you can invest them wherever you want and you get the added bonus of tax free compounding which really does give you a big bang. Kevin McCormally: Can you give me a comparison between the taxable account and an IRA? Janet Bodnar: Right, for example let's just say that, you are going to contribute $4000.00 a year to a taxable account and you are going to do this religiously for 30 years and you are going to earn 8% which is no pretty good return, but every year the Federal and the State governments are going to take a 33% bite out of your earnings at the end of the 30 years, you are going to have about $280,000.00 in your taxable account. Kevin McCormally: Oh that's pretty good. Janet Bodnar: Yeah, it is pretty good but if you had the money in an IRA and it was growing tax deferred, you would end up with in the same example $450,000.00, that's an extra $170,000 because of the tax deferred and if it were a Roth IRA all that money would be able to come out tax free. Kevin McCormally: Ih! That's fabulous and I understand folks of Kiplinger have a way to goose up that return even more. Janet Bodnar: Right, the example that we used Kevin, assumes that you do what most people do which is way to the last minute, April 14th to open your IRA for the preceding year, but if you actually open your account at the beginning of the year for which you are eligible to contribute, you will earn additional money on that account. And in this case that's an additional $40,000.00 over the 30 years that we have decided. Kevin McCormally: Just by putting the money at the beginning of the year rather than the end of the year, add -- $40,000.00 Janet Bodnar: Right, which is a great reason not to procrastinate. Kevin McCormally: Thank you Janet.