This submission is part of the NerdWallet 2013 Roth IRA writing contest. The views and recommendations presented in this piece are held by the individual contest participant and do not represent those of NerdWallet.
By Kenyada Powell
The number of employers offering retirement packages is far-in-between. A popular alternative is to open a Roth Individual Retirement Account. The investment options do offer higher rates of return than savings accounts. However, these rates are in the 1 digit range. This begs the question if contributing to a Roth IRA is even worth it? At this time, it is not. Contributing money to a Roth IRA would not be much different than depositing money in a savings account. In fact, putting money away for retirement is the better option. Yes, the annual rate of return is much smaller than that of a Roth IRA. However, there is no deposit limit. Neither is there an income limit.
Unfortunately, the interest rates that Roth IRA investment options pay are too low to yield good returns. Investing one-third of $5,000.00 in stocks would yield an annual return of only 7 percent (Le Du) or $119.00. One-third in 30-year treasury bonds would yield an annual return of only 3 percent (Bloomberg, CNN) or $50.00. And, the annual return on the other one-third in a 5-year Certificate of Deposit is comparable to that of a savings account, which is below 1 percent (Barrington, Bond, & Steiner). Because $5,000.00 ($6,000.00 for people 50 and older) is the annual contribution limit for a Roth IRA, the likelihood of building a nest-egg deep into the six-figure range is slim-to-none. The most a 25-year-old person could contribute before 70 is $245,000.00. It would be better to save money to build a nest-egg.
Saving money does sound old-fashion. As mentioned earlier, the rate of return is below 1 percent. However, the real power behind making money grow is saving as much of it as possible. Saving money should be treated in the same manner as making payments on a home mortgage. If the same 25-year-old saves $926.00 a month for 45 years, they would have a $500,000.00 nest-egg. The 0.21 percent (Bond)—0.87 percent for online savings accounts (Barrington)—return would be just a little bit of icing on a huge cake. Unlike the restrictions of a Roth IRA, the restrictions of a savings account would not discourage this person from pursuing financial success.
The income restrictions on a Roth IRA could discourage this person from reaching their greatest earning potential. A $50,000.00 salary would definitely qualify them to receive all the perks a Roth IRA offers. Let’s say 15 years later that salary jumps to $150,000.00. Then they would lose the privilege of contributing money to their Roth IRA. It is refreshing to know that the money already in the account would continue to build interest. Remember, the highest amount of combined interest stocks, bonds, and CDs pay is approximately 11 percent. This person might suppress their financial ambition to keep their salary below $127,000.00 (IRS) in order to continue contributing to their Roth IRA.
Maybe someday the economy will get back to a place where the rate of return on stocks, bonds, and CDs actually pay off. People with Roth IRAs can look forward to a pot-of-gold at the end of the rainbow when they retire. Until then, saving money is the most reliable way to make it grow. Saving money is simple to do when done in a perfunctory manner. People do not have to be financially successful to be good at it. A monthly deposit of $25.00, along with annual tax refunds, can go a long way—when building a nest-egg.
Amount of Roth IRA Contributions That You Can Make For 2013. The Internal Revenue Service, 2012. Web. 28 April 2013. <http://www.irs.gov/Retirement-Plans/Amount-of-Roth-Contributions-That-You-Can-Make-For-2013>.
Barrington, Richard. “10 Online Accounts that Pay Best.” MoneyRates.com, 2011. Web. 28 April 2013. <http://www.money-rates.com/news/10-online-accounts-that-pay-best.htm>.
Bond, Casey. “What is the Average Savings Account Interest Rate?” GoBankingRates.com, 2013. Web. 28 April 2013. <http://www.gobankingrates.com/savings-account/higher-interest-savings-accounts/what-is-the-average-savings-account-interest-rate/>.
Bonds and Interest Rates. CNNMoney, 2013. Web. 8 May 2013. <http://money.cnn.com/data/Bonds/>.
Lu De, Doug K. “Preferred Stock Investors: How Afraid Should You Be of Increasing Interest Rates?” Seeking Alpha, 2012. Web. 28 April 2013. <http://seekingalpha.com/article/633041-preferred-stock-investors-how-afraid-should-you-be-of-increasing-interest-rates>.
Steiner, Sheyna. National CD Rates for May 9, 2013. Bankrate.com, 2013. Web. 9 May 2013. <http://www.bankrate.com/finance/cd/rate-roundup.aspx>.
United States Government Bonds. Bloomberg, n.d. Web. 9 May 2013. <http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/>.