If you decide to invest your $6,000 of spare pre-tax income in a Roth IRA, you will not get an immediate tax deduction like you would with a Traditional IRA. However, the advantage of a Roth IRA is that qualified withdrawals, including both contributions and earnings, are tax-free in retirement.
To calculate how much you will have in 40 years after withdrawing from the Roth IRA, follow these steps:
Calculate the growth of your initial $6,000 investment at an average annual rate of return of 8.4% over 40 years.
Determine the future value of this investment, taking into account that all withdrawals from a Roth IRA are tax-free.
Let's calculate the future value:
Step 1: Calculate the growth of the initial investment:
You invest $6,000 in a Roth IRA, and it grows at an average annual rate of return of 8.4% over 40 years. You can use the compound interest formula:
Future Value (FV) = P(1 + r/n)^(nt)
Where:
P = Principal amount ($6,000)
r = Annual interest rate (8.4% or 0.084)
n = Number of times interest is compounded per year (assuming it's compounded annually, so n = 1)
t = Number of years (40)
FV = $6,000 * (1 + 0.084/1)^(1*40)
FV = $6,000 * (1.084)^40
FV ≈ $38,098.13
Step 2: Since Roth IRA withdrawals are tax-free, you will have the full amount available to you:
Total After 40 Years = $38,098.13
So, after 40 years, you will have approximately $38,098.13 in your Roth IRA after withdrawing from it, and this amount is entirely tax-free.