Maryanov Madsen Gordon Campbell, Certified Public Accountants

Serving up some ideas for your money in ’07

Howard Gordon
Special to The Desert Sun
January 10, 2007

Around this time every year, newspaper columns are full of advice for your financial New Year's resolutions. Now it's my turn and I'd like to share with you the advice I gave my 19-year-old grandson last week.

I suggested he consider opening a Roth IRA and putting in $2,800 this year and every year for a total of 6 years. At the end of the sixth year, he would no longer need to make any more contributions (unless of course he wanted to), but just leave the account to accumulate and grow for the next 40 years. Assuming the IRA earned at an average of 11 percent each year, I asked him how much he thought he would have accumulated by that time.

I also asked him to consider what he would accumulate if he waited 6 years to open the account and then contributed $2,800 each and every year for the next 40 years. Being young and unable to relate to ever being 35, much less 65 and retired, it was the second option that appealed to him.

Whipping out my fancy financial calculator, I showed him that $2,800 contributed every year for 6 years, and then allowed to accumulate for 40 years at 11 percent, would give him a total of $2 million.

Surprisingly - and this was a real eye-opener - the second option would net him the exact same $2 million. My question to him and to you is which would you rather do: deposit $2,800 a year for six years (or $16,800) and then allow it to accumulate for 40 years, or wait and deposit $2,800 a year for 40 years (about $112,000) in order to accumulate the same $2 million?

This may be a tough decision for a 19-year old; however, you as a parent or grandparent should encourage the young worker to start saving as soon as possible. The magic of compounding earnings combined with the tax-free earning power of the Roth IRA can be astounding, as you can see. The question you may have is "where can I earn 11 percent on my investment?" The answer for some of you may be a S&P 500 stock index fund. Since 1926, the S&P 500 has averaged 11 percent a year - some years more, some years less, but overall the average has been 11 percent.

In order to invest in a Roth IRA, you must have earned income that is at least as much as the amount you are investing. The maximum contribution in any one year is $4,000 - unless you're age 50 or older. There is no rule that prohibits you from giving your children or grandchildren the funds to put in the IRA, as long they have earned income that is reported on their tax return.

Let me leave you with one more thought: a contribution of $2,800 each and every year for 30 years would accumulate only $700,000 as compared to $2 million over 40 years, proving once again that there's nothing like an early start. Yet even a late start is better than nothing.

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