Ask the Dollar Diva By Dorothy Rosen • Bankrate.com

Time is on your side with a Roth IRA

Dear Dollar Diva,
I am 23 years old and plan to put $50 a month into a Roth IRA from now until I am 59-1/2 years old. How much will I have when I reach that age? Please use whatever interest rate you feel is appropriate. I realize your answer will be an estimate.

The Diva is happy to have a 23-year-old reader with the vision to think about retirement and the smarts to come up with a plan to start saving for it.

To answer your question: It's going to take you about 36 years to reach age 59-1/2. If you contribute $50 a month to a Roth IRA that is invested in a mutual fund with an annual return of 11 percent  -- a reasonable expectation -- you will have more than a quarter of a million dollars in your pocket at the end of 36 years. If the return is only 7 percent, you'll end up with around $98,000. If you're lucky enough to get 12 percent, your nest egg will be about $367,000.

The following chart gives a breakdown of how much of your nest egg would be made up of your contributions and how much would be made up of tax-free earnings at various rates of return:

Tax deferred contributions

The Diva thinks the Roth IRA is a wonderful retirement vehicle, especially if you have exhausted all of your tax-deductible options. There is some dispute over whether you should put your money in a traditional, tax-deductible IRA or a Roth IRA, and no one can give you a definite answer because no one knows what your financial situation is going to be in the year 2036. 

When in doubt: If your marginal tax rate is 28 percent or higher, make the maximum contributions to your 401(k) first. Then, if you're eligible, use any money you have left over to fund a Roth IRA. Or, if you don't have a company retirement plan, put your retirement dollars in a traditional IRA.

Remember, when you're in the 28 percent bracket, you can contribute $69 a month to your 401(k) plan and your out-of-pocket will only be $50 because of the tax deduction. $50 is also the net cost of a $69 contribution to a traditional IRA if you are in that tax bracket.

DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting, from the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen has more than 15 years of experience in the financial arena, serving in Illinois and Florida as a certified public accountant, financial consultant, expert witness and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that serves individuals and small businesses.