All Hail the Roth IRA!

My smartest investment concerns retirement savings. Many years ago, I contributed the maximum annually to a traditional IRA — for a long time.

When the Roth IRA became available, I rolled over both my 401(k) account from a former employer and my previous IRA contributions into a new Roth IRA account, attracted by the prospect of tax-free withdrawals in retirement. In that account, I invested in a well-regarded mutual fund and in technology stocks. I was a lot younger then and figured that if my account grew by 11% annually over the next few decades, I'd retire with more than $6 million — tax-free!

— D. C. W., Valparaiso, Indiana

The Fool Responds: Wow — $6 million is a great goal and would provide most of us with an extremely comfortable retirement. Both Roth IRAs (which debuted in 1998) and Roth versions of 401(k) accounts (introduced later) are great ways to save for retirement.

As you know, contributions to traditional IRAs and 401(k)s allow you to exclude the amount of your contribution from taxation in the year of the contribution, treating your future withdrawals as taxable income. Roth accounts, though, skip the upfront tax break and instead simply allow you to withdraw funds in the future tax-free.

Your expectations for 11% returns may have been too rosy, but even retiring with $3 million would be good. Regularly adding money to tax-advantaged retirement accounts over many years is a powerful move. ¦