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<<I am a 20 year old college student. I plan to retire well before age 59 1/2 and I would like to know if an IRA
could have any place in my portfolio. The main question is "Is the benefit of having earnings accumulate
tax-deferred greater than the cost of the 10% penalty for early withdrawal over say a 20 to 25 year period?". I
already have some savings and investments, but I had never considered IRAs because I always planned on
retiring early. If anyone has an answer for me I would appreciate it greatly. I am familiar with the other aspects
of investing that Fools promote-index funds, Foolish Four, small cap stocks, and shorts, and their allocation
within a portfolio, I seek only information about the appropriateness of IRAs or other tax deferred investment
vehicles for my situation.>>

To look at the value of the tax-deferred growth aspect of an IRA (401(k), 403(b), etc) run some numbers: Take a $2000 annual investment (max IRA annual contribution) and grow it at 25% (to be broadly consistent with the various Foolish screens) for 30 years (I'll let you retire at 50, just to keep the numbers round). Then do the same, but reduce your growth rate by 15%, 28%, and 33.6% at various break points in your 30 years of investing, to be consistent with your tax bracket changes as your career progresses and the fact that now you're not investing in a tax deferred environment. You'll find the difference over the time frame to be quite astonishing for not having had tax-deferred growth.

That said, next consider two things: a) the brute force of simply paying the early withdrawal penalty of what you might take out annually, or as a lump sum, for those 9.5 years before you turn 59.5 as compared to the value of that portfolio at age 50; alternatively, b) setting up a program of "substantially equal withdrawals" forever (or maybe only until 59.5; TMF Pixy can answer such a question in the Retirement Planning message board) from your IRA (401(k), and I think, 403(b) retirement plans would have to be rolled into an IRA to do this) and thereby avoid the early withdrawal penalty.

Hope this helps.

Eric Hines
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