Be a part of the seven-figure club with only a few consistent behaviors.
Even though we saw the broad stock market decline by over 20% at points last year, there's still every reason to believe that you can become a Roth IRA millionaire. With enough discipline, time, and focus, achieving a tax-free, seven-figure retirement balance is within the realm of possibility.
Let's go over the four key behaviors to ensure you're a Roth IRA millionaire when it comes time to retire.
1. Contribute the annual maximum in January
While this won't be possible for all investors, contributing the annual maximum to your Roth IRA as soon as the new year begins gives your money the longest amount of time to compound tax-free. If contributing $6,500 (or $7,500 if you're 50 or older) at one time isn't possible for you, consider smoothing out your contributions over 12 months. But make a commitment to investing, regardless of how the stock market is performing.
The longer your money is invested, the more it will earn in dividends, and the longer it will have to grow. Even though the benefit of investing in January is limited, it's still an effective way to ensure your money is working as hard as it possibly can.
2. Stick with a single, broad-market index
The elegant beauty of growing your Roth IRA is that only a single investment is required. When you're thinking about which one, consider a broadly diversified, low-cost index fund that has a history of solid performance. In this conversation are funds like the Vanguard S&P 500 Index ETFand the Vanguard Total Stock Market Index ETF.
The logic here is that you don't need anything overly complex, expensive, or hard to manage. Beyond transferring funds into the account once (or a few times) per year and investing the money, there isn't a need for any ongoing management. As money grows in your Roth IRA, you can focus on life's more pressing matters -- as defined by you.
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3. Set dividends and capital gains to reinvest
Reinvesting dividends is one way to take advantage of market downturns, much like the one we're currently experiencing. When you're paid a dividend in a down market and you choose to reinvest it, the money you receive is automatically put back into the same investment at lower prices. Over the long term, you'll end up with more than you would have if you simply took the dividends in cash. Similarly, if you own mutual funds, reinvesting any capital gains distributions you receive will also have the same boosting effect.
The positive impact of dividend reinvestment is only seen over a period of many years. You'll need to be extra patient when the market falls, though, since your investments may experience intermittent losses. The key to making the most of dividend reinvestment is to set the process up and let time take its course.
4. Rely on the math
If the emotions of investing feel like they're too much at times, you're certainly not alone. 2022 was one of the worst years for broad financial markets in over a decade. Still, the math behind becoming a Roth IRA millionaire still holds.
Assuming an annual January contribution to your Roth IRA of $6,500 and an 8% average long-term investment return, you can expect to become an IRA millionaire in just under 34 years. In reality, it could happen even faster, since contribution limits typically go up over time and the markets might have long-term returns above 8%.
Nonetheless, the math proves that consistency and time will inevitably make you a seven-figure IRA owner.
Control what you can control
While there's no guarantee that financial markets will perform well over any one- or two-year period, the odds that they'll perform positively over multi-decade spans are very much in your favor. That's why consistent contributions to your retirement account and a simplified investment plan make a lot of sense if you're trying to grow your net worth into a sustainable nest egg.
If you're unsure or hesitant about how to get started, consider working with a qualified financial planner who has your best interests at heart, or ask a knowledgeable family member or friend. Like with most long-term goals, the sooner you get started with investing, the better.
Sam Swenson, CFA, CPA has positions in Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
FAQs
With a maximum annual contribution of $7,000, it's hard to fathom becoming a Roth IRA millionaire. But we're here to tell you that it's not only possible, it's actually quite easy! Opening an account takes less than 10 minutes (and it's free if you use one of our favorite low-cost brokerage firms).
How to grow money with a Roth IRA? ›
A Roth IRA is just the account type, not an automatic investment. To build wealth over time, the money you put in needs to be invested. If you're a hands-off investor and you've opted to open your Roth IRA at a robo-advisor, that service will choose a diversified investment portfolio for you.
How many Roth millionaires are there? ›
The new figures show that, as of 2019, nearly 3,000 taxpayers held Roth IRAs worth at least $5 million. (The total of more than 28,000 people holding IRAs of that size includes both traditional and Roth IRAs.) The aggregate value of those Roth IRAs was more than $40 billion.
How much to invest at 25 to be a millionaire? ›
Stashing away this much money can take a while, which is why it's important to start investing as soon as you can. If you're 25 years old and want to reach $1 million by the time you're 65, you can invest as little as $240 per month, assuming a 9% yearly return.
What is the rich man's Roth IRA? ›
Despite the nickname, the “Rich Person's Roth” isn't a retirement account at all. Instead, it's a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals.
How long does it take for Roth IRA to reach $1 million? ›
However, if you commit to contributing $7,000 per year, it would take just over 28 years to reach $1,000,000, assuming the same annual return. Essentially, you'll want to save and invest as much as you can every year to increase your chances of building a million-dollar Roth IRA.
How much will a Roth IRA grow in 20 years? ›
If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.
What income is to high for Roth? ›
Income limits for Roth IRAs
For 2024, the modified adjusted gross income (MAGI) phaseout ranges for Roth IRA direct contributions are: $146,000 to $161,000 for individuals filing as single or head of household. $230,000 to $240,000 for married couples filing jointly.
Does money sitting in a Roth IRA grow? ›
Roth IRAs grow through compounding, even during years when you can't make a contribution. There are no required minimum distributions (RMDs), so you can leave your money alone to keep growing if you don't need it.
Do billionaires use Roth IRAs? ›
But the tax incentives that the new accounts provided weren't lost on the rich or their accountants. In recent decades, with the advent of the Roth IRA and relaxed restrictions on IRA rollovers, ultrawealthy Americans have reportedly built tax-sheltered accounts worth many millions—or even billions—of dollars.
Employee Benefit Research Institute (EBRI) data estimates that just 3.2% of Americans have $1 million or more in their retirement accounts. Here's how much most Americans have saved and what you can do to boost your retirement savings. Don't miss out: Click to see our list of best high-yield savings accounts.
What is the largest Roth IRA ever? ›
Few stories have captivated the public's imagination quite like that of Peter Thiel's Roth IRA. Here is the journey from a modest contribution of $1,700 to +$5 billion, step by step.
How much money do I need to invest to make $4000 a month? ›
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
How much money do I need to invest to make $5000 a month? ›
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Do Roth IRAs make a lot of money? ›
Historically, with a properly diversified portfolio, an investor can expect anywhere between 7% to 10% average annual returns. Time horizon, risk tolerance, and the overall mix are all important factors to consider when trying to project growth.
What is the highest income for Roth IRA? ›
The consequences of a high income on Roth IRA contributions
If your income exceeds the cap — $161,000 for single filers, $240,000 for married couples filing jointly — you may not contribute to a Roth.
What is the most money ever in a Roth IRA? ›
Few stories have captivated the public's imagination quite like that of Peter Thiel's Roth IRA. Here is the journey from a modest contribution of $1,700 to +$5 billion, step by step.
