Imagine what you could do with $1 million of tax-free money available to you in your retirement.
A Roth IRA can be an incredibly powerful tool for your retirement. Key benefits it can bring you include:
- Once in your Roth IRA, your money can grow tax free for the rest of your life.
- After you've reached age 59 and a half and have had your Roth IRA funded for at least five years, any withdrawals you make from your Roth IRA are completely tax free.
- Your kids can find a path to withdraw a Roth IRA they inherit from you without paying taxes on those withdrawals.
With all those benefits in mind, becoming a Roth IRA millionaire is a wonderful goal to set for yourself. If you want to have a shot of reaching that target, these three tips are important ones for all current and aspiring retirees to know.
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No. 1: Start early
People under age 50 can generally contribute up to $7,000 per year to their Roth IRAs. Those aged 50 and up have a "catch-up" contribution amount they can also contribute, bringing their typical limit $8,000.
With limits like that, it's possible to reach millionaire status from your direct contributions to your Roth IRA, but you need to start early to have the best chance of doing so. It will take around 28 years, assuming returns in line with the market's long-run historical levels, for $7,000 per year of contributions to grow to $1,000,000.
No. 2: Take advantage of "backdoor" contributions
As you progress in your career and build your nest egg over time, it might actually get tougher to directly contribute to a Roth IRA. This is because once your income gets larger, your personal contribution limit could start to decrease.
If you're single, your ability to contribute starts to phase out once your modified adjusted gross income above $146,000, If you're married filing jointly, that phase out starts at $230,000. That limit is based not just on your salary but rather on most sources of income.
Get a bonus? It's included. Have a stock get bought out for a gain? That gain gets included. As you get close to those phase out ranges, it may be tough to tell until very late in the year if you're able to contribute.
Fortunately, there's a workaround, known as a backdoor Roth IRA contribution. In essence, you contribute to a Traditional-style IRA, then convert that money to a Roth IRA account. There are no income limits on either Traditional-style IRA contributions or on Roth conversions , so that process can effectively allow higher-income earners to get money into a Roth IRA.
Do note that due to a pro-rata rule, if you have other money inside a Traditional IRA, you might face a higher immediate tax burden on a backdoor Roth IRA than you would on a direct contribution to one. Still, you may decide it could be worth it for the benefits you'd get from a lifetime of tax-free compounding on your money.
No. 3: Your Roth IRA can help keep your post-retirement income in check
If you invest in Traditional-style retirement accounts throughout your career or get a decent employer match, you might find yourself with a fairly hefty nest egg in those accounts once you retire. As awesome as that may seem on the surface, Traditional-style retirement plans are subject to Required Minimum Distributions (RMDs).
RMDs are mandatory withdrawals from those retirement plans, generally taxed as ordinary income . Your RMD amount is based on your age and account balance , not your spending needs. The older you get and the higher your account balance thanks to compounding, the larger those RMDs become. In addition to the direct tax on those RMDs, RMDs can both increase the amount of your Social Security subject to taxes and increase your Medicare Part B and D premiums .
Roth IRAs are not subject to RMDs during the original account owner's lifetime . As a result, the more of your retirement money you get into your Roth IRA, the lower your RMDs will be.
The same conversion rules that allow you to make those backdoor Roth IRA contributions allow you to convert your Traditional retirement account balances to Roth IRAs after you retire. You can't convert the money you're required to withdraw as part of your RMD , but any other amount in your account can be converted. Once converted (with the conversion taxes paid), any additional compounding on that money can be completely tax free -- and free from those RMDs for as long as you're alive.
Get started now
The sooner you get started putting a Roth IRA to work for you, the better your chances are of getting to that $1 million balance. Make today the day you decide to put at least one of these three tips to work for yourself. If you reach millionaire status, you'll certainly be glad you did.
Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
For example, if you invest your Roth IRA funds in individual stocks, exchange-traded funds, and other assets you've researched, and achieve a return of around 8% to 10% -- which aligns with historical stock market averages -- you could potentially accumulate a million dollars in your Roth IRA alone within three to four ...
How to use a Roth IRA to become a millionaire? ›
For example, if you invest your Roth IRA funds in individual stocks, exchange-traded funds, and other assets you've researched, and achieve a return of around 8% to 10% -- which aligns with historical stock market averages -- you could potentially accumulate a million dollars in your Roth IRA alone within three to four ...
Should a 70 year old invest in a Roth IRA? ›
You're never too old to fund a Roth IRA. The earlier you start a Roth IRA, the longer you have to save and take advantage of compound interest. Even when you're close to retirement or already in retirement, opening this special retirement savings vehicle can still make sense under some circ*mstances.
What is the average return on a Roth IRA? ›
Historically, the average annual return for a Roth IRA or any other type of account invested heavily in stocks can range from 7% to 10%. That estimated return assumes a diversified portfolio over a long-term investment horizon, similar to the stock market's historical performance.
How to get the most out of Roth IRA? ›
Making your contribution at the start of the tax year allows it to compound for a longer period. Alternatively, making small monthly contributions is easier on your budget and still gets you to the right place. If you hold stocks in your IRA, it's a good idea to make equal monthly contributions throughout the tax year.
How to get $1 million in Roth IRA? ›
Becoming a Roth IRA millionaire is not only possible, it's actually quite easy! Just set up a free online account with a big broker, fund it annually with maximum contributions, and invest in low cost index funds. Boom – you'll reach millionaire status in your Roth IRA account over the course of a few decades.
How many Roth IRA millionaires are there? ›
In fact, Fidelity noted that as of the end of 2023, a record number of people -- 391,562 -- had balances of a million or more in their IRAs.
Should a 70 year old convert to a Roth IRA? ›
In retirement, it's not too late to convert your money into a Roth IRA. The IRS will let you convert qualified funds at any time, as long as you pay the associated taxes. It might, however, be too late to get real benefit from that decision.
What is the 5 year rule for Roth IRA? ›
This rule for Roth IRA distributions stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings from the account tax-free. Keep in mind that the five-year clock begins ticking on Jan. 1 of the year you made your first contribution to the account.
How much can a 70 year old contribute to a Roth IRA? ›
The most you can contribute to all of your traditional and Roth IRAs is the smaller of: For 2021, $6,000, or $7,000 if you're age 50 or older by the end of the year; or your taxable compensation for the year.
Note that there are income limits for Roth IRA eligibility. If you can afford to contribute around the max without neglecting bills or yourself, go for it! Otherwise, you can set yourself up for success if you can set aside about 20 percent of your income for long-term saving and investment goals like retirement.
What is the average IRA balance for a 65 year old? ›
The above chart shows that U.S. residents 35 and under have an average of $49,130 in retirement savings; those 35 to 44 have an average $141,520; those 45 to 54 have an average $254,720 $313,220; those 55 to 64 have an average $537,560; those 65 to 74 have an average $609,230; and those 75 or older have an average ...
Which is better a Roth IRA or a 401k? ›
In a 401(k) vs. Roth IRA matchup, a Roth IRA can be a better choice than a 401(k) retirement plan, as it typically offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.
Can I lose my IRA if the market crashes? ›
It is possible to lose money in a Roth IRA depending on the investments chosen. Roth IRAs are not 100% safe, but they offer the potential for growth over time. Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money.
Who should not do a Roth IRA? ›
Key Takeaways. You may not want to open a Roth IRA if you expect your income (and tax rate) to be higher at present and lower in retirement. A traditional IRA allows you to devote less income now to making the maximum contribution to the account, giving you more available cash.
What should my Roth IRA portfolio look like? ›
If you're building a Roth IRA to save for retirement, you'll want to design a portfolio using a long-term, buy-and-hold approach. A strong portfolio will be diversified across different asset classes, such as stocks and bonds, and across market sectors.
Can you get rich off of Roth IRA? ›
With a Roth IRA, you can leverage your retirement savings to reach the millions well before retirement. Of course, attaining this goal takes strategy, careful planning, and consistency. The earlier you can start putting away savings in a Roth IRA, the longer your money can grow into the millions.
Is a Roth IRA a good way to build wealth? ›
Bottom line. These are some of the top reasons that many retirement experts think the Roth IRA is one of the best retirement accounts around. The Roth IRA offers you tons of flexibility as well as the ability to grow your money tax-free, potentially for decades. It's little wonder that investors love it, too.
How much can 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 if I max out my Roth IRA every year for 30 years? ›
How Much Can a Roth IRA Grow in 30 years? Over 30 years, if you invest the annual maximum of $6,000 into a Roth IRA in 2022, it could grow to $1.4 million.
