$800,000 Roth IRA Starting With $1
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Unlocking Financial Freedom with the Roth IRA
Hey there, fellow money enthusiasts! I know you’re just like me – not thrilled about working forever. We’re kindred spirits. Yes, you’re right; we might just have become best friends. But please, I implore you, don’t show up at my doorstep. I personally want to retire at a reasonable age, grab my dog, hop in a van, go hiking, do some camping, perhaps enjoy some mushroom sandwiches, or even a handful of dirt. I understand you have an image of what life will be like when you can finally escape that soul-sucking job of yours. To get there, we need to get our financial situation in order, so we can afford… wait for it… a Roth Individual Retirement Account (IRA).
Understanding Roth IRAs
So, there are plenty of these Roth IRAs around. If you’re not familiar with them, you’re in the right place.
Building an Impressive Roth IRA Portfolio
But here’s the real deal – you’re here to learn how, starting today, you can easily accumulate somewhere between $800,000 and $1 million in a Roth IRA portfolio with minimal effort. The goal? To quit your job faster than most people around you.
I’ll walk you through the steps and cover everything you need to know about a Roth IRA. If you have any questions during this video, drop them in the comments below, and I’ll answer each and every one of them.
Demystifying Roth IRAs
Now, you might think the name “Roth IRA” sounds like some secret government agency lurking in the shadows. But relax, it’s just a type of investment account. Specifically designed for retirement
investing, it comes with some nifty advantages that make growing your money a whole lot easier.
Breaking Down the Name
The “IRA” part stands for Individual Retirement Account, but the “Roth” part is the real gem. It means you won’t ever have to pay taxes on the gains your money earns within the account once you’ve deposited it. So, if you stash away $2,000 in your Roth IRA this year and invest it wisely, fast forward 35 years with an average 7% return, and your account will have blossomed to over $21,000. The best part? You’ll never owe taxes on that $19,000 gain or your initial $2,000 contribution when you withdraw it for the rest of your life.
Understanding Post-Tax Contributions
Let’s delve into the nitty-gritty of why a Roth IRA is such a smart move. It all boils down to the money you put in – it’s what we call post-tax money or, occasionally, net pay. In essence, you’ve already paid taxes on this cash. But here’s the kicker: when you deposit it into your Roth IRA, you’re essentially saying, “Hey, IRS, you can tax this money now, but I want a guarantee that you’ll never tax it or any of the money it earns within this account ever again.”
The Roth IRA Advantage: Tax-Free Growth
Think of it this way: taxed on the way in, it grows tax-free, including dividends, and remains untaxed when you withdraw it after hitting the ripe age of 59½. Technically, you can withdraw some cash before that age, but we’ll get to that in a moment.
This is where the Roth IRA shines, making it way more powerful than a run-of-the-mill taxable investment account. In the case of a taxable investment account, the money you put in has already been taxed by your employer. Then, when you decide to withdraw any funds from the account, you’d be taxed again on any gains.
For instance, using the same numbers from our Roth IRA example earlier: imagine you contributed $2,000 to a taxable investment account, and after thirty years, it grew to $21,000. You’d have investment gains of $19,000.
Comparing Tax Consequences
Since $21,000 minus your $2,000 contribution equals… drumroll, please… $19,000, you’d be hit with long-term capital gains tax on that $19,000 profit in a taxable investment account.
With a Roth IRA, on the other hand, you’d owe $0 in taxes on that same profit. That’s not to say you should never invest in a taxable investment account. However, it’s a good idea to max out your Roth IRA contributions first due to the tax advantages.
Annual Contribution Limits
When I say “max out your Roth IRA,” there’s a cap on how much you can contribute each year. This limit depends on your income and age. The government is all about letting you skip out on taxes, but they want to limit how much tax you’re avoiding. As of 2021, you can contribute up to $6,000 annually if you’re 49 or younger and $7,000 per year if you’re 50 and older.
Getting Minors Involved
Now, even those below 18 can contribute to a Roth IRA, provided a parent assists in opening an account and they have some form of taxable income. These are commonly referred to as custodial accounts or custodial IRAs.
Stay tuned – we’ll discuss where to open a Roth IRA shortly. And if you could do me a huge favor and Hulk smash that thumbs-up button, I’d greatly appreciate it.
Income Matters in Roth IRA Contributions
Your income plays a crucial role in determining your eligibility to contribute to a Roth Individual Retirement Account (IRA). For those filing taxes jointly as a married couple, your combined income must be less than $198,000 for the year to make the full contribution. If your income exceeds these thresholds, your contribution limit begins to phase out. We’ll discuss a workaround for higher incomes shortly.
Exploring the Backdoor Roth IRA
If your income surpasses the Roth IRA contribution limits, there’s a clever strategy called a backdoor Roth IRA. This workaround allows you to contribute to a Roth IRA regardless of income levels. However, navigating the rules of a backdoor Roth IRA can be tricky, so it’s crucial to have a clear understanding of these regulations before attempting it. Alternatively, you can consult an accountant or financial advisor for assistance in executing this strategy effectively. If you’d like me to create a dedicated video explaining the intricacies of the backdoor Roth IRA, please let me know in the comments below.
Accessing Your Roth IRA Funds
As you contribute to your Roth IRA, it’s essential to understand when you can access the money without running into trouble with the IRS. Typically, you gain unrestricted access to the full amount in your Roth IRA at the age of 59½. Attempting to withdraw all the funds before reaching this age incurs penalties and is generally not advisable. However, there is a way to access some of the funds penalty-free before reaching 59½.
The IRS allows you to withdraw the amount you’ve contributed to your Roth IRA at any time without penalties, as long as you don’t touch any of the investment gains within the account. For example, if you’ve consistently maxed out your Roth IRA with annual contributions of $6,000 over a decade, your total contributions would amount to $60,000.
Using Roth IRA Contributions and Gains
Now, let’s consider a scenario where, over time, the balance of your Roth IRA account has grown. You’ve accumulated $60,000 in contributions and an additional $40,000 in investment gains. Here’s how it works when it comes to withdrawing funds from your Roth IRA:
- You can withdraw any of the $60,000 in contributions without incurring early withdrawal penalties.
- However, you cannot touch any of the $40,000 in gains before reaching the age of 59½.
Keep in mind that once you take money out of the account, you cannot put it back in. Therefore, it’s crucial to make this decision after careful consideration. Understand that while it’s an option, it can have an impact on your long-term financial growth.
My Personal Approach
From my personal perspective, I intend never to use the money in my Roth IRA until I’m at a stage where I’m living off my investments. If I encounter financial challenges before reaching that point, I always have an emergency fund and alternative income sources to mitigate any adverse circumstances. I encourage you to adopt a similar approach.
When you start withdrawing money from your Roth IRA, it disrupts the growth of your investments. Think of your Roth IRA as a tree you’re trying to nurture and grow. If your goal is to allow the tree to grow as large and tall as possible, you wouldn’t start cutting off parts of the tree as it attempts to grow, would you? Yes, it will continue to grow, but you’re slowing down the process. Unfortunately, trees take a long time to grow, and we don’t live forever. The same principle applies to a Roth IRA. Every time you want to withdraw your contributions, you have to sell some of your investments to access the cash. This inevitably disrupts the growth of your overall account. What may seem like a simple $6,000 withdrawal can result in the withdrawal of double or even triple that amount due to the growth it could have achieved if left untouched and invested in the account.
The Importance of Investing Within Your Roth IRA
It’s essential to understand that once you deposit money into your Roth IRA, you must take the next step of investing it to facilitate its growth over time. Remember that the term “IRA” stands for individual retirement account. The account itself is not the investment; it’s merely a container where you place your investments to allow them to grow tax-free. Think of your Roth IRA as a bucket. Within that bucket, you can house a variety of investments that will help your money grow. While you can leave cash in the bucket, you can also include assets like individual stocks, REITs, target-date funds, index funds, bonds, and other investments that can contribute to long-term growth.
Optimizing Your Roth IRA Investments
I’ll provide you with a glimpse into my Roth IRA shortly to give you an idea of my investment choices. However, remember that the primary purpose of a Roth IRA is to provide you with an opportunity to grow your money tax-free. Therefore, it’s essential to invest that money as quickly as possible and keep it invested for as long as possible.
Choosing Where to Open a Roth IRA
Have you ever strolled down the toilet paper aisle at the grocery store? The sheer number of different brands and types of toilet paper options can be overwhelming. Opening a Roth IRA can feel a bit like that, with numerous choices available. There are traditional options like Vanguard, Fidelity, and Charles Schwab, but there are also newer, more modern platforms like M1 Finance.
Now, let me give you a quick overview of my Roth IRA, which I have with M1 Finance. While my investments may seem unexciting to some, they are highly effective. I primarily invest in a single index fund that diversifies my money across over 3,600 different stocks. It’s important to note that I have a high-risk tolerance, which is why my investments are entirely in stocks, with no bonds at this point.
Investment Disclaimer
Please don’t take my investment choices as financial advice. Your financial goals and risk tolerance may differ from mine, so keep that in mind when making your decisions.
I’m known among my friends, family, and acquaintances as that person who constantly asks, “Have you opened a Roth IRA?” This is because I genuinely want everyone in my circle to achieve financial success.
Many individuals tell me that they are already contributing to their 401(k), 403(b), 457, or taxable investment accounts, so they wonder why they should bother with a Roth IRA.
The Control Advantage of a Roth IRA
One of the primary reasons a Roth IRA should be maxed out before other accounts is the level of control it offers. If you’re anything like me, you appreciate having control over your financial decisions.
With a self-directed Roth IRA, you have control over:
- Where to Open: You get to choose where you want to open your Roth IRA. Unlike a 401(k), where your employer selects the retirement provider, you can opt for more well-known investment firms like Vanguard, Fidelity, or Charles Schwab. Alternatively, you can use newer and more modern platforms like M1 Finance.
- Investment Choices: A Roth IRA provides you with more options for the types of investments you can choose. In contrast, some employer-sponsored plans may have limited or suboptimal investment choices.
For instance, my employer uses a company called Empower Retirement for our 401(k), and while I don’t mind them, they don’t offer the most appealing investment options.
Expanding Your Investment Choices
With a Roth IRA, your investment choices multiply significantly. The brokerage firms I mentioned earlier provide you access to hundreds more options compared to some other retirement accounts. This abundance of choices can be a game-changer for your investment strategy.
Building an $800,000 Roth IRA
The journey to constructing an $800,000 Roth IRA might be more straightforward than you think. It all boils down to two critical elements: simple math and time.
If you consistently max out your Roth IRA contributions at $500 per month and assume an average annual return of 7%, your account would swell to an impressive $829,000 of tax-free funds in just 35 years. Yes, 35 years may seem like a lengthy period, but this is the power of investing with a long-term perspective.
As you can see, it’s entirely feasible to amass significant wealth in your Roth IRA by consistently investing and giving your investments time to grow.
Closing Thoughts
That wraps up our discussion on Roth IRAs for now. I hope you found this information valuable, and I look forward to seeing you in the next informative session.
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