– Can you actually become a Roth IRA millionaire with $542 per month? Yes, but there's a little bit of a catch that we should probably talk about. In this video, we'll cover what it takes to become a Roth IRA millionaire, as well as everything you need to know to be able to maximize one of the most powerful retirement accounts. By the way, according to the Census Bureau, only about 18% of working age adults have an IRA account, which means that even less have a Roth IRA.
I think this is a mistake, especially since it's the second investment account that I think a lot of people should be maxing out every single year. For the technical nerds out there who will be furiously typing in the comments below about how an IRA stands for individual retirement arrangements, I know, I know. Calm down, have a glass of warm milk, put your earmuffs on. – All you gotta do is say, "Earmuffs," son, earmuffs. And say whatever you want. – And go sit in the corner for the remainder of this video because I am going to refer to it as an individual retirement account since that's how US normal people call it.
A Roth IRA is a self-directed retirement account where your money has the ability to grow and be withdrawn tax-free when it's invested. We'll talk about the investing side of things later in the video, so hang tight for a few minutes. Starting in 2023, you can contribute up to $6,500 per year per person or $7,500 per year per person if you are 50 years or older by the end of that year. One additional thing to add here is that stay-at-home parents can fund IRAs if their spouse works and the couple files their taxes jointly. In my opinion, Roth IRA is one of the most important accounts that most people should be investing in, even if you already have access to something, like a 401k, 457, or taxable investment account for reasons that I will cover later in this video. The self-directed part of this account is something that you really need to be aware of. Now, unlike other retirement accounts, your employer doesn't automatically set up a Roth IRA for you.
You handle everything from start to finish. I think this is part of the reason why only 18% of working age adults actually have an IRA. You've gotta take it upon yourself to open an account, deposit money, and choose your own investments, which we'll talk about in a minute, because not everyone is eligible to contribute directly to a Roth IRA. To be able to contribute to a Roth IRA, you have to have earned income that falls within the guidelines that the IRS has listed as compensation. On screen, I'll have what the IRS defines as compensation on their website.
Now, if you wanna read more about the details, then you can just do a quick Google search for Publication 590-A. On top of that, there are specific income limits, which you can see on screen right now. Now, everyone's situation is different, so you'll have to calculate your modified adjusted gross income on your own. The bad news is that you have to follow these rules to be able to contribute to a Roth IRA directly. Now, the key word there is directly. Two pieces of good news, though. The first is that the income levels increase over time, so if you make too much today, then you might fall within that limit at some point in the future.
The second part of the good news has to do with being able to contribute to a Roth IRA indirectly. If you make more than the income limit, you can still legally contribute to a Roth IRA through something called a Backdoor Roth. I'm not going to go into these specifics here, but at a high level, it's when you contribute money to a traditional IRA, then convert that money into a Roth IRA for the tax-free investment growth. Keep in mind that taxes play into this decision for yourself as well because when you do a Backdoor Roth, you are going to pay taxes on that money within the current year, so that it has the benefit of growing tax-free within a Roth IRA going forward. So make sure that you either talk to your accountant or you understand all of that before executing a Backdoor Roth IRA.
If you are someone who thinks that you could potentially go over the Roth IRA income limits within the year, but you're not sure, then you don't have to contribute within that calendar year. That's because you have up until the tax deadline of the following year to contribute to your Roth IRA for the current year. For example, if we are in the middle of 2023 and you get a new job or expect some sort of bonus that could put you over the Roth IRA income limits by the end of the year, then you can wait until the year is over, calculate your modified adjusted gross income for 2023, and if you are under the income limit, then you can contribute directly This is how it works every single year, so pay more attention to the timeframe within the example that I just gave as opposed to focusing on these specific years that I used in the example.
If you'd like to help support my dog, Molly, as well as myself and this channel, please make sure to hit that thumbs up button, tap that Subscribe button, and the notification bell as well. Now that we've talked about getting money into the Roth IRA, you'll need to understand the rules around getting the money out of the account. This is very important to know so you don't accidentally screw something up, so pay attention.
The full amount within your Roth IRA can be withdrawn once you reach the age of 59 1/2. Now, if you try to withdraw the full amount before that, then you'll pay a 10% tax on a portion of the money. Now, before some of you go completely berserk about how your money is locked up forever, there's a little bit of a catch here, so hold on. According to the IRS, there are a few ways that you can withdraw the full amount without paying that 10%, which you can see on screen right now. Not all of your Roth IRA money is locked up under that 10% early withdrawal penalty, only the investment growth amount is. You can withdraw your contribution amount at any point in time without paying that penalty. For example, if you max out your Roth IRA for, say, three years, and due to your investment growth, the account has grown to, say, $30,000 during that time, then you can withdraw the $19,500 of contributions without paying the early withdrawal penalty. You will pay taxes on the $10,500 worth of gains within the account if you try to withdraw that money. But keep in mind, you only have to worry about this sort of thing if you plan to withdraw any of the money early.
I think trying to do an early withdrawal of any amount from your Roth IRA is a very bad idea for 99% of circumstances. Some people are gonna get about how, "Oh, my gosh, they're locking up my money until 59 1/2. I want access to my money right now because it's mine." Oh, those people. The reason that this rule is in place is to discourage you from an early withdrawal so that you can use the account for what it is intended for: retirement. Do your best to keep your hands off of this account until you are in retirement. Just pretend like you're not allowed to touch this money, period. If you get at a cash crunch in the short-term, then try to solve that issue without using your Roth IRA contributions as a backstop because keep in mind, that's what emergency funds are supposed to be used for, not retirement accounts. I always like to remind you guys that the today you has to look out for the older retired you. You have a responsibility to that person, and touching this money before they're retired is kind of like spitting in their face because their earning abilities are not as good as yours are right now.
Since you control everything about a Roth IRA, you'll have to decide which investment brokerage that you want to use. Now, there's a ton of them out there, like Fidelity, Vanguard, Charles Schwab, or M1 Finance. Fidelity is good enough from a traditional investment brokerage perspective, but my go-to is M1 Finance because their user interface is way better and is geared more towards a long-term buy and hold investors. The process of opening a Roth IRA is pretty simple. In the case of M1 Finance, once you create an account, you'll choose to add account, pick the Retirement account option, choose to open a Roth IRA, confirm that this is what you want to do, then you're done. After that, you'll need to connect your bank account to fund your Roth IRA. Now, M1 Finance keeps track of your funding history, so you can stay below the allowed contribution every single year. Not sure if other brokerages do this for you, but that's just what they do.
I'll have a link in the description to check out M1 Finance and get the signup bonus that they're currently offering. Keep in mind that that is an affiliate link that when you use and deposit money does help support myself and this channel. But if you have another brokerage that you prefer, then by all means, use that one. Once you get money into the account, you'll need to start investing it. Now, a lot of people skip this step, which isn't a good idea if you're trying to let your money grow.
Because the money within your Roth IRA grows tax-free and can be withdrawn tax-free, you want this account to get as large as possible. That's not a reason or a license to take on additional levels of investing risk, though, so don't take take on more than you normally would. Yes, we want the account to grow really, really big but it's not worth pushing all of your chips into a highly speculative investment where the downside is just as big as the upside.
If you know what you're doing when it comes to investing, then just stick to what you know. If you don't know much or you're like me who knows a lot about it but doesn't like messing around with individual stocks, then build yourself a nice, solid traditional index fund or index ETF portfolio. Something like a Total World Market Fund like VT or you could build something like a two-fund portfolio with the Vanguard Total US Market ETF and Vanguard Total International ETF or whatever else you want. Not a recommendation because I don't know your specific situation, but I personally stick with a two-fund portfolio within M1 Finance based on my personal situation at this point in time. M1 Finance makes this part easy because of their Pie investing. All you have to do is choose the percentages for your investment allocation, tap on the Buy button, then they'll automatically invest your money based on the allocation that you've already chosen for each investment fund.
No need to do the math on your own and click into each fund to purchase it, like you would on a platform like Fidelity. All the work is handled for you by M1 Finance. I have all kinds of videos to help you out with building a simple portfolio that is super easy to manage. Now, I'll create a special playlist of those videos for you, which will be linked up above my head in the description and at the end of this video as well. So the question at the very beginning that we need to answer: could you actually become a Roth IRA millionaire? Yes, of course, but there are a few factors that need to happen in your favor. The first is the amount of time that you have the money invested. As with most types of investing, the longer the better. While Warren Buffett has been a great investor, one of his secrets to success is the amount of time that he's been investing.
Look at how long this guy has been investing. Basically his whole life. If we're talking about maxing out a Roth IRA at the current contribution limits for 37 years straight, then at an average annual return of 7%, you'll have a little over $1 million in your Roth IRA. The second factor that would go into how quickly you become a Roth IRA millionaire is the average annual return that you want to assume. Personally, I don't like to assume an average annual return of more than 5%, but if you're someone who does, then at a 10% average annual return, it would only take you 30 years.
Even if you don't hit the millionaire status within a Roth IRA, that's okay, because the account is still extremely useful from a tax savings perspective. When it comes to investing in a Roth IRA, you are going to need to know how to build a portfolio and the difference between things like traditional index funds and index fund-based ETFs. Now, you can learn all about those topics in this playlist to your left next. Make sure to help support my dog, Molly, and this channel by hitting that thumbs up button, subscribing, and tapping that notification bell.
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