Take these 5 simple steps to become a Roth IRA millionaire. Given enough time, anyone who is eligible can build a million-dollar Roth IRA. With the comparatively low contribution limits and income limitations, there are relatively few people who have been able to reach this financial freedom type of milestone. However, with the help of a Roth 401(k), many more people should be able to become Roth IRA millionaires in the future.
1) Open A Roth IRA Account
The first step towards becoming a Roth IRA millionaire is opening a Roth IRA account. Pretty simple, right? Many times, the biggest hurdle to building life-changing wealth is getting started.
You will need to choose a custodian to hold your account. You can also hire a fee-only Certified Financial Planner to help you set up the account and get on track to become a Roth IRA millionaire.
Sadly, not everyone can contribute to a Roth IRA each year. If you can’t contribute, there is little reason to open the account (sorry, I didn’t write the tax code). For single filers to be eligible for Roth IRA contributions in 2023, they must have an income below $153,000. For married people filing jointly, you must have a combined income of less than $228,000 to make Roth IRA contributions.
2) Contribute Enough Money To Your Roth IRA Account
The second step toward becoming a Roth IRA millionaire is determining how much money to contribute. Most people will likely have 2 numbers here. 1) How much do they need to contribute to become a Roth IRA millionaire in a certain amount of time? 2) The amount they think they can afford to save each month. If you don’t have any other retirement accounts, you really should try, at a bare minimum, to contribute the maximum allowable amount to a Roth IRA, which is $6,500 per year (or $541.67 per month).
The important thing is to get started. Set up automatic payments into the account each month. Many people say they don’t even miss the money. When I opened my first Roth IRA, I started with a whopping $25 per month. Before you scoff, this was right after I graduated college and before I had a job. Decades later, I do have a job, and I save quite a bit more for retirement.
Keep reading as we share some of the math of building a millionaire retirement account. A rough rule of thumb is to save at least 10% of your salary. For those playing catch up when saving for retirement, you will likely need to save quite a bit more per year.
3) Invest Your Roth IRA Contributions
Becoming a Roth IRA millionaire without contributing $1 million into your retirement account will require investing your contributions. If you want to do it the slow and hard way by contributing $6,500 per year and just having it sit there, it will take around 154 years. Even the most optimistic readers of this post will likely not believe they will be alive in 154 years. So, we need to earn more on our Roth IRA contributions.
Assuming a 10% return on your investments, it would take around 29 years with the same $6,500 per year contribution.
Becoming a Roth IRA millionaire will take time. It is much more likely that people will become retirement account millionaires, which means taking into account their 401(k) and traditional IRA balances.
4) Take The Time To Become A Roth IRA Millionaire
The government sets the amount that can be contributed to a Roth IRA each year. For 2023, the Roth IRA contribution limit is just $6,500. The number is $1,000 higher for those 50 or older. So, even with market-beating investment returns, it will take time to become a Roth IRA millionaire. So, getting started sooner rather than later is important.
Here are some rough estimates of how long it will take you to become a Roth IRA millionaire. We are assuming a 10% average return on your Roth IRA investments.
$100 per month = 45 years
$250 per month = 36 years
$541.67 per month=29 years
As you can see here, the earlier you start investing for retirement, the easier it will be to become a Roth IRA millionaire.
5) Don’t Make The Mistake Of Raiding Your Roth IRA
Following the steps above should have you on the path to becoming a Roth IRA millionaire. However, if you make the mistake of raiding your Roth IRA before retirement, you will significantly reduce your chance of achieving financial freedom. After five years, you can withdraw your contributions to a Roth IRA. This may tempt many people to make withdrawals before retirement. I would take the opposite tack and use this option as an opportunity to save as much as possible into your Roth IRA now, knowing you can access the funds in the future if you get desperate enough.
Is It Better To Be A 401(k) Millionaire Or A Roth IRA Millionaire?
I will cheer for anyone who reaches these major milestones. But there is a clear winner when it comes to net after-tax income: The Roth IRA millionaire. Only the Roth IRA allows for tax-free withdrawals from the account in retirement. In plain English, the Roth IRA with a million-dollar balance is worth more than the same-sized 401(k) because you won’t have to pay taxes on the withdrawals from the Roth IRA.
For those of you making enough money, consider becoming a Roth IRA millionaire and a 401(k) Millionaire. This will give you the best options to pay the lowest amount of taxes over your lifetime of working. Likewise, you can strategically pay fewer taxes on your retirement income by diversifying the taxation of your retirement income.