The Roth IRA (individual retirement account) has garnered a lot of attention in the retirement world, especially since ProPublica released information about Peter Thiel’s whopping $5 billion Roth IRA.
How a Roth IRA works
A Roth IRA can be a valuable piece of your retirement portfolio. Unlike a traditional 401(k), you can unlock tax-free income during retirement and won’t have to worry about required minimum distributions when you reach a certain age. All you have to do is contribute after-tax dollars into the account and invest in high-quality assets that can grow tax-free. If you build a $1 million Roth IRA portfolio, you can withdraw the entire balance without splitting the money with the government.
If your income is above the limits, you won’t be able to make direct contributions to a Roth. It’s best to contribute as much as you can while your income qualifies, especially if you expect to be in a higher income tax bracket in the future.
You also want to start as early as possible to maximize your Roth IRA growth potential. This is especially important because there are limits on how much you can contribute every year. For 2022, most people can contribute up to $6,000 in a Roth IRA. If you are 50 or over, you can contribute up to $7,000.
Acquiring $1 million in a retirement account may seem out of reach when you can only contribute $6,000 a year. But time and compounding can work wonders on your investment goals.
Your way to millions
Amassing $1 million in your Roth IRA is a long-term game. The earlier you start, the more time you’ll have to reach your goals. If you start your Roth IRA journey in 2022, you can make consistent contributions and max out your account every year to get you to the million-dollar mark.
For instance, let’s calculate how long it would take to reach $1 million using these assumptions:
- Age: 21
- Annual contribution: $6,000
- Investment rate of return: 8%
By the time you turn 56, you can have around $1.03 million in your account.
If you’re 35, you can still aim for the million-dollar mark, but you may be a bit older when you reach your goal. It’s also good if you can count on higher returns, so we’ll use a 10% investment rate of return.
- Age: 35
- Annual contribution: $6,000
- Investment rate of return: 10%
At age 66, you can have over $1 million in your account.
Having a long-term horizon is key. Your investments won’t always go up. It’s important to be in a position to maximize market downturns so that your portfolio can still reap some benefits.
Multiply your Roth IRA funds
It’s safe to say that saving $6,000 a year won’t get you to the million-dollar mark. Even if you saved money for 100 years, you would only have $600,000 in your account. The secret to multiplying your money is time, as well as the ability to load up on assets that can get you a decent return.
Here are some ways to invest your money:
Create the mix of investments that best match your risk tolerance, goals, and desired rate of return. If you have a self-directed Roth IRA, you can invest in alternative assets, like cryptocurrency, where you can potentially generate superior returns.
Even if you decided to dump all your money in an index fund, it wouldn’t be unreasonable to expect a 10% return. That’s the average annual return of the S&P 500 from 1926 to 2018.
Start your million-dollar success plan
A Roth IRA may not get you to $1 million overnight, but it’s a surefire way to get you closer to your goal. The secret recipe to success is to create a plan, make consistent contributions, and invest in high-quality assets. Soon, you’ll notice the power of compounding working in your favor to get you to your $1 million Roth IRA.
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