With time and a strategic game plan, you'll be on your way to a million-dollar Roth IRA.
Building a million-dollar retirement might not be easy, but more and more people are crossing the million-dollar mark every year, proving that it's possible. 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. This is impressive given that the traditional and Roth IRA contribution limits are lower than those of other retirement accounts, yet people have still managed to use IRAs to achieve their goals.
If you're looking for the blueprint for Roth IRA success, we've put together a few secrets for you to check out.
Image Source: Getty Image.
1. Maximize annual contributions
Every year, you can stash away a certain amount of money into a Roth IRA. If you miss your window of opportunity to contribute, you can't make up for it later. So, if you qualify to contribute to a Roth IRA and it makes sense for your retirement plan, you might not want to drag your feet. The more money you contribute, the more you'll have to invest. It's even better if you can contribute the maximum amount every year.
For example, in 2024, you can contribute $7,000 to a Roth IRA if you are single and your modified adjusted gross income is under $146,000. The contribution limit increases to $8,000 if you are 50 and older. Since contributions are made with after-tax dollars, you are essentially paying your tax bill in the current year, allowing you to enjoy tax-free income during retirement. If you contribute $7,000 annually for 30 years, you would have made $210,000 in contributions that can be invested and grow tax-free over time.
The great thing about Roth IRAs is that anyone with earned income can contribute, whether they're 8 years old or 80 years old. If your child is making money from a summer internship, you can open a custodial IRA and manage the account until they are eligible to do so. By helping them maximize contributions now, you could put them on track for a million-dollar Roth IRA before retirement.
2. Live within your means
Contributing $7,000 a year to a Roth IRA can be a lot of money, especially if you're just starting out and don't have much left over after paying your bills. But if you want to slam dunk your Roth IRA goals, you'll have to pick up this common millionaire trait: living below your means.
Cutting expenses can be a touchy subject because living on a bare-bones budget is not ideal for everyone. Instead, try negotiating bills, searching for discounts, and avoiding frivolous spending. You can also boost your income if needed, but be careful not to let lifestyle creep get the best of you.
The goal is to put yourself in a position that makes it easy to contribute the maximum amount to a Roth IRA every year. Once you have your finances together, you can set up recurring weekly or monthly contributions to your Roth IRA without the fear of overdrawing your account.
3. Make smart investment decisions
Although you'll need to invest your money to help you reach the million-dollar mark, you don't need to chase after the hottest stocks to achieve your goal. Do your research and invest in a diversified portfolio of assets that align with your goals and risk tolerance. You can consider individual stocks, exchange-traded funds, and index funds.
Let's assume the per year as it has over the past several decades and you invest $7,000 annually. Here's how your money could grow over the next three decades:
Growing at 10% For | $7,000 Invested Annually |
|---|
10 years | $122,718 |
20 years | $441,017 |
30 years | $1,266,604 |
Data source: Author.
Amassing a million dollars in a Roth IRA is a big deal because all of it is tax-free after you turn 59 1/2 and meet the requirements of the five-year rule. If you're willing to be consistent and stick to a proven game plan for success, you'll be one step closer to joining the ranks of Roth IRA millionaires.
FAQs
Roth IRAs have a unique tax break you don't receive from popular accounts like 401(k) or traditional IRAs. They allow you to contribute money that's already been taxed and then take tax-free withdrawals in retirement, as long as you're 59 1/2 years old and made your first contribution at least five years ago.
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.
How a Roth IRA can make you a millionaire? ›
All you really have to do is make the maximum allowable contributions each year, then sit back and relax. Compound returns will work their magic and bring you to millionaire status eventually! The toughest part is doing the right thing on repeat, making those contributions like clockwork, and then just waiting.
What is the average rate of 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.
What is the Roth IRA loophole? ›
Although opening a "backdoor" Roth IRA may sound shady, don't let the name mislead you. It's a totally legal loophole. At its core, a backdoor Roth IRA is a simple conversion: You put money into a traditional IRA or 401(k), then convert it to a Roth IRA.
At what income level does Roth IRA not make sense? ›
For tax year 2024, single and head-of-household filers with MAGIs of $146,000 to $161,000 can contribute only limited amounts. The income phaseout range for married couples filing jointly is $230,000 to $240,000. Taxpayers with incomes above those top numbers cannot contribute anything to a Roth IRA.
How many people have $3000000 in savings in the USA? ›
There are estimated to be a little over 8 million households in the US with a net worth of $3 million or more.
How many people have $5000000 in retirement savings? ›
Data from the Employee Benefit Research Institute, which utilizes the Federal Reserve's Survey of Consumer Finances, indicates that only about 0.1% of retirees have over $5 million saved for retirement. Additionally, about 3.2% have savings exceeding $1 million.
What percentage of retirees have $2 million dollars? ›
And if you're aiming for the $2 million club? Well, the number of those who make it is even smaller. We're talking about a sliver of a sliver – somewhere between that 3.2% and the razor-thin 0.1% who've got $5 million or more.
Do billionaires use Roth IRAs? ›
The Senate committee report came in the wake of a June 2021 ProPublica article based on what it said was tax return data from “thousands of the country's wealthiest people.” It singled out tech investor Peter Thiel as an example, saying that over 20 years, he had managed to build a Roth IRA worth $5 billion.
However, if you commit to contributing $7,000 per year, it would take just over 28 years to reach $1,000,000, assuming the same annual return. Essentially, you'll want to save and invest as much as you can every year to increase your chances of building a million-dollar Roth IRA.
What is a rich persons Roth IRA? ›
The Rich Person's Roth concept is a life insurance product that utilizes Internal Revenue Code 72E, 7702, and 101A for contributions into an asset class, with Market Downside Protection and allowing for Tax-Free distributions. A Participant funds the program using Post Tax Dollars.
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 ...
What is a good amount in Roth IRA for retirement? ›
How much a Roth IRA will be worth is determined by its rate of return. In addition, thanks to the power of compounding, returns may eventually exceed contributions over time. Most experts suggest using 80% of your current income as a guide to help you plan your retirement savings.
How much does the average person have in Roth IRA? ›
After ProPublica revealed that some wealthy Americans hold Roth IRAs worth hundreds of millions — compared to $39,000 for the average account holder — Democrats requested data. It shows more than 28,000 people with IRAs worth $5 million or more.
What is the catch to a Roth IRA? ›
One disadvantage of the Roth IRA is that you can't contribute to one if you make too much money. The limits are based on your modified adjusted gross income (MAGI) and tax filing status.
How do I get the best out of my Roth IRA? ›
One of the simplest ways to do this is to invest in a few core index funds. Ideally, a strong portfolio will contain a single U.S. stock index fund, which provides broad exposure to U.S. economic growth, and a single U.S. bond index fund, which provides exposure to relatively safer income-generating assets.
What are the negatives of a Roth IRA? ›
Earnings can't be withdrawn tax-free until age 59½ and the account is at least 5 years old. Diversification in retirement, so all of your accounts aren't tax-deferred. The maximum contribution is relatively low compared with a 401(k). You'll probably need other accounts to save enough for retirement.
What is unique about the Roth IRA plan? ›
Unlike conversions and earnings, contributions to a Roth IRA are not subject to any holding period, so in most cases, you can withdraw them without paying taxes or penalties at any time.
