How Much Should a Roth IRA Be to Be a Millionaire?
Given it will take approximately 37 1/2 years to accumulate $1 Million if you max out your IRA this year and earn an average annual return on investment of 6%, that is not too bad a plan.
But what if you want to break into the seven-figure club faster? While it is achievable, this requires disciplined efforts and consistent behaviors.
1. Compounding
Compounding is a key term when discussing investing, yet not everyone understands its meaning. Compounding allows your investments to expand faster by adding interest on top of what was originally invested.
Take for instance if you begin investing at age 25 with $100 invested each month over 20 years – your Roth IRA would contain $96,000 by retirement time; but had another person began contributing half as much, their investment would only total $48,440 less.
Compound interest makes the difference; the more and for how long you invest, the higher your returns will be – even when markets decline.
2. Dividend reinvestment
Reinvesting dividends will allow your earnings to expand even faster, eventually surpassing annual contributions into your account balance.
Julian could invest $200 a month until retirement at age 65 in his Roth IRA and see his savings grow to over $764,145 – that’s over $254,973 more than had he saved his savings in regular taxable accounts over that same timeframe.
When you can, prioritize investing in a Roth IRA. However, remember there may be income restrictions, and your contribution could be phased out at higher income levels. Also remember any withdrawals prior to age 59 1/2 may incur tax and penalty obligations; to avoid these penalties you will need to follow specific rules for making qualified withdrawals.
3. Time
Compound interest can do amazing things for a Roth IRA of any amount; and starting early can only help it work more effectively.
For example, let’s assume Johnny begins contributing the maximum annual amount of $6,000 into a Roth IRA each year until age 18, assuming an average market return of 10 percent, his account would grow into well over $1,000,000 in today’s dollars.
Although it’s certainly achievable for someone older than 18 to reach this goal, the more complicated and slower its rate of growth becomes, the harder it will be. Therefore, starting early and saving at least the maximum allowed each year is key if you live on a modest income – spreading out contributions can ease some of the pressure over time.
4. Taxes
Roth IRAs offer many advantages over traditional IRAs, one being tax-free withdrawals of contributions made. This can make an enormous difference to how much a person saves throughout their lifetime.
Young adults who begin contributing to their Roth IRA when they get their first job may see it grow into over $1 Million by age 70 if their contribution amounts remain consistent over time and their annual return averages 7% or greater.
However, withdrawals of earnings from a Roth IRA made prior to age 59 1/2 could incur taxes and penalties; it’s especially important for those in higher tax brackets. There are exceptions, however; qualified expenses like purchasing your first home, medically necessary treatments, disability-related costs or having children can all qualify as qualified withdrawals without penalty being applied.
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