One of my favorite investments is the ROTH IRA. This investment will make you rich. And is it so good? Taxes.
In a traditional 401k or traditional IRA these accounts are tax deferred. So you can build up the principal higher and then pay taxes as you withdraw the money as income.
In a ROTH IRA you pay taxes up front. But then you are never taxes again. So you all your dividends and capital gains are tax free. Reducing your taxes and fees is an important step in getting rich.
The maximum amount you can currently contribute to a ROTH IRA is $6000. This amount generally increases over time as congress approves increases due to inflation. I would recommend maxing out this amount, because $6000 is low compared to the $19,000 limit afforded by the 401k. So in order to become a millionaire through the ROTH you need to be contributing to this account year after year.
The other benefit of a ROTH IRA over the traditional is no withdraw date. You can keep the money growing in this account till you die and pass the account along to an heir. Now there are rules about how long someone inheriting this account can keep it before have to withdraw the money. In a traditional account you must start withdrawing the funds at age 72. And start paying taxes on those funds.
So lets get to the numbers. If you contribute the max for 10 years you will have put in 60,000. Your capital gains will come from the stock market which over time will return anywhere from 8 -12%. Now there will be many times where your ROTH account will decrease with the declining market. But the market always goes up over the long term. And ROTH investing is a long term game. I am going to assume that the market is going to return 8% over the long run. But if the market does better than 8% you will reach millionaire status faster.
After investing $6000 for 10 years at 8% annual returns minus taxes paid you will have earned $99,800.
If you consistently invested $6000 at 8% with a tax rate of 22% your account will reach $1,000,000 after 34years. If you get returns of 9% you will get there in 32years. 10% you will get there in 30years. If you reduce your taxes you will get there even faster.
Reaching millionaire status is an amazing accomplishment. But the true reward is financial independence AKA F-You money. You want to have the freedom to make choices in your life. You do not want to have to work yourself to death.
You should also know that you can have a ROTH IRA and a 401k or 453b if you work for a nonprofit. Max out both and you will a millionaire even faster.
Work the system. Congress wants you to save for retirement. They passed laws encouraging you to use these accounts. Don’t believe that social security will be there to save you.
Here are the accounts that I invest into:
– ROTH IIRA
– Taxable stock account
Check out my articles about investing in a Health Savings Account – HSA to learn about how amazing those are.
Financial independence is very possible you just have to have patience and persistence.
Sound off on your thoughts about ROTH IRAs and your investing strategies in comments section. Where are you on your journey?
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