Roth IRA - Your Path to Becoming a Millionaire
#6 AdviceBy_
Want to be a millionaire by the time you retire?🤑Make use of retirement accounts! I started a bit late because I didn’t know how to use these accounts. So, I hope my articles make it easier for you to start earlier. In this article, I’ll discuss Roth IRAs. Make sure to share this with your friends and subscribe above to get my next article on 401(k)s straight to your inbox.
Part 1: Savings vs. Checkings Account (read here)
Part 2.1: Investing - Definitions (read here)
Part 2.2: Investing - Start Now (read here)
Part 3.1: Retirement Accounts - Roth IRA (this one!!)
Part 3.2: Retirement Accounts - 401(k) (read here)
Part 3.3: Education Accounts - 529 & Coverdell (read here)
Part 4: Credit Cards
📝 Today’s Agenda
What Is It? • How Can I Contribute? • How Much Can I Contribute? • Other Tips? • Action Items
🔒 What Is It?
A Roth IRA is a retirement account where you contribute your money after paying taxes, and the earnings (interest or gains from investing the money) grow tax-free.
Tax-free growth is a significant benefit. Usually, interest or gains from investments are taxed, meaning you lose part of your profits as they go to the government. However, Roth IRA gains are not taxed. You keep all of your profits!
To illustrate this, suppose you contribute $6000 every year starting at 20 years old. You could retire at 60 with a Roth IRA balance of ~$3 million if you invested your contributions and got the market average annual return of 10%. Use the calculator here to play around with assumptions and see your balance at retirement, which you can take out tax-free! So, you get to keep the entire ~$3million.
You cannot withdraw money from the account until you are 59.5 years old.
You can start contributing at 18 years old - open an account as soon as you turn 18!
📈 How Can I Contribute?
Open a Roth IRA through a trading account (see my previous post that discusses how to open a trading account). There will be a Roth IRA option on the trading platform’s website, or you can call them to help you set it up.
Opening the Roth IRA within a trading account is critical so that you can actually invest the money you contribute into stocks, ETFs, cryptocurrency, etc.
Do not open your Roth IRA through your bank account because your gains from the bank (interest) will very likely be significantly less than the gains you can get by investing in the markets (~10% annually on average). Banks also make it difficult for you to transfer your Roth IRA once you’ve opened it with them, only giving you a couple of weeks window throughout the year to do so.
💸 How Much Can I Contribute?
There’s a $6000 annual contribution limit for Roth IRAs.
You must make less than $139,000 annually (file taxes as a single person) or less than $203,000 (file taxes jointly) to contribute to the Roth IRA.
You can only contribute to the account if you’ve earned money that year. Your parents or grandparents can contribute their money to your account as long as you have earned income that is at least equal to the amount they contribute. For example, if you made $2000, your parents/grandparents can put $2000 into your Roth IRA on your behalf (so you can keep ‘your’ money with you), but not more than that.
🌟 Other Tips?
Make sure you open your Roth IRA account well before the tax filing deadline in April so you can complete any paperwork needed in time. You can contribute to the Roth IRA for the 2020 tax year until the 2020 tax filing deadline in April 2021.
Open your Roth IRA account as early as possible once you’re 18 years old. This will allow you to maximize your contributions, which is applicable for $139,000 annual income or less. However, remember that you/your family can only contribute to your account what you actually made that year.
After paying your regular expenses, focus on maximizing your Roth IRA contribution (maximum $6000 a year) since the gains are tax-free.
Make your more risky investment decisions through the Roth IRA since those will likely result in higher gains, which will not be taxed when you withdraw the funds.
✔️ Action Items
Open a Roth IRA account through your trading account
Decide how much you want to contribute each year (try getting as close to $6000 as possible)
Contribute a certain amount weekly, monthly, or a lump-sum amount so you can reach your annual goal
Invest your contributions into stocks, ETFs, mutual funds, cryptocurrency, etc
Watch your contributions grow and take them out tax-free after you are 59.5 years old
If you have any questions (regarding content, opening an account, etc.), feedback, or suggestions for future articles, please reach out. If you haven’t already, subscribe above to get the next article discussing 401(k)s delivered straight to your inbox!