- I can confidently say that most Americans
should consider owning a Roth IRA.
Investing in it for just one year could turn $583 per month
into anywhere between 50,000 and $100,000.
Doing this for just a few years longer
could even grow at to at least $660,000 of tax-free money.
The problem is that over the past 12 months,
I've talked to eight people in my personal life
who were clueless about a Roth IRA.
Some of them had no idea a Roth IRA even existed.
At first, I didn't believe it.
I thought to myself, how is this even possible?
Can there really be that many people
who either don't know how it works or even know it exists?
So I went on a quest to find an answer to this question
and I came across this 156 page study.
What I discovered blew my mind.
Don't worry, I just printed out the first two pages
because I didn't want to waste paper.
I didn't print all 156 pages, you weirdos.
They found that only 24% of households own a Roth IRA
and of the 15% that actively contribute
to an IRA every year.
Only about 8% of them contributed to a Roth IRA.
Let me say that a different way.
76% of households don't have a Roth IRA
and 92% don't even put money
into this extremely powerful retirement account.
This genuinely bothers me
because it's mainly an education problem.
How do you know there's a solution to a problem
if you don't even know the solution exists?
We are going to fix that right here, right now.
Not only am I going to show you how the average person
can grow their Roth IRA to be worth anywhere between 600,000
and possibly more than a million dollars,
I'm also going to get you up to speed
on everything else you need to know
so you can turn your Roth IRA
into one of the best financial decisions
that you've ever made in your life.
All a Roth IRA is as a retirement account
you can put money into then invest it
so it can grow tax free.
The reason the government allows you to never pay taxes
on money within the account is because you are contributing
to the account with dollars that have already been taxed
when your employer paid you.
With a Roth IRA, they're pretty much saying,
"Hey, let's make a deal.
If you give us your tax money now on the front end,
then we will call it even so you don't have to pay us again
in the future.
This is how it's possible to have a Roth IRA
worth a million dollars
and the government won't make you pay taxes on any of it.
Unlike something like a 401k, 403b
and other retirement accounts,
a Roth IRA has nothing to do with your employer.
It's a separate account that you open,
contribute to and own on your own
outside of your employer sponsored retirement plan.
So technically you can invest
in both your employer sponsored retirement account
and a Roth IRA at the same time.
And to be honest, most people should be doing this.
Since a Roth IRA isn't offered by your employer,
I think this is part of the reason
76% of households don't invest in one.
Your employer is going to tell you
about the retirement accounts that they offer
when you are hired.
They have the account and all of your investment options
laid out there on a silver platter
ready for you to start investing.
But if no one in your life ever tells you about a Roth IRA
or they don't explain the details of how it works,
then you'd never even know it exists.
It's literally luck.
You're just hoping that someone comes around
and tells you about a Roth IRA in your life
and if they don't, then you're screwed.
If you wanna get your Roth IRA to be worth a large amount,
you can't just deposit that much
into the account all at once
because there are yearly contribution limits
that you have to follow.
Listen up here because like I said,
92% of people don't even contribute
as little as $1 to a Roth IRA every year,
which is a huge mistake.
This year, you can contribute up to $7,000
and if you are 50 or older,
you can contribute an additional $1,000,
which is called a catch-up contribution.
No, not that kind of ketchup, you freaks.
Since this is an individual retirement account,
you and your spouse
can each have your own separate Roth IRAs,
which means that combined
you can contribute up to $7,000 each
if you are under the age of 50.
Non-working spouses or stay at home parents
can also contribute to a Roth IRA
up to the contribution limit
as long as the other person works
and you file taxes jointly.
The key word with all of this is up to.
It's not an all or nothing type of account
where you have to contribute all 7,000 or $8,000.
You can also contribute money in any frequency
that works best for you and how you get paid.
It can be all at once, every week, every month,
every quarter or whatever as long as you don't exceed
that 7,000 or $8,000 contribution limit.
In fact, I encourage everyone
to invest at least something into their Roth IRA,
no matter what their financial situation is,
even if it's only a hundred dollars.
The main point is to start getting your money
into this account as soon as possible
so it can start growing, which we'll talk about
how to grow that money in just a few minutes.
Just like there are contribution limits,
there are also income limits.
To be able to contribute directly to a Roth IRA,
you have to have an earned income
that falls within certain guidelines
that the IRS has listed as compensation.
On screen, you can see what the IRS defines as compensation.
If you wanna learn more about the details,
then you can do a quick Google search for Pub 590-A.
Here are the income limits to be able to contribute
to a Roth IRA directly.
You are going to have to calculate
your modified adjusted gross income on your own
to make sure that you fall within limit.
Once again, the key word with these income limits
is that you have to fall within these guidelines
to be able to contribute directly.
Two pieces of good news with this.
First, the income limits usually increase from year to year,
so if you are over the limit this year,
then you may fall within the income limit next year
or the year after that.
Second, if you are over the income limit,
then you can still legally contribute
to a Roth IRA indirectly
by doing something called a backdoor Roth.
I'm not going to go into all of the details,
but it's where you contribute to a traditional IRA,
then contact your brokerage to have them convert that money
to a Roth IRA so you can benefit
from the tax-free investment growth.
I know this sounds like some weird loophole
that might not be legal, but I have done a backdoor Roth
and there's thousands of people who have done it
quite a few times so I can confirm
that it doesn't break any rules.
Keep in mind, the taxes could play into this decision
depending on your tax bracket,
so make sure that you do additional research on the topic
or talk to your accountant.
There's a lot of you out there
who aren't a hundred percent sure
if you are going to fall under the income limit
by the end of the year
to be able to contribute directly to a Roth IRA.
All it takes is getting a raise at work,
getting a higher paid job or getting an end of year bonus.
Then the next thing you know,
you are over the Roth IRA income limit.
There are two ways to completely avoid this potential issue.
First, you actually have roughly 16 months
to contribute directly to a Roth IRA.
So for your 2024 Roth IRA,
you have from January 1st, 2024 through April 15th, 2025
to contribute directly to your 2024 Roth IRA.
This is how it works every single year,
which means you can wait until the calendar year is over,
then calculate your modified adjusted gross income.
If you are under the income limit,
then you have through when taxes are due
to contribute to your Roth IRA for the previous year.
Pro tip: if you do this,
make sure you put the money in the correct year.
If you deposit money into your account January
through April, then whoever you invest with
should give you the option of which Roth IRA year
you want the money to go towards.
You'll always want to choose
the previous year's contribution bucket
to get that one filled up before moving on
to the current year's Roth IRA bucket.
The second way to get around the income limit issue
is to just do a backdoor Roth IRA, no matter what.
Do this, if you 100% know
that you want to contribute to a Roth IRA
to take advantage of the tax-free growth,
no matter what your income or tax situation is.
There isn't a rule saying that you can't do a backdoor Roth
if you happen to end up below the Roth IRA income limit.
So there's no harm in just going through with it
to cover your butt no matter what ends up happening
with your income.
Now that you understand the rules
around getting money into the account,
let's talk about the rules
around getting money out of your Roth IRA.
Then we'll cover where to open an account,
how to invest the money and a few other things
that you need to know.
Since this is a retirement account intended for retirement,
they have rules in place
to try to prevent you from taking money out.
If you try to withdraw money from the account
before the age of 59 and a half,
then you'll pay a 10% penalty on a portion of the money.
Before you freak out, hold on,
because there's a little bit of a catch
to try to avoid paying 10%.
First, there are some exceptions
to this early withdrawal penalty,
which you can see on screen right now.
The IRS goes into more detail on each exception.
Just do a quick Google search for pub 590-b
and it starts on page 25.
Second, you will not pay a 10% penalty
on any contributions you withdraw from the account,
but you will pay a 10% penalty
on any investment gains that you try to withdraw.
For example, let's say you've contributed the maximum amount
for the past three years.
Over that time, the account has grown to $30,000
because the money was invested.
You can withdraw up to $21,000 from the account
and not pay the 10% penalty on that money.
But if you try to withdraw,
any of the $9,000 investment gains before 59 and a half,
then you will pay a 10% penalty
on the portion of that money you withdraw.
Keep in mind that once you withdraw money from this account,
you cannot put it back in.
And if you were like me
and you don't plan on withdrawing any money
before the age of 59.5,
then none of this matters to people like us.
My personal opinion is that the money in this account
shouldn't be touched under 99.999% of circumstances.
This money is for the 60 plus year old you.
Your earning ability is way better the younger you are
compared to someone who is in retirement.
If an emergency comes up where you are in a financial pinch,
then solve the problem with an emergency fund,
your current income or go find a way to make more money
so that you don't have to touch your Roth IRA.
Please, I am begging you.
You can of course do whatever you want with your money,
but for gosh sakes, try not to touch the money.
To start putting money into a Roth IRA,
you need to choose an investing platform
where the account will be held.
There's a bunch out there that offer a Roth IRA
like Fidelity, Vanguard, Charles Schwab
and my favorite, which is M1 Finance.
Each one has their pros and cons,
so if you have a preferred platform,
then stick with that one.
I've been contributing to my Roth IRA on M1 finance
since 2019 because I think
that it is by far the best platform
for long-term buy and hold investors like myself.
The process of opening a Roth IRA is pretty easy.
In the case of M1 Finance, once you create an account,
you'll choose to add account,
pick the retirement account option,
choose to open a Roth IRA,
confirm that this is what you want to do, then you're done.
Yes, it's literally that easy to open an account.
This can be done in less than 10 minutes
and can change your financial future forever.
Seems like a pretty good trade off to me.
If you are interested, I'll have a link down below
in the description to a video
where I walk you through an M1 finance tutorial
that I create.
Once you open your account,
you still need to actually invest the money
so it has the potential to grow.
Remember that a Roth IRA is just an account.
Think of it like an empty bucket.
If you wanna transport things,
you gotta actually put things in that bucket,
just like with a Roth IRA.
If you want the money to grow,
you have to put investments in that Roth IRA account.
I've heard horror stories of people depositing money
into their Roth IRA, then forgetting to invest the money
only to realize this mistake many years later
when their account hasn't grown
by more than their contributions
because you'll never pay taxes on money within this account.
Realistically, we wanted to get as big as possible,
but that does not mean that you should take on more risk
than you can handle
by investing in a bunch of random things.
If you are someone who already knows what you're doing
and you know what you want to invest in,
then go do your thing.
If you don't, then I'll give you some options
based on a few simple buy and hold strategies
that I personally like.
Once again, these are made to be bought
and held for long periods of time.
I'm talking 10, 20, and 30 plus years.
No selling in and out of these things
based on which way these stock market wins are blowing
from year to year or to be honest
from day to day or week to week or month to month.
Yes, you are going to have up years.
Yes, you are going to have down years,
but over time your money should grow
by following these strategies over the long term.
If you wanna be completely hands off
with managing your portfolio, then the first option
is to just choose a simple target date retirement fund.
Each of the three major platforms
offer their own type of TDF for you to pick from.
If you are younger or have a higher risk tolerance,
wanna go a hundred percent stocks
and be very hands off as well,
then a total world index fund
or the ETF version is a good choice.
When you put money into this fund,
you are investing in a little under 10,000 stocks
across the world.
I also like the two fund portfolio
where you pick an individual US stock fund like VOO or VTI
and also add in an international fund like VX US.
Going this route would basically be like
splitting up a total world fund into two individual funds
that cover US only stocks and all non-US stocks as well.
If you want some bonds,
then the three fund portfolio is a good option as well.
It's basically just the two fund portfolio,
but you add in a bond index fund or ETF, like B&D.
I have videos on the two and three fund portfolio
as well as target date funds,
which I will link up down in the description below.
If you want to grow your Roth IRA
to be worth anywhere between 600,000
and over a million dollars,
there's a few things that you need to know.
First, do your best to never miss a year
where you max out your contribution.
Doing everything in your power
to max out this account every single year
is going to be extremely important to this outcome.
I understand that life can happen,
so there could be a year here or there
that you might not be able to invest the full amount
and that is perfectly fine,
but try to make sure that times like this are the exception
and not the rule.
As I touched on a little bit before, during years like this,
just try to invest at least something into the account.
Next is time.
Getting the money invested and giving it time to grow
is going to determine how much you have in this account.
I'm of the opinion that it's best to invest money
as soon as it gets deposited into your Roth IRA.
Now, this is backed up by research
and it's wide this year and past years,
I invested 100% of my money
the day that I got it deposited into my Roth IRA.
Lastly is your investment returns.
Now here's the problem.
This sort of thing is out of your control.
A lot of people will say,
"Oh, I can control my investment returns."
Most of them can't. They say they can, but they can't.
We can use history to get an idea of what returns have been
over different time periods in the past,
but it's not guaranteed to play out
that exact same way going forward.
For example, over the past handful
of recent 30 year rolling periods, we can see
that all of the average annual returns
are in the range of 11 to 12%.
If things played out the same way over the next 30 years,
four year Roth IRA
where you've got an 11% average annual return
and maxed out these $7,000 per year,
then your account would be worth about $1.4 million.
While I hope this is how everything works out for you,
I personally suggest expecting
a lower average annual return like 7%.
Sure the account will only be worth $660,000
instead of over a million,
but that's still $660,000 of tax-free money you have.
Heck, even just maxing out the account for one year
would turn your money into over $50,000
in 30 years and over a hundred thousand dollars in 40.
Also, keep in mind that every year or few years,
the government increases the maximum
that you can contribute to your Roth IRA.
So as that increases and you continue investing more,
your account could be worth more than $660,000 in 30 years.
So aim a little low with your expected investment returns
and who knows if things end up better,
you're in a great spot.
If they don't, then hey,
you've already planned for a lower average annual return
compared to history anyways.
There are some additional Roth IRA mistakes
that you need to look out for
which you can learn about in this video to your left next.
Make sure to share the video with someone
that you think could help.
Hit that thumbs up button
and check out M1 Finance down in the description below.
I'll see you in the next one, friends! Done.