- Can you actually become a Roth IRA millionaire
with $542 per month?
Yes, but there's a little bit of a catch
that we should probably talk about.
In this video, we'll cover what it takes
to become a Roth IRA millionaire,
as well as everything you need to know
to be able to maximize
one of the most powerful retirement accounts.
By the way, according to the Census Bureau,
only about 18% of working age adults have an IRA account,
which means that even less have a Roth IRA.
I think this is a mistake,
especially since it's the second investment account
that I think a lot of people
should be maxing out every single year.
For the technical nerds out there
who will be furiously typing in the comments below
about how an IRA stands
for individual retirement arrangements,
I know, I know.
Calm down, have a glass of warm milk,
put your earmuffs on.
- All you gotta do is say, "Earmuffs," son, earmuffs.
And say whatever you want.
- And go sit in the corner for the remainder of this video
because I am going to refer to it
as an individual retirement account
since that's how US normal people call it.
A Roth IRA is a self-directed retirement account
where your money has the ability to grow
and be withdrawn tax-free when it's invested.
We'll talk about the investing side of things
later in the video, so hang tight for a few minutes.
Starting in 2023,
you can contribute up to $6,500 per year per person
or $7,500 per year per person
if you are 50 years or older by the end of that year.
One additional thing to add here
is that stay-at-home parents can fund IRAs
if their spouse works
and the couple files their taxes jointly.
In my opinion,
Roth IRA is one of the most important accounts
that most people should be investing in,
even if you already have access to something,
like a 401k, 457, or taxable investment account
for reasons that I will cover later in this video.
The self-directed part of this account
is something that you really need to be aware of.
Now, unlike other retirement accounts,
your employer doesn't automatically set up
a Roth IRA for you.
You handle everything from start to finish.
I think this is part of the reason
why only 18% of working age adults actually have an IRA.
You've gotta take it upon yourself to open an account,
deposit money, and choose your own investments,
which we'll talk about in a minute,
because not everyone is eligible
to contribute directly to a Roth IRA.
To be able to contribute to a Roth IRA,
you have to have earned income
that falls within the guidelines
that the IRS has listed as compensation.
On screen, I'll have what the IRS defines as compensation
on their website.
Now, if you wanna read more about the details,
then you can just do a quick Google search
for Publication 590-A.
On top of that, there are specific income limits,
which you can see on screen right now.
Now, everyone's situation is different,
so you'll have to calculate
your modified adjusted gross income on your own.
The bad news is that you have to follow these rules
to be able to contribute to a Roth IRA directly.
Now, the key word there is directly.
Two pieces of good news, though.
The first is that the income levels increase over time,
so if you make too much today,
then you might fall within that limit
at some point in the future.
The second part of the good news has to do
with being able to contribute to a Roth IRA indirectly.
If you make more than the income limit,
you can still legally contribute to a Roth IRA
through something called a Backdoor Roth.
I'm not going to go into these specifics here,
but at a high level,
it's when you contribute money to a traditional IRA,
then convert that money into a Roth IRA
for the tax-free investment growth.
Keep in mind that taxes play into this decision
for yourself as well
because when you do a Backdoor Roth,
you are going to pay taxes on that money
within the current year,
so that it has the benefit of growing tax-free
within a Roth IRA going forward.
So make sure that you either talk to your accountant
or you understand all of that
before executing a Backdoor Roth IRA.
If you are someone who thinks that you could potentially
go over the Roth IRA income limits within the year,
but you're not sure,
then you don't have to contribute within that calendar year.
That's because you have up until the tax deadline
of the following year
to contribute to your Roth IRA for the current year.
For example, if we are in the middle of 2023
and you get a new job or expect some sort of bonus
that could put you over the Roth IRA income limits
by the end of the year,
then you can wait until the year is over,
calculate your modified adjusted gross income for 2023,
and if you are under the income limit,
then you can contribute directly
This is how it works every single year,
so pay more attention to the timeframe
within the example that I just gave
as opposed to focusing on these specific years
that I used in the example.
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Now that we've talked about getting money into the Roth IRA,
you'll need to understand the rules
around getting the money out of the account.
This is very important to know
so you don't accidentally screw something up,
so pay attention.
The full amount within your Roth IRA
can be withdrawn once you reach the age of 59 1/2.
Now, if you try to withdraw the full amount before that,
then you'll pay a 10% tax on a portion of the money.
Now, before some of you go completely berserk
about how your money is locked up forever,
there's a little bit of a catch here, so hold on.
According to the IRS,
there are a few ways that you can withdraw the full amount
without paying that 10%,
which you can see on screen right now.
Not all of your Roth IRA money
is locked up under that 10% early withdrawal penalty,
only the investment growth amount is.
You can withdraw your contribution amount
at any point in time without paying that penalty.
For example, if you max out your Roth IRA
for, say, three years, and due to your investment growth,
the account has grown to, say, $30,000 during that time,
then you can withdraw the $19,500 of contributions
without paying the early withdrawal penalty.
You will pay taxes on the $10,500
worth of gains within the account
if you try to withdraw that money.
But keep in mind, you only have to worry
about this sort of thing
if you plan to withdraw any of the money early.
I think trying to do an early withdrawal
of any amount from your Roth IRA
is a very bad idea for 99% of circumstances.
Some people are gonna get about how,
"Oh, my gosh, they're locking up my money until 59 1/2.
I want access to my money right now because it's mine."
Oh, those people.
The reason that this rule is in place
is to discourage you from an early withdrawal
so that you can use the account
for what it is intended for: retirement.
Do your best to keep your hands off of this account
until you are in retirement.
Just pretend like you're not allowed to touch this money,
period.
If you get at a cash crunch in the short-term,
then try to solve that issue
without using your Roth IRA contributions as a backstop
because keep in mind,
that's what emergency funds are supposed to be used for,
not retirement accounts.
I always like to remind you guys that the today you
has to look out for the older retired you.
You have a responsibility to that person,
and touching this money before they're retired
is kind of like spitting in their face
because their earning abilities
are not as good as yours are right now.
Since you control everything about a Roth IRA,
you'll have to decide which investment brokerage
that you want to use.
Now, there's a ton of them out there,
like Fidelity, Vanguard, Charles Schwab, or M1 Finance.
Fidelity is good enough
from a traditional investment brokerage perspective,
but my go-to is M1 Finance
because their user interface is way better
and is geared more towards a long-term
buy and hold investors.
The process of opening a Roth IRA is pretty simple.
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.
After that, you'll need to connect your bank account
to fund your Roth IRA.
Now, M1 Finance keeps track of your funding history,
so you can stay below the allowed contribution
every single year.
Not sure if other brokerages do this for you,
but that's just what they do.
I'll have a link in the description to check out M1 Finance
and get the signup bonus that they're currently offering.
Keep in mind that that is an affiliate link
that when you use and deposit money
does help support myself and this channel.
But if you have another brokerage that you prefer,
then by all means, use that one.
Once you get money into the account,
you'll need to start investing it.
Now, a lot of people skip this step,
which isn't a good idea
if you're trying to let your money grow.
Because the money within your Roth IRA grows tax-free
and can be withdrawn tax-free,
you want this account to get as large as possible.
That's not a reason or a license
to take on additional levels of investing risk, though,
so don't take take on more than you normally would.
Yes, we want the account to grow really, really big
but it's not worth pushing all of your chips
into a highly speculative investment
where the downside is just as big as the upside.
If you know what you're doing when it comes to investing,
then just stick to what you know.
If you don't know much
or you're like me who knows a lot about it
but doesn't like messing around with individual stocks,
then build yourself a nice, solid traditional index fund
or index ETF portfolio.
Something like a Total World Market Fund like VT
or you could build something like a two-fund portfolio
with the Vanguard Total US Market ETF
and Vanguard Total International ETF
or whatever else you want.
Not a recommendation
because I don't know your specific situation,
but I personally stick with a two-fund portfolio
within M1 Finance
based on my personal situation at this point in time.
M1 Finance makes this part easy
because of their Pie investing.
All you have to do is choose the percentages
for your investment allocation,
tap on the Buy button,
then they'll automatically invest your money
based on the allocation that you've already chosen
for each investment fund.
No need to do the math on your own
and click into each fund to purchase it,
like you would on a platform like Fidelity.
All the work is handled for you by M1 Finance.
I have all kinds of videos to help you out
with building a simple portfolio
that is super easy to manage.
Now, I'll create a special playlist of those videos for you,
which will be linked up above my head in the description
and at the end of this video as well.
So the question at the very beginning
that we need to answer:
could you actually become a Roth IRA millionaire?
Yes, of course,
but there are a few factors
that need to happen in your favor.
The first is the amount of time
that you have the money invested.
As with most types of investing, the longer the better.
While Warren Buffett has been a great investor,
one of his secrets to success
is the amount of time that he's been investing.
Look at how long this guy has been investing.
Basically his whole life.
If we're talking about maxing out a Roth IRA
at the current contribution limits for 37 years straight,
then at an average annual return of 7%,
you'll have a little over $1 million in your Roth IRA.
The second factor that would go
into how quickly you become a Roth IRA millionaire
is the average annual return that you want to assume.
Personally, I don't like to assume
an average annual return of more than 5%,
but if you're someone who does,
then at a 10% average annual return,
it would only take you 30 years.
Even if you don't hit the millionaire status
within a Roth IRA, that's okay,
because the account is still extremely useful
from a tax savings perspective.
When it comes to investing in a Roth IRA,
you are going to need to know how to build a portfolio
and the difference between things
like traditional index funds and index fund-based ETFs.
Now, you can learn all about those topics
in this playlist to your left next.
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In the description will be more ways
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