A Roth IRA is a tax-advantaged individual retirement savings plan wherein you can contribute after-tax dollars to save for retirement. The primary benefit of this account is that your money grows tax-free and can be withdrawn tax-free after fulfillment of certain conditions. If you wish to build a substantial retirement corpus and achieve millionaire status, you may consider taking advantage of this retirement account invest your money in a Roth IRA for the long-term. Reach out to a professional financial advisor who can guide you on maximizing your savings using a Roth IRA account.
Read below to learn how you may use different Roth IRA strategies to substantially grow your retirement funds.
How to make the most of your Roth IRA account
There are several investment options available to you that you can invest in a Roth IRA. This includes:
- Stocks
- Exchange-traded funds (ETFs)
- Mutual funds
- Money market funds
- Bonds
- Certificates of Deposits (CDs)
- Cryptocurrency
The Internal Revenue Service (IRS) stipulates the contribution limits for a Roth IRA, which are revised occasionally. For 2023, you can contribute $6500 to your Roth IRA account. However, if you are 50 years of age or above, you can make an additional catch-up contribution of $1000, bringing your total to $7500 for the year. Try and maximize your contributions for the year. Doing so would allow you to harness the power of compounding and give a significant boost to your retirement fund.
6 Roth IRA strategies can you employ to grow your finances
Everyone wants to save a substantial sum of money to live comfortably in retirement. And saving a million dollars would go a long way toward making that dream a reality. Let us discuss some strategies that can help you to become a millionaire, while maximizing the use of your Roth IRA account.
1. Start investing in your Roth IRA from a young age
If you start saving from a young age, say in your mid-20s, you would be looking at a 40-yr window before you reach your full retirement age. By starting early, you not only harness the power of compounding but also enable your money to grow at a faster rate. You can also consult with an advisor who can advise you on which investments to pick in a Roth IRA. Given ample time and with careful planning and execution, you could grow a significant corpus for your retirement.
2. Maximize the power of compounding
When saving for retirement, you need to consider the impact of the power of compounding on building wealth and your savings in the long term. Let us consider an example to understand this effect better. Suppose you start investing money in a Roth IRA when you turn 25. You make a contribution of $6500 (as per the Roth IRA 2023 contribution limit) each year until you turn 70 years of age. Say, you earn an average return of 7% annually, meaning by the time you turn 70, you would have saved $1.86 million in your Roth IRA. That said, it is not given that your investment will grow at 7% each year. However, if they were to grow at only half the return i.e. 3.5 to 4% per year, you would still save a sum of $$389,937. This may not be true if you start saving for retirement at a later stage in your life, say at 35 years of age. To do so, you will need to save at a significantly higher rate to reach the same level of wealth. Hence, it is better to start saving and investing your money from an early age to make the most of the power of compounding.
3. Avoid making early withdrawals
To maximize your Roth IRA account, you should refrain from making early withdrawals and allow your money to grow over time to take advantage of the power of compounding. However, if you need to withdraw in case of a financial crisis or a medical emergency, ensure that you do not attract any penalties or taxes on the withdrawn amount. Ensure that you are 59.5 years of age or older and have held your Roth IRA account for at least five years before you withdraw money. Doing so will allow you to make tax and penalty-free withdrawals. You could also spread out your withdrawals over several years to avoid entering a higher tax bracket. You also have the option of borrowing money from your Roth IRA without having to pay taxes or a penalty provided you deposit the money back in less than 60 days. That said, ensure you understand the rules with respect to making a withdrawal vis-a-vis your taxability.
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4. Maximize your contributions to boost your Roth IRA savings
You must invest more money in your account to derive the maximum benefit from your Roth IRA investment. As per studies, an individual should invest nearly 15% of their annual income in their retirement plan but that is not the case. On average, an individual invests only 3% of their annual income which is not enough to build a million-dollar retirement corpus for themselves. Apart from maximizing your contributions, you must ensure you invest them in the right investment instruments that will allow you to boost your retirement savings. Choose your investments based on your risk appetite, future goals, and needs. There are a number of options that you can select from such as stocks, bonds, mutual funds, money market funds, CDs, ETFs, and more. Make sure that you invest in a mix of different asset classes that will allow you to not only minimize your risk but also generate higher returns. Do keep in mind to start early and pick your investments wisely.
5. Take Roth IRA fees into account while budgeting your finances
To run and maintain your Roth IRA account, you must shell out a certain fee. In addition, you may incur a transaction fee on the sale or purchase of investments. This fee varies based on the asset, broker, and financial entity that brokers the transaction. It is vital to consider this fees while calculating your investment amount.
6. Take advantage of a Spousal Roth IRA
If you are married, you can boost your contributions by investing in a spousal Roth IRA. If only one of the spouses earns, he/she can contribute on behalf of their spouse no matter if they earn little or no income. Contributions to a spousal Roth IRA are subject to the same rules and limits as a regular Roth IRA. That said, there are certain rules you must adhere to be eligible to make a spousal Roth IRA contribution. These are:
- You must be married and file a tax return jointly.
- You can only make contributions from earned income i.e. any income received from a job or self-employment such as salary, commission, bonuses, wages, and tips.
- Your total contribution cannot exceed the taxable compensation filed by you on your joint tax return.
To conclude
If fully utilised, your Roth IRA could contribute to your goals of becoming a millionaire. Take advantage of its tax benefits, maximize your contributions, do not make early or unplanned withdrawals, and make use of the power of compounding. It is also vital to be disciplined and ensure that you invest in different asset classes and sectors to minimize your risk. A Roth IRA can be a great tool to attain your financial goals, provided you are willing to commit to a long-term investing strategy by being patient and financially disciplined.
Reach out to a professional financial advisor who can assist you with suitable Roth IRA strategies to grow your finances so you can live comfortably in retirement. Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself, and the match tool will find advisors that match your financial needs.