Become a Multimillionaire by Fully Funding Your Roth IRA

If you start investing early and contribute the maximum allowable amount into your Roth IRA every year, it is possible for you to retire as a multimillionaire. A Roth IRA allows your money to grow tax-free with high return rates, and it is a great way to build long-term savings for a comfortable retirement. For more about how to maximize your Roth IRA’s potential, see below.

What Is a Roth IRA?

A Roth IRA is a retirement account that allows you to save money specifically for your retirement years. You can contribute a maximum of $6,000 annually ($7,000 if you’re 50 or older) to a Roth IRA, per IRS regulations. If you contribute the maximum amount allowed each year, it is possible to reach a few million dollars by the time you reach retirement age. Of course, this depends upon how soon you start contributing to your IRA and how soon you want to retire. The sooner you start saving, the more you’ll end up with down the line. You can calculate how much you will have saved by retirement based on your age and the amount you save by using an investment calculator, like the one that David Ramsey provides on his website.

Potential Roth IRA Amounts by Retirement

While you can technically start investing at any age, you need to be 18 in most states to open your own brokerage account (as previously reported). Furthermore, while opening a Roth IRA as early as possible will lead to the highest returns, you may not have a source of income that you can use to start investing while you are a teenager. The table below provides some potential Roth IRA contribution paths that you can take, as well as the expected returns for each scenario.

For each Roth IRA example, we assumed an 8% annual return, which is a reasonable estimate given that the benchmark S&P 500 Index (which tracks the performance of 500 major companies in the U.S. stock exchange) has gained nearly 12% since inception. The money grows tax-free.

Also, keep in mind that you can open your account with a deposit of virtually any size. Unless the difference is thousands of dollars, the initial deposit will not likely have a very significant impact on your eventual returns. We’ve chosen to assume an initial investment of just $100 for each test scenario.

If you can’t afford to contribute the maximum amount yet, know that you can always increase your monthly deposits later until you reach the $6,000 annual limit (which equates to $500 per month). We’ve provided examples of a variety of contribution amounts to give you an idea of how much a small increase in your monthly contribution can affect your overall returns.

Account Opening Age Retirement Age Initial Investment Monthly Contribution Annual Return Result (Approximate)
18 65 $100 $100 8% $625,000
18 70 $100 $500 8% $4,670,000
20 65 $100 $200 8% $1,050,000
20 70 $100 $500 8% $3,970,000
22 65 $100 $300 8% $1,340,000
22 70 $100 $500 8% $3,370,000
25 65 $100 $400 8% $1,400,000
25 70 $100 $500 8% $2,640,000
30 65 $100 $400 8% $900,000
30 70 $100 $500 8% $1,740,000

Income Restrictions

The IRS sets Roth IRA contribution limits not just based on age, but also based on income (more specifically, your modified adjusted gross income, which is your adjusted gross income with certain deductions added back in).

If you are single or married and file your taxes separately, you can only contribute the full amount to your Roth IRA each year if your modified adjusted gross income (MAGI) is less than $124,000. If you make between $124,000 and $139,000, you can contribute a reduced amount. If you make $139,000, you cannot contribute to your Roth IRA.

If you are married and file jointly, the amounts increase to $196,000 for full contributions and $206,000 for reduced contributions. A MAGI of $206,000 or more means that you cannot contribute.

There are a few ways around these restrictions. First, you may be able to convert your traditional IRA to a Roth IRA. There are no income restrictions for after-tax traditional IRA contributions. You may also be able to convert other contributions and earnings into a 401(k) plan if you have one through your employer. You should consult your tax professional before doing something like this, because it can have serious implications for your annual taxes.

Where to Open a Roth IRA

If you’re ready to start saving for your future by opening a Roth IRA account, we list the following reputable companies that are known to provide some of the best account options:

With little effort, you can put away enough money annually into a Roth IRA to retire as a millionaire. If you can’t afford to invest the max contribution of $6,000 annually right now, you can look into ways to make money on the side, including jobs you can do from home.

18 comments

  • Jimmy Barrios says:

    If I am only 16 years old with a summer job that pays 400$ every two weeks for six weeks, can I still fund my Roth IRA and possible make a decent amount of money?

    • William Lipovsky says:
      First Quarter Finance logostaff

      Hey Jimmy,

      Yes, you can invest in a Roth IRA at your age and with that income. There’s no minimum income required (just a maximum). Make sure though that you can prove you earned the money. This is as simple as paying taxes as you normally would. And you can make good money with $1,200 invested. You’ll probably make about $100 your first year if you invest in an index mutual fund or ETF and sit in a hammock all year. Investing is pretty sweet. The money will compound over time and turn into a very respectable sum. But what’s more important than how you invest is investing a lot of money to begin with. Make sure you’re continually earning more money as you grow older. Finally, since you’re the under age of majority, your parents will need to sign for your Roth IRA. You’ll need to open a custodial account. It’s not too tricky but you can read more about the process here: https://firstquarterfinance.com/how-old-do-you-have-to-be-to-buy-stocks/

      Let me know if you have any other questions!

  • Financial Samurai says:

    Good luck! But before you contribute another dollar, please read my anti-Roth IRA post in the URL above. It is the #1 anti-Roth IRA article searched online and there are like hundreds of comments that will make you think.

    Roth is better than nothing, but are you maxing out your 401k first?

    • William Lipovsky says:
      First Quarter Finance logostaff

      Yo!

      Yep, Roth is maxed at Vanguard at 50%. I’ll head over and reach your article. Thanks for challenging me!

  • I never really thought about investing in the Roth IRA like that, I always thought I should focus on maxing out my 401(k) first (which, since it has a higher limit, is a lot harder!) Maxing out the Roth seems like a good idea, plus it’s something I could actually do annually, which would make me feel good too! Hey!

    • William Lipovsky says:
      First Quarter Finance logostaff

      Is your 401(k) a Roth 401(k) by chance? Those are pretty swell.

      Maybe you can earn another $5500 this year and max out both the IRA and the 401(k)!

  • Well done!

    The Roth IRA is great when you are just starting out, or when income is low and you have close to zero tax liability. I wish I had contributed to a Roth when I was 10. That will give you a sweet foundation later

    I wouldn’t sweat the phase out at higher incomes. I think the Roth is overrated at higher income levels, and a Traditional 401k and IRA are the way to go.

    That’s what we did, and retired in our 30’s and pay zero tax on investment income of over $90k/year. I have to agree, America is pretty great

    • You two retired in your 30’s making $90K+ per year with zero taxes? I think I may be spending the rest of my day on your blog. 🙂

      Well done!

        • Thanks Will!

          Since you starting investing at 10, you’ll blow right past us. Compound interest is a powerful force

        • Will, have you ever considered moving some of the contributions you are making to your Roth IRA to an HSA, IRA, etc instead? I’ve been reading Jeremy’s blog a ton lately, and am intrigued by his strong recommendation to use tax-deferred accounts as much as possible. I’m curious if you have read his suggestions, too, and what your thoughts are.

      • Haha, thanks Paul

        Yeah, that’s what appears on our tax forms anyway. I published last year’s 1040 so people can see how we did it. I’ll do the same with this year’s 1040, and plan to do our Schedule D as well

        The US Tax Code is really friendly to early retirees

        Cheers

        Jeremy

  • Another benefit to a Roth IRA is that contributions (which are not the same as earnings) can be withdrawn penalty and tax-free at any time. I’m not saying a Roth IRA should be treated as an emergency fund, but being able to withdraw your contributions if needed is a sweet perk if something unexpected happens.

    • William Lipovsky says:
      First Quarter Finance logostaff

      I know, right?! I thought about buying a house with my principal. But then again, I’ll never have the opportunity to makeup for what I took out. I probably won’t do it but I should research it further. Do you think it’s wise?

      • Paul Bures says:

        I think that Roth IRA contributions should only be used in a situation in which they can generate a higher return outside the Roth than inside of it. In the situation you mentioned, I would only do it if the housing prices are low, stock prices are high, and have an opportunity to buy a house outright (i.e. you can avoid paying mortgage interest, etc). I think it’s nice to not have a rent / mortgage payment, but things like property taxes (incredibly high here in parts of Omaha / La Vista) and maintenance can still make renting a better option than buying. I guess that’s my long way of saying “it depends.” 🙂

      • William Lipovsky says:
        First Quarter Finance logostaff

        I know! It’s such a terrible investment. I think people just say it’s a good investment in an attempt to rationalize their giant house. Fantastic link, btw! I was laughing and crying all at the same time. Laughing because I haven’t bought a house but crying because my sister has!

        It should be something that locks its owner in one geographical area. That’ll limit their options and keep ‘em docile for their employers!

        So true.

  • This sounds like the TFSA here in Canada (no income phase out though). I love compound interest!

  • Great post and links. Awesome that the limits are based on MAGI versus Gross… we worked tons of paid overtime last year and working just a few hours less would have been all the difference. Something we’ll want to keep in mind moving forward!