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.
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.