How To Use A Roth IRA To Become A Millionaire 26

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If you are new to the Roth IRA, this is the place to be. I am going to show you the three reasons to open a Roth IRA, potential negatives, and the best ways to invest in a Roth. I will also include my Roth IRA plan, how I track my progress, and a 52 week savings challenge!

Grab the FREE Roth IRA Savings Plan Printable Here!

Every year, my wife and I are looking for new investment opportunities. We spend a large amount of time reading, thinking, and testing different markets. But before we do any of this, we max out our Roth IRA’s first. This is our safety net. If every other investment we have results in failure, we will still retire millionaires. Here’s what happens when you invest $6,000 into a Roth IRA at an 8% interest rate every year. Keep in mind this is for one person, so if you’re married you can DOUBLE this.

This is why I am a Roth IRA fanatic. If you are not familiar with a Roth, I will give you a rundown of how it works. I have found it is an amazing way to plan for your retirement.

Here are three reasons why:

1. Manageable to Max Out

If you are under the age of 49, you can contribute $6,000 to your Roth IRA per year. Break this down monthly and it comes out to $500. If that sounds like more than you can save, I have put together a weekly ROTH IRA savings challenge below. This should be manageable for anyone. Even with an entry level salary.

2. Your Contributions Can Be Withdrawn Without Penalty

A Roth IRA is funded with after tax income. The amount you contribute to a Roth IRA can be withdrawn at any time, without penalty (Although I would never advise taking money out). You just can’t pull out any of the money you earn in your account (i.e. interest or dividends).  

Say you are in your 40’s, and you have contributed $40,000 to your Roth IRA. Your roof caves in on your house and you have no extra money to cover it (this would never happen to a DXD reader now would it?).  You can take out $10,000 for the repair without fees or penalty. This is freedom you don’t have in a 401K.

3. Grows Tax Free

Since you contribute with after tax money, a Roth IRA can grow tax free. So every dollar your money earns, can be withdrawn in retirement without being taxed. This is a huge benefit for me. As you can see from the chart above, you only need to contribute $6,000 per year, but the account will earn millions. That is a million tax free dollars!

This is a benefit you don’t get with your 401K. Since the 401K’s contribution is pre-tax money, you must pay taxes when you take money out.

Let’s make it simple:

Roth IRA: Pay taxes going in. No taxes pulling out.


401K: No taxes going in. Pay Taxes going out.

Got it home slice? Cool.   

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Potential Downsides to a Roth IRA

1. The Withdrawal Rule

To withdraw the money earned beyond your contribution, you must be 59 and a half. So, if you plan on retiring early, you may have to get a little creative if you plan on using this money right away.

2. Income Limits

There are income limits to the Roth IRA. If you and your spouse make $194,000 or more, you can not contribute to a Roth IRA. As an individual, if you make over $132,000, you also can not contribute.

But never fear high earners, there is a solution to this wonderful problem. That solution is called the backdoor Roth IRA.

The IRS will allow high earners do one conversion per year. Meaning, they can convert from their Traditional IRA, to their Roth IRA. You will be responsible for paying taxes, since the traditional Roth IRA is funded with your pre-tax dollars.

Some fear that the government will crack down and take this option away. Only time can tell. When it was introduced in 2010, there was an 800% increase in IRA conversions.

What type of investment is good for a Roth IRA?

1. Index Funds

Index funds are what I put in my Roth IRA. They are a great way to save for retirement without a worry in the world. I invest in Vanguard, specifically VTSAX, in my ROTH IRA. The chart above shows what will happen when you invest in this fund.

2. Dividend Stocks

The purpose of a dividend portfolio is to earn cash flow in the form of a dividend to supplement your lifestyle. A Roth is a great place to put your dividend stocks. That is because every dollar earned is tax free. So you have a tremendous advantage in retirement when you are taking those dividends to pay your expenses.

3. Value Investing

Value investing is great in a Roth IRA because again, your money goes tax-free. Since value investors look for undervalued stocks, this is a huge benefit.

Where to Track your Roth IRA

The best place I have found to track my Roth IRA is Personal Capital. It is so easy to set up and they have a beautiful layout of charts and graphs that show you exactly how well your Roth IRA is performing. Additionally, you can link up your bank accounts and other investment accounts as well, so all you have to do is check one app. No more thumbing through 6 websites to get your financial picture, it is all in one spot!

The Roth IRA Savings Challenge

Use this challenge to save for your Roth IRA. The savings starts small and snowballs from there. You’ll be amazed at how fast you can max out your Roth.

Grab this Roth IRA Savings Plan Printable Here for Free!

If you plan to use a Roth IRA for your future the time is now. Every year that you don’t max it out, is another year gone. You can’t backtrack all the years you didn’t contribute. It’s now or never.

Do You have A Roth IRA?

andrew
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26 thoughts on “How To Use A Roth IRA To Become A Millionaire”

  • Mrs. Picky Pincher

    Oooh, I love the idea of a Roth IRA savings challenge! Luckily I opened up an IRA when I was 22. I’ve never been able to max it out, but I’ve always made it a point to contribute each month. Even if you can only put in $5, you need to do it!

    • andrew Post author

      When you lay it out weekly it doesn’t seem so bad, right?

      Absolutely, any dollar amount helps since you can’t go back in time and contribute. I try to do whatever I can to max it out. Million dollar Roth IRAs need to be maxed out in order to reach a million.

  • Super Money Woman

    Great idea for the weekly challenge. Such a good way to save. Here in the UK we have company pensions and personal pension, plus ISAs. I love an ISA as its tax free on the way out as tax has already been paid. Also the limit is £20,000 a year.
    Got keep saving!

  • alma

    I’m 56 years old and married. I have a $100,00 in my 401k from my previous job. can I rollover this to Roth IRA , what can you suggest.
    thanks
    alma

    • andrew Post author

      You can rollover $6,500, one time per year. Since you are 56, you have the advantage of rolling over an extra $1,000.

  • MM

    This is helpful. Although I knew about Roth IRA, I honestly hadn’t looked into it since we are just trying to get a good savings set.
    So dummy question, but where do you find a Roth IRA? We are self employed. I looked at the bank website but didn’t see anything.

    • andrew Post author

      I use Vanguard for my Roth IRA. They have the lowest fees and you actually become a part owner of the company when investing with them!

  • Lexy

    I like this idea!
    What do you recommend for someone who is playing catch up with saving for retirement since I am new here in the US.
    I am in my mid 30s. Thanks.

    • andrew Post author

      Thanks Lexy! I’m not an advisor but I invest in good old fashioned index funds. VTSMAX from vanguard specifically.

      • William

        Andrew, not seeing VTSMAX on Vanguard’s site. There is a VTSMX, however. Is this the same thing?

          • William

            Thanks for the update Andrew. Interesting to me that fund is showing decent 1, 5, & 10 year AAR’s but the overall return is only about 6.31% since inception. I suppose this is due to the dip in mid ’08? I can see why the returns have been good since that dip too with majority of holdings in Financials and Tech.

            If we don’t have $10k to invest in admiral shares, would the VTSMX be a good alternative? How about VTI?
            Note, I found VTSMX by linking from the admiral shares page of VTSAX – I don’t see VTSMX listed anywhere in the list of mutual funds on Vaguards site.

            Thanks again!

          • andrew Post author

            Yep, you will be just fine in VTSMX. Once your balance hits 10K you can always transfer it to admiral shares. The only difference is the yearly fees which are both dirt cheap in either fund. If you can’t find it, just type in “total stock market index fund” in Vanguard’s search. Their S&P 500 index fund is also fantastic.

  • Shanetta

    Great idea and a seemingly easy way to retire rich. It makes me wish I only started a little earlier to start saving for my retirement. Though it’s never too late, I can only imagine where I would be in 20 years if I started saving to an IRA in my twenties.

  • Amber

    Loved this article! I’m a big fan of ROTH IRA’s over 401K’s and traditional IRA’s. I’m also a huge fan of cash value life insurance, as it’s a ROTH on steroids! You can contribute more than $5500 per year depending on the death benefit amount, which means you could have even more saved up by retirement. Have you read The Power of Zero by David Mcknight? I highly recommend that book for tax free retirement advice!

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