If you need an incredible incentive that will get you excited about contributing to your retirement account, consider this: An extra stream of income. Retirement accounts like the Roth IRA (individual retirement account) give you a special opportunity to contribute money you've already paid taxes on, invest in assets that can supercharge your portfolio, and benefit from frequent deposits of tax-free income for the rest of your life.
It may sound too good to be true, but a few strategic moves now can make this all possible. Here's the scoop on how you can turn your retirement account into an income-producing asset that can fund your lifestyle.
Image source: Getty Images.
Go beyond retirement savings
When most people think about retirement, they rarely think beyond the ability to save up a lump sum of money that can provide a comfortable nest egg. Stashing money away for retirement is great, but what's even better is using your money to generate a lifetime of income.
This is why the Roth IRA is a true gem. It works wonders even for those who are enjoying access to the perks associated with an employer-sponsored retirement plan like a 401(k). The Roth IRA allows you to invest in dividend-paying companies that can reward you with quarterly (or even monthly) deposits. When you make an investment in a dividend-paying stock, you'll qualify to receive income every time the Board of Directors declares a dividend.
Follow the rules first
The Roth IRA is a unique retirement account because all the income you earn is tax-free as long as you follow the rules. For starters, you must have met the five-year rule and be over age 59 1/2 to unlock the tax-free benefits of this account. However, there are a few exceptions to the rules that allow you to withdraw earnings tax- and penalty-free.
Unfortunately, not everyone can get their hands on this account because they don't meet the qualifications. You must have earned income to contribute and your income for the year must not exceed the thresholds.
Grow your portfolio
Start stashing cash away in your Roth IRA now to tap into the benefits that this account offers. If you can contribute the maximum amount to a Roth IRA, you'll have a chance to accelerate your portfolio growth goals. For 2021, you're typically eligible to contribute up to $6,000 to a Roth IRA if you're under 50. You can contribute a maximum of $7,000 if you're over 50. But if you didn't earn at least $6,000 for the year, your contribution amount is limited to the amount of your earned income.
Once you have money in your account, don't let it sit there and get comfortable. Start investing in dividend-paying stocks so you can put your money to work. The more shares of dividend-paying equities you own, the more chances you have to increase your income. Unlike in a traditional brokerage account, you don't have to worry about dividend tax rates. All the money that flows into your account is all yours as long as you follow the rules.
There are thousands of stocks to choose from, so define what your goals are to make the process easier. Determine your investing strategy, the desired rate of return, how much money you want to earn, your risk tolerance, and your time frame.
For example, if you're looking for stocks that have a record of increasing their dividend payout every year, you should look into Dividend Aristocrats like Procter & Gamble, Clorox, and Walmart. These company stocks have increased their dividends for at least 25 consecutive years. This means you'll automatically see an increase in your income because of the sweet "pay raises" that you'll be granted every year.
Another option to consider is reinvesting your dividends. Through a dividend reinvestment plan (also known as a DRIP), you can automate your dividend investing process and use your dividend income to accumulate more shares of the dividend stocks in your portfolio. Later, you can stop your dividend reinvestments and collect the cash that you've accumulated from your additional shares.
Enjoy another source of income
Dividends are a great source of income because you can automatically earn them without lifting a finger. It's even better when you can start earning dividends in your Roth IRA because you won't have to pay taxes on this income once you hit the target age and account requirements.
This is the perfect time to think about using your retirement account as a way to generate more income. By creating a strategic plan now, you'll be able to enjoy the perks of monthly deposits flowing into your account while you spend your golden years doing what matters most to you.
