Instead of hoping and wishing for the winning lottery numbers, there's a simpler way to get closer to the million-dollar mark. It's called the Roth IRA, and it's infused with incredible benefits that will make your financial goals a bit easier to achieve.
Here are a few things to consider if you want to maximize your Roth IRA success like the millionaire next door.
Image source: Getty Images.
Commit to the max
Don't settle for less if you want the best chance of success. The more you contribute to a Roth IRA, the more money you can use to invest in assets that can pump up your portfolio.
Although it would be phenomenal to contribute as much money as you wanted, the IRS establishes contribution limits every year. For 2021, the cap on IRA contributions is $6,000 if you're under 50 and $7,000 if you're 50 or over. To meet the $6,000 max, you could contribute $500 for the 12 months from January through December. If you happen to slip up one month, you have until the tax deadline of the following year to designate funds as a prior year's contribution.
You're not required to contribute the maximum amount to a Roth IRA every year, but aiming for this goal will help you develop millionaire habits that will be crucial to your success.
Consistently invest in high-quality stocks
Roth IRA millionaires aren't created overnight. The actions you take every year will compound and lead to your financial success.
Let's say you're 23 years old and you contribute $6,000 to a Roth IRA every year for 40 years. Your total contribution would be $240,000. But your portfolio has the potential to be worth a whole lot more due to the power of compounding. Assuming a 7% average annual return, your investment could turn into more than $1 million in your portfolio by age 60. This all happened because you consistently saved $500 a month and invested in quality assets.
To attract the best and most reliable returns, you should consider investing in high-quality companies that have the potential to be around for decades and are agile enough to survive tough times. For starters, check out quality growth stocks and sprinkle a few Dividend Kings throughout your portfolio if the companies' performance aligns with your goals. These are companies that have been increasing their dividend payout for at least 50 consecutive years. It's a relatively safer bet to pursue companies with a history of strong performance instead of just chasing the hottest speculative stocks in the market.
Reduce your future tax liabilities
The Roth IRA accomplishes two goals: It allows your contributions to grow and create more income while allowing you to potentially take advantage of mega tax savings later. Once you've reached 59 1/2 and have met the five-year rule, you'll be able to grab all the earnings accumulated in your account without worrying about taxes.
This is a big deal. Taxes are the single largest expense for many households: The more income you earn, the greater the potential for a higher tax burden. Although people typically earn less in retirement, it isn't far-fetched to assume you could be making more than you expected.
A Roth IRA fits well within a diverse portfolio of retirement vehicles because it's one account that allows you to skip the tax headaches associated with required minimum distributions (RMDs). These distributions are taxed like ordinary income, with rates climbing as high as 37% in 2021. Since you've already paid taxes on the money used to fund your Roth IRA, you don't have to worry about any future tax obligations.
To reach millionaire status, you have to make sure that expenses don't eat up a huge chunk of your income. The Roth IRA is one way to manage your future tax responsibilities.
Your million-dollar treasure is closer than you think
Obtaining millions of dollars in your retirement portfolio doesn't have to be an esoteric concept. The key to unlocking your dreams is simple: Start early, be consistent, and make informed decisions. That pretty much sums up the formula for financial success.
Access to the best information and resources is crucial. That's why taking advantage of the Roth IRA is a game-changer. It helps you unlock tax-free income that's hard to find anywhere else, and is a great addition to a well-diversified portfolio of assets. To spice up your retirement portfolio, you can also consider a conversion from a 401(k) to a Roth IRA. Just make sure you understand how taxes work so you won't be caught off guard later.
In order to use the Roth IRA to its full potential, you have to start as early as possible. Time will be your best friend on your Roth IRA journey to becoming the millionaire next door.
