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How the S&P 500 and a Roth IRA Can Make You a Millionaire

By David Smith – Updated Sep 27, 2021 at 2:39PM

Key Points

  • Roth IRAs have several unique benefits.
  • The S&P 500 is a simple, effective tool for long-term growth.
  • By contributing just $6,000 a year to a Roth IRA, you can become a millionaire relatively quickly.

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This simple strategy can make you a millionaire in under 30 years.

"Money is a terrible master but an excellent servant." -- P.T. Barnum, American showman, businessman, and politician

In today's economy, people are often searching for their next side hustle, but not optimizing the money they already have. Rather than grinding for extra income, you can become a millionaire by following two simple rules: max out your Roth IRA, and invest in the S&P 500. 

1. Max out your Roth IRA

A Roth IRA is funded with post-tax money and can grow in perpetuity tax free. Because of its tax-free status, you are limited to contributing $6,000 annually (or $7,000 if you're over 50). 

The Roth IRA has several benefits:

  1. You enjoy tax-free growth forever. 
  2. If you decide to change your investments, there are no capital gains tax implications.
  3. The contribution limits are indexed to inflation, so the $6,000 contribution limit should increase to $6,500, then $7,000, etc. in the future.
  4. Unlike a traditional IRA, there are no required minimum distributions (RMDs) as you age.

A Roth IRA is the best way for the average person to set themselves up for success if they can't contribute to a 401(k). Economists have warned that Roth IRAs will cost the U.S. government $14 billion down the road, and you should take advantage of this if you're eligible!

If you aren't eligible for the IRA due to income limitations, you may be able to capitalize on the strategy through a Roth 401(k) for the same results. 

Happy man saving for retirement.

Source: Getty Images.

2. Buy an S&P 500 index fund

Adding funds to your Roth IRA is great, but you also need to invest it or else it won't grow. The simplest way to invest is in the S&P 500, which is essentially owning 500 of the largest successful public companies in the U.S. 

While it's not possible to buy the index directly, there are investments that mimic the index at nearly zero cost. These are the Vanguard S&P 500 ETF (VOO -1.78%), which trades just like a stock, and the mutual fund Vanguard 500 Index Fund Admiral Shares (VFIAX -0.11%)

Watch it grow

Assuming a 2.5% inflation rate and 9% long-term return (which is below the S&P 500's average return of 10%), the account surpasses one million dollars after 29 years. That means a college student can become a millionaire by 50, and a Millennial can do it by 65. 

Most of this money is due to compound growth. Only 25% of the $1 million is from contributions, and the other 75% is from the investment's long-term growth. 

While it isn't always easy, there are several strategies to save $6,000 a year. However, if you didn't use a Roth IRA or invest, you would need to save four times as much to become a millionaire over the same timeframe!

Rather than being a servant to money, make your money a servant to you! 

David Smith owns shares of the Vanguard S&P 500 ETF. The Motley Fool owns shares of and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

Stocks Mentioned

Vanguard Index Funds - Vanguard S&P 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&P 500 ETF
VFIAX
$376.88 (-0.11%) $0.42
Vanguard Index Funds - Vanguard S&p 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&p 500 ETF
VOO
$367.34 (-1.78%) $-6.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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