Racking up a seven-figure retirement account might seem far-fetched, but the Roth IRA rules make it possible. A Roth IRA is a tax-advantaged retirement account that allows your investments to grow tax-free, and qualified withdrawals in retirement are also tax-free.
Anyone can contribute to a Roth IRA at any age, even a 70-year-old, as long as they have earned income for the year. Although the contribution limits are lower than other retirement accounts like a 401(k), you can still put a Roth IRA to work to make compounding magic happen over time.
Below are four tips to get you moving toward your goals.
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1. Remember, time is still your friend
Even if you're nearing or already in retirement, you still have time to grow your Roth IRA. As long as you're earning income, you can continue to contribute and let your investments compound tax-free.
Albert Einstein, one of the most well-known mathematicians and physicists in history, is often credited with saying, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." When you tap into the power of compound interest, it can create exponential growth in your retirement portfolio. Even if you're retired and no longer contributing additional dollars, your retirement account will still benefit from the power of compounding.
2. You don't have to withdraw funds
Unlike traditional IRAs, Roth IRAs don't have required minimum distributions (RMDs) that force you to withdraw money after a certain age. So there's no need to hit the panic button when you get into your 70s.
This benefits your retirement portfolio because you can keep your money in the account as long as you want. Since your Roth IRA portfolio won't be disrupted by RMDs, you give your investments more time to grow into a million-dollar Roth IRA.
3. Don't underestimate the power of catch-up contributions
There are benefits to growing older. For one, you'll get the chance to set aside extra money in a Roth IRA to help boost your savings.
For those 50 and older, the Roth IRA offers a "catch-up" contribution. This means you can contribute an extra $1,000 on top of the $7,000 limit in 2024. So if you earn at least $8,000 in 2024, you'll be able to contribute the full amount to a Roth IRA this year if you meet the age requirements. Remember, dividends, interest, and Social Security benefits won't count toward earned income. However, if you're doing some consulting work in retirement, that's considered earned income.
Let's say you haven't reached 50 yet, and you contribute the $7,000 maximum to your Roth IRA every year, earning an average annual return of 10%. You could become a Roth IRA millionaire in less than 29 years. However, if you're able to ramp up your contributions after you turn 50 and continue to contribute the maximum amount as contribution limits rise, you may be able to shave off some years to reach your million-dollar jackpot sooner.
4. Stay consistent
Of course, staying consistent is easier said than done. But if you can put things in place right now to make it easier to remain consistent, you'll have a better chance of achieving your goals. Here are a few tips:
- Set up automatic contributions.
- Keep a budget.
- Track your progress.
- Educate yourself.
Given the relatively small contribution limits of an IRA, reaching a million-dollar retirement balance will take time and won't happen overnight. But others have done it before, so it's not impossible. Although investment returns are not guaranteed, and it's hard to predict how long it will take to reach your milestone, there are a few things that are in your control that can give you a better shot at building a million-dollar Roth IRA.
