Can you become a millionaire retiree? The answer is a resounding "yes" for many Americans. And the Roth IRA provides a great vehicle for making it happen.
If you want to build a Roth IRA million-dollar portfolio, the process is relatively simple. Here's a step-by-step guide starting with $500 monthly.
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1. Understand the power of investing in a Roth IRA
First, it's important to understand why a Roth IRA is a great tool for retirement savings. These accounts allow your money to grow tax-free. While you'll pay taxes on contributions, you won't pay any taxes on withdrawals later.
There is an income threshold you must meet to set up a Roth IRA, though. The following table shows if you're eligible:
| Filing Type | Modified Adjusted Gross Income | Eligible for a Roth IRA? |
|---|---|---|
|
Single OR Married filing separately (if you didn't live with your spouse at any point during the year) OR Head of household |
<$150,000 | Yes |
| >=$150,000 but <$165,000 | Yes (with reduced contributions) | |
| >=$165,000 | No | |
|
Married filing jointly OR Surviving spouses |
<$236,000 | Yes |
| >=$236,000 but <$246,000 | Yes (with reduced contributions) | |
| >=$246,000 | No | |
| Married filing separately (if you lived with your spouse at any time during the year) | <$10,000 | Yes (with reduced contributions) |
| >=$10,000 | No |
Data source: IRS. Table created by author.
2. Set up your Roth IRA
The next step is to set up your Roth IRA. Several online brokers make it easy to open a Roth IRA, including Charles Schwab, E*Trade, Fidelity, and Vanguard.
You'll need to have several pieces of information to complete the process. Common requirements include your Social Security number, birth date, driver's license (or other government ID), mailing address, email address, and beneficiary information (name, address, and Social Security number).
3. Make your monthly $500 contribution automatic
You could set up your Roth IRA and try to remember to contribute $500 each month. A better approach, though, is to automate your monthly contributions.
The main things you'll need to set up an automatic monthly contribution are your bank account number and routing number. Once your automatic contribution is established, you'll be on the right track to get to that magic $1 million.
4. Select how to invest your money
One critical step is to select how to invest the money in your Roth IRA. Key considerations with this step include how long you have until your plan to retire and your risk tolerance.
Stocks offer tremendous long-term growth prospects. Exchange-traded funds (ETFs), especially index ETFs, provide a convenient way to invest in a basket of stocks.
5. Reinvest any dividends
Many individual stocks and ETFs pay dividends. Instead of letting the cash from those dividend payments accumulate, you can elect to reinvest any dividends. This approach allows you to immediately plow dividend payments into the investment alternatives you've specified.
Over time, reinvested dividends can significantly boost your overall return. For example, the S&P 500 (^GSPC -0.14%) has increased by roughly 358% over the last two decades without dividends reinvested. However, the index's total return with dividends reinvested during this period is around 608%.
6. Contribute more if possible
A monthly contribution of $500 could help you build a $1 million retirement portfolio if you make an average annual return of 7% and can invest for nearly 37 years. For individuals who begin saving early in their careers, this is an attainable goal. However, if you start saving for retirement later, you'll need to contribute more.
Currently, you can only contribute $7,000 per year if you're under age 50. But if you're age 50 or older, you can make $1,000 per year catch-up contributions, which brings your total annual maximum contribution amount to $8,000. Your best bet for becoming a millionaire retiree is to contribute as much as possible to your Roth IRA.
7. Stay the course
The final step is an especially important one: Stay the course. Keep contributing to your Roth IRA each month. Don't make early withdrawals. And don't panic when the stock market declines. If you want to build a $1 million Roth IRA, time is on your side.
