What is a Roth IRA?
A Roth IRA is an individual retirement account, just like a Traditional IRA. In the case of a Roth IRA, you do not receive an upfront tax deduction when you contribute to the plan. However, the contributions you make grow tax-free. This allows the money to grow in your retirement plan, unhindered.
If you make investments with your Roth IRA, all associated income and gains grow tax-free. And when it’s time to take a qualified distribution, you don’t have to give any of that money to the government. This is money that has (most likely) grown significantly over the past several years – and you get to keep every dime, nickel, and penny of it.
With a Traditional IRA, you receive a tax deduction when you put money into the plan. The money within the account grows tax-deferred, meaning you don’t pay taxes on your contributions right away.
If you make investments with your Traditional IRA, the income and gains of the investment are also tax-deferred. You can purchase cryptocurrency, make real estate investments or traditional investments without paying tax. This allows the money to grow unhindered, much like the funds in a Roth IRA.
But here’s the difference:
At the time you take a qualified distribution, the income and gains the investment accumulated over the years will be taxed – and we all know the larger the growth, the larger the tax.
Studies on How Americans Save for Retirement
When you read the studies on how much Americans save for retirement, oftentimes the numbers and demographics change, but one factor remains consistent: American adults struggle to save for retirement.
Let’s take a look at a survey provided by the CFP (Certified Financial Planner) board, which they released earlier in the year. According to the survey, 48% of Americans aren’t saving for retirement.
Because social security will never provide enough for anyone to live comfortably during retirement, these studies are not only disturbing, but confusing, given the many retirement options available, such as the Roth IRA.
In this article, we are going to help you become better aware of how you can earn millions with a Roth IRA by starting young – and how self-directing your plan may give you the extra push if you are a Gen Xer or Baby Boomer.
How to Earn $1 Million with a Roth IRA
The earlier you start saving, the more you will “take home” tax-free when you take a qualified distribution. This may sound like obvious advice, but very few people act on it.
When calculating for retirement, there are two important factors to consider:
- Your tax bracket
- Rate of return (on investment)
If you begin saving at age 20…
You’re young, but not too young to save for retirement. In these examples, we are going to assume you’re just starting off and you have a balance of $0.
Annual Contribution: $3,500
Rate of return: 7%
Tax Rate: 24%
If you start contributing to a Roth IRA at 20, you will earn $1,070,131 in the Roth IRA by the time you reach age 65.
If you begin saving at age 28….
At age 28, you’re still young but you have to make higher annual contributions. Nevertheless, at age 28, you can still earn over $1 million with the same rate of return and tax rate.
Annual Contribution: $5,900
Rate of return: 7%
Tax Rate: 24%
If you start contributing to a Roth IRA at 28, you will earn $1,012,210 in a Roth IRA by the time you reach age 65. However, you will have to almost max out your contribution every year.
Increase Your ROI with Alternative Investments
Anyone over age 28 who plans to retire at 65 can no longer earn millions in a Roth IRA alone with a 7% rate of return on your investments due to the IRA contribution limits. As a result, you will need to make a few adjustments. For example, contribute to another retirement plan, such as a 401(k).
Another option is to increase your rate of return, which is possible if you invest in alternative assets. While the average investor who invests in stocks, bonds, mutual funds and other traditional assets may generate a 7% rate of return, an investor with a Self-Directed Roth IRA can invest in real estate, cryptocurrency and tax liens, nearly tripling their gains.
For example, if you used your retirement funds from your self-directed retirement plan, you can purchase property for $100,000 and when everyone else is buying, sell the property for $120,000. You will generate 20% on that one investment.
Self-Directed Roth IRA for Baby Boomers and Gen Xers
If you are a Generation Xer or Baby Boomer and you haven’t saved enough for retirement, the Self-Directed Roth IRA may be right for you. It encompasses the attractive features of a Self-Directed IRA, which allows you to invest in alternative investments that you understand and have the potential to gain a higher return. Being a Roth IRA, when you remove your funds, the income and gains are tax-free.
You’re closing in on your retirement years, but don’t panic. The important thing to do is make consistent contributions, savvy investments (work with a financial advisor if necessary) and trust the process.
If you don’t think a Roth IRA or Roth 401(k) plan is right for you, that’s fine, there are many retirement plans to establish, but the important thing is that you establish a plan.
If you can participate in a work-sponsored 401(k), match your employer’s contributions (if applicable to your plan) or even increase your 401(k) contribution rate.
If you are self-employed, establish a Solo 401(k) and discover the benefits of making higher contributions.
If you don’t want to invest in the stock market, establish a Self-Directed IRA to invest in real estate, precious metals, tax liens and much more.
Wherever you are in life, if you do not have a retirement plan, you should consider establishing one in the near future. Otherwise, you may become yet another variable in a disturbing retirement survey.