How to Build a Million-Dollar Roth IRA Starting With $500 a Month

Building a million-dollar Roth IRA may sound like a distant dream if you’re starting from scratch. But if you break down the numbers, you’ll notice that a few consistent steps are all you need to cross the million-dollar mark.

We’ll break down your million-dollar Roth IRA plan using a simple strategy that won’t keep you up at night.

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How a Roth IRA can be your wealth partner

The Roth IRA (individual retirement account) stands out in the retirement world because you can contribute after-tax dollars now in exchange for tax-free money later. That’s a big deal if you expect to be in a higher tax bracket later. Basically, you’re paying your tax bill up front and clearing your mind of any future tax obligations, so long as you follow the rules. On top of that, your earnings will grow tax free and you won’t have to pay a tax bill every year.

After you contribute the money to your Roth IRA, there is no limit to the amount of tax-free wealth you can accumulate. Having a chance to increase your income and decrease your tax bill is a surefire way to build wealth. After you hit 59 1/2 and have met the five-year rule, you can withdraw all your wealth tax-free.

Your contribution game plan

Although there is no limit on your Roth IRA’s wealth potential, there is a cap on how much you can contribute to your account every year. For 2022, you can contribute up to $6,000 if you’re under 50. However, you can’t contribute more to a Roth IRA than you earned for the year. You also need to check your income to ensure it doesn’t exceed the annual requirements.

If a $6,000 annual contribution sounds a bit steep, you can break down your goal into monthly milestones. You can contribute $500 per month for 12 months to reach $6,000.

But if you’re not at the point where you can comfortably contribute that much, it’s not the end of the world. You can assess your income and expenses to see if you can find any hidden money. For example, you can cancel a subscription you are not using and allocate that money toward your Roth IRA. You can also contribute bonuses or side-gig money to a Roth IRA, as long as your extra income doesn’t push you over the income threshold.

The power of $500 contributions

Let’s say you start maxing out your Roth IRA this year, and you’re 21 years old. If you put your contributions on autopilot and invest in high-quality assets, it wouldn’t be farfetched to earn an 8% return and reach a million dollars before you hit retirement age. Here’s how the math breaks down.

Annual contribution: $6,000 ($500 per month)
Investment rate of return: 8%
Account balance after roughly 35 years: $1.03 million

By the time you turn 56, you can have around $1.03 million in your account.

It’s still possible to hit the million-dollar Roth IRA jackpot if you’re older. Here’s another example, assuming a higher investment rate of return.

Age: 36
Annual contribution: $6,000 ($500 per month)
Investment rate of return: 10%

At age 67, you can have over $1 million in your account.

The two scenarios above are just examples of how the math works to get you to a million-dollar Roth IRA over the long term. However, stocks and other investments in your portfolio may not always go up. It’s important to diversify your portfolio with various assets across sectors. You can look into individual stocks, exchange-traded funds, and mutual funds. An S&P 500 index fund may be a simple option to consider. The index boasts an average return of around 10% over the long term.

A self-directed IRA may also be an option if you’re looking to load your retirement portfolio with more exotic assets. This account will grant you access to investments such as real estate, tax liens, and crypto. Before you go on the alternative path, it’s best to make sure you understand what you are investing in so you don’t jeopardize the quality of your retirement portfolio.

Increase your chances of retirement success

When you’re ready to execute the $500 per-month plan, make sure you do your research. Investing in the cheapest assets won’t always yield the greatest returns. Aim for a diverse portfolio of high-quality assets to give your portfolio the performance you want over the long term.

Achieving your retirement goals starts with intentional steps right now. If you’re in the financial position to make $500 monthly contributions, you’ll be on your way to the million-dollar mark and the retirement you’ve always dreamed of.

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