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How to Be a Roth IRA Millionaire

Even though we saw the broad stock market decline by over 20% at points last year, there's still every reason to believe that you can become a Roth IRA millionaire. With enough discipline, time, and focus, achieving a tax-free, seven-figure retirement balance is within the realm of possibility.

Let's go over the four key behaviors to ensure you're a Roth IRA millionaire when it comes time to retire.

1. Contribute the annual maximum in January

While this won't be possible for all investors, contributing the annual maximum to your Roth IRA as soon as the new year begins gives your money the longest amount of time to compound tax-free. If contributing $6,500 (or $7,500 if you're 50 or older) at one time isn't possible for you, consider smoothing out your contributions over 12 months. But make a commitment to investing, regardless of how the stock market is performing.

The longer your money is invested, the more it will earn in dividends, and the longer it will have to grow. Even though the benefit of investing in January is limited, it's still an effective way to ensure your money is working as hard as it possibly can.

2. Stick with a single, broad-market index

The elegant beauty of growing your Roth IRA is that only a single investment is required. When you're thinking about which one, consider a broadly diversified, low-cost index fund that has a history of solid performance. In this conversation are funds like the Vanguard S&P 500 Index ETF and the Vanguard Total Stock Market Index ETF.

The logic here is that you don't need anything overly complex, expensive, or hard to manage. Beyond transferring funds into the account once (or a few times) per year and investing the money, there isn't a need for any ongoing management. As money grows in your Roth IRA, you can focus on life's more pressing matters — as defined by you.

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3. Set dividends and capital gains to reinvest

Reinvesting dividends is one way to take advantage of market downturns, much like the one we're currently experiencing. When you're paid a dividend in a down market and you choose to reinvest it, the money you receive is automatically put back into the same investment at lower prices. Over the long term, you'll end up with more than you would have if you simply took the dividends in cash. Similarly, if you own mutual funds, reinvesting any capital gains distributions you receive will also have the same boosting effect.

The positive impact of dividend reinvestment is only seen over a period of many years. You'll need to be extra patient when the market falls, though, since your investments may experience intermittent losses. The key to making the most of dividend reinvestment is to set the process up and let time take its course.

4. Rely on the math

If the emotions of investing feel like they're too much at times, you're certainly not alone. 2022 was one of the worst years for broad financial markets in over a decade. Still, the math behind becoming a Roth IRA millionaire still holds.

Assuming an annual January contribution to your Roth IRA of $6,500 and an 8% average long-term investment return, you can expect to become an IRA millionaire in just under 34 years. In reality, it could happen even faster, since contribution limits typically go up over time and the markets might have long-term returns above 8%.

Nonetheless, the math proves that consistency and time will inevitably make you a seven-figure IRA owner.

Control what you can control

While there's no guarantee that financial markets will perform well over any one- or two-year period, the odds that they'll perform positively over multi-decade spans are very much in your favor. That's why consistent contributions to your retirement account and a simplified investment plan make a lot of sense if you're trying to grow your net worth into a sustainable nest egg.

If you're unsure or hesitant about how to get started, consider working with a qualified financial planner who has your best interests at heart, or ask a knowledgeable family member or friend. Like with most long-term goals, the sooner you get started with investing, the better.

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Sam Swenson, CFA, CPA has positions in Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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