Whether you fund a Roth IRA, a Traditional IRA, or a combination of the two, you are allowed to contribute up to $ 6,000 per year in 2020. If you are 50 or older, you can catch up an additional $ 1,000. . contribution, so your limit is $ 7,000. Here’s how long it would take you to become a millionaire if you max out your IRA each year using the 2020 limits.
How Long Does It Take To Become An IRA Millionaire?
Suppose you started maximizing your contribution each year at age 22 for an average cost of $ 500 at the start of each month. You get annualized returns of 8%, which is just below the S&P 500 post-inflation average of the past 40 years.
You would reach millionaire status at age 55, after 33 years and four months of contributions. It also assumes that you did not make a $ 1,000 catch-up contribution when you turned 50. Of course, this uses the 2020 limits. They’re adjusted for inflation in $ 500 increments, so it’s safe to say you’ll be able to contribute more over time – though you’ll also need to save. well over a million dollars to have the same purchasing power as a millionaire. 2020 dollars.
It is also important to consider that the 8% return estimate is based on the average annualized returns of the S&P 500 Index from 1980 to 2020. Past performance is no guarantee of future results. The level of risk you take when investing also has a major effect on your returns.
Roth vs Traditional IRA: It Makes a Big Difference
Becoming a Roth IRA millionaire is very different from becoming a traditional IRA millionaire. With a Roth IRA, you cannot deduct your tax contributions. But the money is 100% tax-free when you withdraw it after you’re 59 and a half, as long as you’ve had the account for five years. (You can withdraw contributions, but not earnings, whenever you want without paying taxes or penalties.) A traditional IRA gives you an initial tax deduction on your contributions in most cases. But you still owe income taxes when you withdraw your money in retirement.
In short, being a Roth IRA millionaire means you have $ 1 million going back to you in retirement. Being a traditional IRA millionaire means you have $ 1 million, but the IRS is still going to demand its reduction.
If you plan to be in a high tax bracket when you retire or are worried about rising tax rates, choosing a Roth over a traditional IRA makes sense, provided you qualify. based on Roth IRA income limits. If you earn too much to fund a Roth, you can use a strategy called a backdoor IRA, where you fund a traditional IRA and then convert it to a Roth. You pay applicable taxes in exchange for this tax-free nest egg later.
Should You Maximize Your IRA?
If your employer offers a 401 (k) match, contribute enough to get the match complete before funding your IRA. Paying off high interest credit card debt and building an emergency fund that can cover you for three to six months first are also good choices.
Once you’ve done these things, try to maximize your IRA contributions. You will have a lot more investment options and general flexibility because you control the account, not your employer.