The Personal Finance Podcast - How to Become a Retirement Account Millionaire in 2024 (with New Contribution Limits!)

Episode Date: November 27, 2023

In this episode of  the Personal Finance Podcast, we're going to talk about how to become a retirement account millionaire in 2024 and the new contribution limits. How Andrew Can Help You:  Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel!  Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Policygenius: This is where I got my term life insurance. Policygenius is made so easy. To get your term policy go to policygenius.com and make sure your loved ones are safe. Listen to Planet Money wherever you get your podcasts.  Links Mentioned in This Episode:  How to Open an HSA (and Why You Should Consider it!) - Money Q&A Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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contribution limits. If you guys have any questions, make sure to hit us up on Instagram, TikTok, Twitter, at Master Money Co, and follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast on it. If you want to hop out the show, consider leaving a five-star rating and review on your favorite podcast player. Can I thank you guys enough for leaving those five-star ratings and reviews? They truly mean the world to me. Now, today, we're going to be diving in to a bunch of different things when it comes to your retirement accounts. And obviously, investing in retirement accounts is a huge staple here at the personal finance podcast and one big thing that we talk about. And so we're going to go through A, the new updates to retirement accounts.

So the IRS has now released their brand new updates and the contribution limits have increased once again. And so it seems like the past couple of years, they are increasing these contribution limits over and over again. And part of that is because of the inflation rate, which we'll talk about in a second. In addition, we're going to talk about how each account works. So if you're new to retirement accounts, you've never even heard of them before. We'll go through how each of them works as we're talking about these contribution limit increases. Then what we're going to do is talk about, hey, are these actually a good deal? Are these pacing inflation?

Did the IRS do the right thing by increasing these? We will go through that portion. And we're also going to talk about how to become a millionaire with each of these accounts. And if you max them out, how fast you can become a millionaire based on different rates of return. So we'll go through 7%, 8%, 9%, and 10% rate of rate of it. return and how fast you can hit that point in time where you become a millionaire. So this is a action-packed episode. I love when these updates come out because we can go through each and every single one of these things. And these are so incredibly important for your wealth-building journey along

those same lines. Now, one thing I want to note before we dive right into this is you're going to hear on maybe TikTok or Instagram or any other social media site, you're going to hear all these people preaching, hey, retirement accounts are a scam. But typically what I'm finding out is that when people say that online. Typically, they're trying to sell some sort of other scam to you when they're doing that. So make sure that you are very cautious about who you listen to online because I'm seeing that message spread more and more and more. And typically on the back end, there's somebody with a real estate course or there's somebody trying to sell you an IUL life insurance or a whole life insurance policy. So I want you to be very, very cautious who you're listening to when it comes

to this because there have been plenty of studies done. And one of the most recent ones was by Ramsey's solutions. Dave Ramsey's company did a study of a bunch of different millionaires. over 10,000 millionaires, and guess what? 80% of them became millionaires in their company's 401K. Simple as that. That is a massive number when it comes to becoming a millionaire. So that is why it is so important to understand how these accounts work and make sure that you are taking advantage of these accounts

in order to be able to build wealth. So if that's something you're into, without further ado, let's get into it. All right, so we are going to dive into these retirement changes for 2020 that the IRS has released. And the first one that we're going to go through is the 401k, the 403B 457 TSP contribution limits. And this is going to be those pre-tax accounts. So inside of these pre-tax accounts, for 2003, the contribution limit was $22,500. And there was a catch-up contribution of $7,500. Now let's pause it right there, because if you don't know what a catch-up contribution is, it is when you are age 50 or older, the IRS allows you to put additional money inside of these

accounts so that you can accelerate your path to getting to retirement. So anybody age 50 or older can utilize the catch-up contribution, which means that last year, this puts you at $30,000 per year in 2023, that you could add to these pre-tax accounts against the 401K, the 403B, 457, TSP. In 2024, it's going to go up $500. So it is now $23,000. per year that you can put in these accounts with a $7,500 ketchup contribution. So the ketchup contribution stays the same throughout every single year. And for all of these accounts, you're going to see the ketchup contribution did not change for most of these, but the annual contribution limit did change. So the IRA contribution limit now is the next one we will go through, and that is

$6,500 in 2023 is what the limit was and a $1,000 ketchup contribution. Now this goes for your Roth IRA, your traditional IRA, all of those different pieces. And for 2024, it has gone up another $500 for $7,000 per year in the Roth IRA or the traditional IRA and a $1,000 catch-up contribution. Now, for simple plans, the 2023 limit was $15,500. And there was a $3,500 catch-up contribution. And it went up another $500 to $16,000 and a $3,500 catch-up contribution. And then lastly, we have the health savings account or the HSA. Now, their catch-up contribution on the HSA, by the way, is age 55 and up. So that's the only differential when it comes to the HSA. And we have two different types of plans when we're talking about an HSA. You have an individual plan and you

have a family plan. So an individual plan is obviously, if you have that specific individual plan for 2023, was $3,850. So it has gone up in 2024 to 4,100,000.4,000.1,000. This is great news for folks who love the HSA, someone like me, because I think it has those triple tax benefits that you can truly take advantage of. And for the family plan, it is $7,750 and it jumped up to $8,300. So a big jump there when it came to the HSA contribution limits. Really, really excited about that. That is just going to keep going up over time where you can keep adding money to the HSA.

One big question we always get on the HSA, by the way, is where should I open an HSA if my employer doesn't offer one. Fidelity has the highest ratings as from what we've seen in all the research that we have done and they have the lowest fees. So Fidelity is a great place to do that. Plus they have fantastic funds and we just had an episode on a Q&A episode talking through that. So if you want to check that episode out, we will link it up down below so that you can check that one out. But we dive into that deeper as we go through that. That's a great place to open one up. Now, which one of these is a better deal? And I want you to kind of look and think through this for a second because the 401k max contribution increased by $500 for 2024. And so it went up to that $23,000 mark. That's only 2.2%

versus the 12-month inflation rate of 3.7% where the IRA max increased $500 to $7,000 per year. And that is a much better increase of 7.7%. This is why it's really important. Make sure you max out both your IRA and your 401k contributions if you are privileged enough to do so, because you can make sure that your investment rate is keeping up. So make sure you're maxing out both of them if you are big into retirement accounts and you've got those extra funds to be able to do so to make sure that your investment rate is catching up. Because I always like to increase my investment contribution by the inflation rate at least at minimum every single year. So for folks who are noodle this or have never heard this before, one big thing I like to do is, hey, if you can't

increase the amount, if your income didn't increase year in and year out, at least try to increase your investment amount by the inflation rate. This means that you will keep the same buying power over that time frame, but in addition, your account will grow to that same buying power. So always increase it by that inflation rate so that you can make a differential long term. So now what we're going to do is we're going to dive into, based on different rates of return, how long it would take you to become a millionaire with these brand new contribution limits in these retirement accounts. So let's do that next. All right. So first, I'm going to get into some of the specifics for each of these accounts and how they work, because I'm

I need you to understand that before we dive into some of these contribution limit increases and how you can take advantage of those increases to accelerate your path to millionaire status. Now, here's what we're going to look at first, is we're going to look at how each account works, and the first one I'm looking at is the Roth 401k. Now, the Roth 401k might be my favorite account out there outside of something like an HSA because the Roth 401K means that you can get more money into a Roth. So here's how it works. If you open a Roth 401K, anything with 401K is typically going to mean that you have to open it through your employer.

And so what that means is that you go to your employer's HR department and say, hey, do you have a 401k option? Typically they'll say yes or no. And if they do, ask also if they have the Roth 401k option because the Roth 401k option has post-taxed contributions, meaning that you're going to put money into the Roth 401k that's already been taxed. It was already taxed when it came out of your paycheck, okay? So your money goes into the Roth 401k, then your money can grow tax-free once you invest those dollars in the Roth 401k, and you can pull the money out tax-free. So withdrawals are tax-free and penalty-free after age 59 and a half, and if you have held it for at least five years in that account.

So one big thing with Roth accounts is that if you have your money in that account for at least five years, you can also pull the contributions out penalty-free prior to that. Now, are there mandatory distributions with a wrong? Roth 401k. There are starting at age 72. And also in a Roth 401k, one big thing that you can get here, and you want to make sure that you're asking your employer this, is do you have what is called an employer match? An employer match is one of the best benefits you can get for working at a company because it is a 100% rate of return on your money. This is an extremely powerful thing to understand. Because if you take advantage of these employer matches, if you have a 3, 4, 5, 6% employer match,

that's a 100% match, then you are definitely going to really see a massive difference in your retirement accounts over the course of 30 years. And we've done some calculations where based on your rate of returns, sometimes it can be up to a million dollar differential by taking advantage of those employer matches. It is definitely a six-figure decision for sure. And depending on your rates of return and how high that employer match is, it can be much more than that. So you've got to make sure that you are taking advantage of those employer matches. And ask your employer if they have the match for each of these different accounts. Maybe they only have it for. for the traditional 401k, I want you to make sure that you're always taking that employer match.

Always, always, always do that even before paying down high interest debt because it is a 100% rate of return. You cannot get that anywhere else. So that's the Roth 401K. Now let's look at the traditional 401k, which is going to be very similar to something like a 403B depending on where you work or a TSP. So it just kind of depends on where you work if you're a government worker or you work for a private company. But the traditional 401k is what most people have offered to them when it comes to retirement plans at their employer. So this is also opened through your employer. Remember, 401K means it's most likely open through your employer,

unless you're self-employed. You can open something like a solo 401K. And it is pre-tax instead of post-tax, meaning money going in is not taxed. Then your money grows when you invest your money. And then you can pull the money out, but you're taxed when you pull that money out. Your withdrawals are taxed.

So there are no penalties after the age of 59.5 On this money when you pull it out, but you still will have to pay taxes. on that money. And you also have mandatory distributions starting at age 72. Now, in a traditional 401k, your employers can also match your contributions. So you want to make sure you're asking that and taking advantage of it because like I said, it's that 100% rate of return. Your boy loves free money. I don't know if you love free money, but I love free money. So you always take advantage of those match and those contributions. And there's no annual income limit, which is really, really important

to understand because some of these will have income limits as you'll see in a second. Now, next we have the Roth IRA. One of my favorite accounts out there, and no matter where you work, you can open yourself up a Roth IRA and get that bad boy rolling. So if one of my favorite accounts that are out there, and you have to open it up yourself. It's not offered through your employer. Your employer would only offer the Roth 401k. They would not offer the Roth IRA. Now, this is also post-tax contributions. It works very similar to the Roth 401k. But after age 59 and a half, you can also pull that money out without penalties or taxes. So you're not paying taxes when you pull this money out because your money has already been tax going into the Roth IRA. It grows tax

free. And then you can pull the money out tax free because you've already been taxed on that money. Now, are there mandatory distributions? There are no mandatory distributions in the Roth IRA, which is another reason why I love it. You can keep that money in there. They're not going to try to make you pull that money out. And one big benefit to the Roth IRA is you can withdraw those contributions. So once you contribute money into a Roth IRA, those contributions can be pulled back out if you had an emergency. Now, I don't recommend you doing this. You don't want to interrupt compound in the interest unnecessarily, but you can withdraw those contributions at any point in time. Lastly, we have the traditional IRA, which works like a 401K. It's just you can open it yourself,

not through an employer. It is pre-tax, so your contributions go in before they're taxed, so your taxable income is lower. Withdrawals are penalty-free but taxed as current income after age 59.5, and you're going to have mandatory distributions at age 72, but there's no annual income limit, whereas with the Roth IRA, there is an annual income limit every single year. And it is going to be in 2024, spoiler is going to be $161,000 for singles and $240,000 for married filing jointly on the Roth IRA, which we will go through here soon. So we're going to go through all of these. We also have something, which is called the health savings account.

And the health savings account is one that we're going to go through those changes as well. The HSA has changes that are massive. but the HSA also has triple tax benefits, meaning money goes in tax-free. You can invest the money in an HSA and it can grow tax-free, and you can pull the money out tax-free as long as you have a qualified medical expense. And the IRS is a very long list of qualified medical expenses, and there is no time limit to when these qualified medical expenses had to have occurred in order for you to reimburse yourself tax-free,

meaning that you could have something 30 years ago where you had to go to the doctor for bronchitis, and you can reimburse yourself for that medical visit because you have that receipt and you have that available to you. So the HSA is a really, really powerful account. It has triple tax advantages, allows you additional flexibility if you have that built up with some receipts on there. And then if you don't use the money in the HSA, it turns into the same thing as like a traditional IRA when you turn H-65. So a lot of cool stuff with the HSA. Love that account. And for a lot of people who come on this podcast, if you hear them talk about that, they always say, hey, the HSA is probably my favorite account. And the reason is those triple tax benefits.

So that is another great one that we will be talking about here as we go through this. So now let's get into the retirement changes for 2024 that the IRS announced and are official as of this point in time. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need. Instead of struggling to get your job post noticed, Indeed's, sponsor jobs help you stand out and hire faster.

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Now, before we go into this, if you cannot max out your retirement accounts yet, maybe you are just starting out, you're working on increasing your income. You know, you're doing the best that you can. Just invest as much as you can there and try to get your savings rate or your investment rate to about 20% of your income or more. Once you get to that point in time, you're going to really accelerate your path to being able to be financially free. And so we always want you to try to target that 20% rate. Now, if you can't do that, what you want to do is start. at whatever amount that you can start at, the max you can start at, and try to increase that amount by 1% every month or every two months or every three months so that slowly you're going to grow

your investment percentage over time. It doesn't hurt as bad to be able to do that. And during that time frame, you can focus on ways to increase your income and or decrease your expenses so that you can invest more dollars towards your freedom because that's exactly why we do this is for our freedom. It's freeing with our time, energy, and everything else so that we can spend more time with the people we love and spend more time doing the things that we love. That is exactly why we do this and why we get so excited about going through these numbers. Now, we're going to see, hey, 7%, 8%, 9%, 10%, how long with these different rates of return is it going to take me to become a millionaire? Let's start with the 401k. So with the 401k, we could put $23,000 bucks per year

inside of the 401k. So if you got a 7% rate of return, it would take you 20.6 years to become a millionaire. if you invested that $23,000 per year. Now, if you got an 8% rate of return, it would jump down almost a year to 19.4 years before you became a millionaire. Now, if you got a 9% rate of return, it would be 18.4 years before you became a millionaire. And if you got that 10% rate of return,

it would be 17.59 years before you became a millionaire. So you can really accelerate your path to wealth by maxing out your 401k. and a lot of folks who became financially independent really, really quickly or retired early, they use their 401k as a huge asset. Now, why is this so important to do? Because you're not getting tax on your money on the front end, and then you're putting your money into these accounts so it can grow faster.

This is a really, really powerful tool that you can utilize. High income earners, the 401k is your friend because you are not paying taxes now while your income is super high. It's very important to look into this and talk to your CPA, say, hey, is the 401K a great option for me because if you are a high income earner in a lot of situations, it can be a fantastic option for you. So make sure you are talking to a CPA or if you have a financial planner in your life, that is somebody else that you could be talking to to see for your specific situation. I've talked to my CPA about this stuff. And so we kind of go through these options each and

every single year. Now let's go through the IRA because the IRA is really powerful. And I'm specifically going to be talking about the Roth IRA in these examples. And the numbers are going to be exactly the same if you have a traditional IRA or a Roth IRA. But I want to talk about why this is so powerful so that you can see this over this time frame. Now, it's going to take longer, obviously, because we cannot put as much money into these accounts as we can with A Roth 401K, for example. So if you max this out, if you maxed out a Roth IRA, that means you're putting $7,000 per year. And if you had a 7% rate of return, it would take you 35.4 years before you became a millionaire. But here is where the power comes into play. Because what that means is over those 35 years,

you would only have put in $248,000 at that 7% rate of return. And what you would have gotten back is an additional $751,970 is the amount of money that your money would have made. But here is what is mind-blowing. Because in a Roth IRA, what did we say earlier? In a Roth IRA, your money grows tax-free. So once you have that money in there, it's going to grow tax-free. And when you pull the money out, you're not going to be taxed on that money

because you were already taxed on those contributions. So what this means is that you have $751,000 that grew in this account that you will never have to pay a dime of tax on. That is incredibly powerful. That is something that we got to take advantage of, especially if you have a long time horizon, because this gets more and more powerful as time goes on. If it at an 8% rate of return, it would take you 32.7 years to become a millionaire, a Rothierre millionaire, your total contributions would be $229,000.

and the amount of money that your money would have made, $770,000 tax-free dollars. Amazing stuff there. Let's look at the 9% rate of return. At a 9% rate of return, it jumps down even more. It would only take you 30.5 years to become a Roth IRA millionaire. And your total contributions would only be $213,000. And the total amount of money that your money would have made

would have been $786,000 adding up to $1 million in total. And $786,000 would be taxed. free. Now, the last one, a 10% rate of return. It would take you 28.6 years to become a millionaire. And your total contributions would only be 200 grand. The amount of money that that 200 grand would have made would have been 800,000 tax-free dollars. This is some incredible stuff that you can do by maxing out these accounts and really getting your money working for you. It is so powerful to get your money working for you because over time compound interest is going to take over and compound interest is your best friend.

It can work way harder than you can, but you got to get it rolling in the early days so that you can make sure that you get to that point in time. The early days, your first 100K, the majority of your money is going to be made through your savings rate, the amount of money that you're actually putting inside of that account. Then after that first 100K, you're going to see it to start to ease up a little bit, and it's going to allow you to actually build wealth over that time frame,

and you're going to see it really, really speed up over time. Now, the cool thing about these is you can run these numbers beyond these dates and see what's going to happen. And what you're going to notice is, say, for example, you're maxing out that 401k, 23 grand per year. In 17 years after a 10% rate of return, you hit that million dollar mark. Well, now you're going to hit $2 million really, really quickly. And then you're going to hit $3 million.

So if you think you're going to work for 30 years, for example, you're going to have a really big 401k that you can use in retirement. And remember, how much money can you draw down in retirement inside of some of these accounts? 4% is the rule that we like to talk about. So the 4% rule means that every million dollars, you can live on 4%. $40,000 per year in retirement and preserve your wealth and preserve your capital over your retirement. So this is really, really powerful stuff and so that you can work backwards to figure out, hey, how much money do I need per year?

This is how much money I need in my retirement accounts. That's how you do the math on that. Listen, thank you guys so much for listening to this episode. I truly appreciate each and every single one of you. And thank you for investing in yourself because it's exactly what you're doing when you listen to this podcast is investing in yourself. I truly hope you guys have an amazing week and I will see you on the next episode. Lausagna, medium power, 15 minutes.

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