The Personal Finance Podcast - How to Become a Roth IRA Millionaire

Episode Date: June 3, 2020

Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Episode 4: How to Become a Roth IRA Millionaire In this episode we cover:  What is a Roth IRA? How to max out a Roth IRA. How much money do you need to save in your Roth IRA to become a millionaire? What to invest in your Roth IRA. The best brokerage for the Roth IRA. Personal Finance Q&A.  Resources in this episode:  M1 Finance ROTH IRA or Brokerage Personal Capital Free Budget App Vanguard Roth IRA Printable  Roth IRA Article  Learn more about your ad choices. Visit megaphone.fm/adchoices

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And today we got a hot one because we're going to talk about how you can use my favorite investment vehicle, the Roth IRA, to retire a millionaire. And yes, you can retire a millionaire with a Roth IRA. So we're going to get into a couple of things. One of which is what is a Roth IRA, how you can actually achieve this goal of becoming a millionaire with your Roth IRA, and what to invest in inside of your Roth IRA. Because all these are extremely important to be able to achieve your goal.

And every year, the Roth IRA is the first thing that my wife and I max out. It's the first thing that we attack at the beginning of every single new year. And a lot of times we'll max it out on January 1st to get it out of the way right away. And the reason being is I love everything about the Roth IRA. There's so many pros to the Roth IRA that you will absolutely see results as long as you keep contributing day after day, month after month, year after year. So first let's get into a few of the numbers because to become a Roth IRA millionaire, you're going to have to definitely max out the Roth IRA.

So how much do you need to max out a Roth IRA? So the first thing we want to do is get into some of the numbers as to why you'd want to invest in a Roth IRA. If you actually max out your Roth IRA, you can become a millionaire within right around 30 years. So if you're a 25 year old, right when you get to the point where you're ready to be able to take money out of your Roth IRA, which we'll get into pretty soon, you'll have over a million dollars inside that Roth IRA. And that's why we max this out at the beginning of the year, because this is actually our backup plan. This is if all else fails in the world, my wife and I will at least have these Roth IRAs that each will have a million dollars in them to fall back on when we retire.

So if all our real estate investments are investments in single stocks, are investments in businesses, if all those fail, we're still going to have this Roth IRA to fall back on to be able to retire with. So let's get into how much you need to be putting away. One of my favorite things about the Roth IRA and the reason why I love the Roth IRA specifically for people who are just starting out is that the Roth IRA, is extremely manageable to max out. So if you're looking at something like a 401k, your company's 401k,

I always recommend to at least get the match because the match is free money. And after you get those free dollar bills, then you need to move on to your Roth IRA because you need to max this bad boy out because you can't go backwards in years. Once you max out your Roth IRA, you can't put any more in for the rest of the year,

but you can't go backwards either. There's no catch-up contribution until your 50s and it's going to be a little bit too late to try to build a million-dollar Roth IRA, if you're in your late 50s. So here's how you do it. You're going to take the amount that it costs to max out your Rothera, which is $6,000 a year. That's how much as I'm recording this you can max out. Now, it's continuously going up. So this could easily go up. It was $5,500 a couple of years ago, and they just increased it to $6,000 per year. So this is pretty simple math.

$6,000 per year divided by 12 months equals you need to invest at least $500 every single month in order to max out your Roth IRA. Or you can, if you have a big chunk of chain, say you get a bonus at the end of the year, you can roll that bonus over the next year, and then you'll be able to take that bonus and invest it to max out your Roth IRA as well. But $500 a month will get you there.

And if there's two of you, if you're married, then that would be $1,000 a month for each of you, if you want to max out a Roth IRA to be able for both of you to have $2 million Roth IRAs, which is going to be extremely powerful, and we'll get into Y later on here. Now, I've actually put together, a Roth IRA savings chart.

So it's something that you can kind of print off and put on your wall if you wanted to be able to max out your Roth IRA. And I actually broke it down on a week-by-week basis because if you break it down on a granular level, you'll be able to understand each week I need to save this amount. Or you can do bi-weekly. So every paycheck, you need to save $250. But to break it down into simple terms

so that you'll be able to just automatically transfer into your Roth IRA is extremely, extremely important. And we've talked about how important it is to automate our finances. So you want this to be automatically done, either at the beginning of the year or every single month. So if you want to break it down on a weekly level, then you need to save $125 a week. And I think a lot of people, even in entry level jobs, could probably scrape together another $125 a week. And if you can't, a side hustle would be able to fund this as well. And if you think about a side hustle funding $125 a week, and that $125 a week turning into a million

by the time you retire, it is well worth pursuing that side hustle to be able to get to this point. The second reason I love the Roth IRA is because your contributions can be withdrawn without penalty. Now, what does that mean? A Roth IRA is funded with after-tax income. So actually, you're putting money into your Roth IRA and that money has already been taxed. Now, this is the opposite of a 401k, where a 401k is automatically put into a 401k before taxes. So you, don't pay any taxes on the money that goes into a 401k. But the beautiful thing about the Roth IRA is your money grows tax-free. And if you look at a chart of how much you're actually contributing in a Roth IRA, it is much less than the amount your Roth IRA is going to grow over long periods

of time. So what happens is your money grows tax-free. So then you're taking money out that has not been taxed at all and it was able to grow tax-free. whereas in a 401k, your money grows, but you're going to get taxed on that money as it grows. But the cool thing about the Roth IRA is that the amount that you've actually contributed can be withdrawn at any time without a penalty. So I would never advise taking money out of your Roth IRA, but you're not going to get penalized for the actual money you put in. So say you put in $6,000 a year for three years.

So that's $18,000 that you've contributed. And say your money grew to say $20, $21,000. Well, you can still take out. $18,000, and the IRS and the government is not going to penalize you. You can actually take that out for an emergency. And that is a really nice flexibility to have if you absolutely need that option. Say your roof caves in on you while you're reading a magazine, then you'll be able to pull out some money to be able to fund a brand new roof. And that's where the Roth IRA has some flexibility, whereas in a 401K, you cannot do that. It's just more freedom that you don't have in your 401K.

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Call 16-531-2600 or visit connectxonterio.ca. Now, the third reason I love the Roth IRA, and we just talked about this, is that it grows tax-free. So since you contribute that after-tax money, your Roth IRA will grow tax-free. So every dollar your money earns can be withdrawn in retirement without having to give it back to Uncle Sam. And this is a massive, massive benefit. Because that is why you can contribute $6,000 a year. And think about that. $6,000 a year is minimal to end up with a million dollars by the time you retire.

You're going to finish your retirement with millions of dollars. And if you can get this past 30 to say when you're 60 years old, and I put this on that same chart that I referenced before that you could print off. But if you actually save up and max out your Roth IRA, say for 60 years, you're going to have over $4 million dollars in your Roth IRA. Now that is absolutely unbelievable for something that grows tax-free, and that is the power of this tax-free growth. So let's make this simple. A Roth IRA, you pay taxes going in, no taxes when you pull it out. A 401K, no taxes going in, but you pay taxes when you pull it out. Got it, Homestlice? Cool. Now let's get into the potential downsides of a Roth IRA.

As with any investment, there's always potential downsides, and the Roth IRA is no exception. There's a couple of downsides that I want to get into, but I just want you guys to remember that the upsides are so high. For me, specifically, it completely outweighs the downsides. So the first one is something that's going to affect people who would like to retire early. And that is the withdrawal rule. To withdraw money earned beyond your contribution, you must be 59.5. So the money that grew tax-free inside of your Roth IRA, you have to be 59.5 to be able to pull that money out. You can still pull out the money that you've contributed, like we said,

said, but the money that's grown, the larger portion of your Roth IRA as time goes on, you cannot pull out until your 59.5. So if you plan on retiring early, you may have to get a little creative if you plan on using that money right away. And there are some creative ways and we're going to get into those on another podcast. But that is a potential downside for people who want to be financially independent or five. So the second potential downside to a Roth IRA is that it does have income limits. And you all know that your boy is always saying you got to increase your income. Increasing your income the way to financial independence. And that is very true. But if you're making too much money at your job, you actually may be restricted on how much you can contribute to your Roth IRA. So I'm going to get

into some of the income limits here. And we'll separate them out is if you're single or if you're married. So if you're single, you can't make more than $139,000 to be able to contribute to your Roth IRA. If you make more than $139,000, then you're not going to be able to contribute to your off IRA. If you're married or you're filing jointly, then you cannot make more together than $206,000. So that actually becomes a little more difficult if there's two of you that are both making a high salary. And those income limits are a true potential downside. Now, that may sound like a lot of money for you, and some of you may be thinking, I'll never get to that point. But potentially you could down the road.

But your boys got a solution for you high earners. And I don't want these high earners to fear because this is a solution to a wonderful problem. It's a wonderful problem to have to make too much money. And my solution is called the backdoor Roth IRA. See, the IRS will allow high earners to do one conversion per year, meaning that you can convert from your traditional IRA and actually convert it to a Roth IRA. So you will be responsible for paying the taxes on that money that you convert over because your 401K is funded with pre-tax dollars.

and this is a great solution for people who have high income. So the next question that comes up is what type of investments are good for a Roth IRA? And there are three that I'm going to list out here that I think are fantastic to contribute to your Roth IRA. And I'm actually going to list them out in order of best to worst in my opinion. If you're someone who's not going to look at stocks and you're not going to look at investments, the number one is definitely for you. This is for people who do not care about stocks. They do not care about investing.

but it's also for people who just want to build wealth because it's actually the most efficient strategy to invest in your Roth IRA. And some of you, if you know me, you may know what I'm talking about. I'm talking about the greatest investment in the world, index funds. Index funds are what I put in my Roth IRA. It's what I put in my wife's Roth IRA. It's what Warren Buffett puts in his wife's Roth IRA. And they are by far the best way to build wealth.

Reason being is you have an extremely done. diversified investment that has the capability return to you historically 8% over time. So the numbers that I ran earlier where I told you could be a Roth IRA in about 30-ish years, that was based on that 8% return from an index fund. And that's the beautiful thing about having the Roth IRA in an index fund, is you can get returns that you can expect to be consistent over time. Now, the second investment vehicle that I would recommend would be dividend stocks. And the reason why is dividend stocks are stocks that produce a dividend.

And what a dividend is is it's a percentage of profits that are returned back to shareholders based on the share price. And it's a really cool way that companies actually return money to their shareholders. It actually shows that shareholders are true owners of companies because they're actually retaining some of the profits that the company earns. And the reason why I love dividend stocks inside a Roth IRA is because you have an asset that is producing cash flow. A dividend is cash flow.

So you have an asset producing cash flow, similar to how a rental property will produce cash flow for you as well. But in this case, it's inside a Roth IRA. And the beautiful thing about that is that money and that cash flow is being earned tax-free. So you're getting tax-free cash flow, which is absolutely amazing. Now, number one, the index fund also pays a dividend. And the traditional S&P 500 index fund pays a 2.4% dividend at the time I'm recording this. But dividend stocks are a fantastic way to produce cash flow.

And if you get your Roth IRA valued high enough, you could be living off tax-free income, tax-free cash flow. So you have a tremendous advantage in retirement because those dividends are reaping rewards for you. Now, the third asset that I would look at investing in a Roth IRA, and this would be the last one that I would entertain is value investing. Now, value investing is a different form of investing than, say, buying dividend stocks or buying index funds and value investing is actually a skill so if you don't have the skill to be able to

perform value investing that I wouldn't even consider it value investing is when you find assets and you find stocks that are valued on the market way less than their true value so think of a company say that maybe has some hardship so maybe a company has here's a great example if you remember a few years back it was somewhere around 2015 2016 target had credit card fraud and it was a situation where a bunch of credit card numbers were stolen from customers of Target. And this caused the stock to completely plummet. And investors lost faith in Target because so many customers, and it was millions of customers, got their credit card numbers stolen when they were shopping at Target. Well, this was a short-term problem because Target eventually fixed it and now the stock

has skyrocketed since then. But at the time that the credit card fraud happened, Target dipped so low and investors lost so much confidence that it was completely undervalued and it was ridiculous at the price value that it was at. So buying at this bottom or this low when the credit card fraud was going on would be called it a value investment. And that's the way you find stocks that are completely beaten down for a short period of time. So those are the three assets that I would look at to invest in it in a Roth IRA. And those are the main three that I would entertain. Now, if you're just starting out or if you're someone, like I said, who does not want to look at individual stocks or doesn't know enough to look at individual stocks, then I would go straight towards index funds. And I would start to plow my money

into index funds because they're such a fantastic investment. And even their top holdings, you can think of their top holdings as some of the biggest companies in the country. It's Apple, it's Amazon, it's Netflix, it's Johnson & Johnson, it's Procter & Gamble. It's all these fantastic companies jumbled into one big fund, and they hold a tremendous amount of weight. And before we wrap this up, I just want to challenge you guys to be able to open up your first Roth IRA. And if you don't know how to track it, you can track it in personal capital. I'll leave a link to personal capital in the show notes to be able to track it there.

I use Vanguard for my Roth IRA. So they have some of the best index funds in the country, and they have really low expense fees. So I would absolutely recommend Vanguard as one place to park your money for your Roth IRA. And I want to challenge you guys to open up. your first Roth IRA if you don't have one. And go ahead and take a look at the Roth IRA challenge at dollar after dollar.com slash Roth IRA millionaire because the Roth IRA challenge is a way for you to week by week track if you're saving enough money to max out your Roth IRA. Or you could break it out month by month and you could save 500 bucks a month or you could save

$125 a week and just make it even all the way through. But get to the point where you can max out your Roth IRA because you can become a millionaire if you're, able to stay disciplined and continue to plow money into your Roth IRA. And like we talked about in the very first episode of this podcast, the first 100,000 may feel like a grind and it may feel like it's moving extremely slow. And you see no light at the end of the tunnel. You can't see any way that this thing is going to get to a million dollars. But if you look at the math and you watch it grow after that first $100,000, then you're going to see that it's going to begin to compound and it's going to begin to snowball and it's going to begin to grow into this massive cash producing monster that

will allow you to never have to work another day in your life. So we're going to introduce a new segment on this show called Personal Finance Q&A. And if you want to ask me a question, feel free to do so. You can email me at Andrew at dollar after dollar.com and I may even put it up on the show and we're actually working on putting together a voicemail so you guys can call into the show, leave a voicemail, and potentially we'll play your voicemail on the show and answer your questions. But we actually had our first question come in, I am broke and deeply in debt. What is one thing I can do to be able to solve this problem today? Now, if you're broken deeply in debt, there's nothing that you can do today to solve that problem. But there is something

that you can do to create a system to be able to get out of debt and eliminate being broke. Here's what I would do. I would go ahead and cancel Netflix. Now, I'm not saying to cancel Netflix to save the $12, because that's not going to make a huge impact for you. But what I am saying to cancel Netflix for is so that you can regain 30 hours a week. See, most people watch TV way too much, and they waste time on social media way too much. And if you regained those hours, you could create an entire business. It's well over 40 hours a week that you're wasting watching TV or surfing social media.

And specifically, if you're broke or if you're in debt, both of those things are, are somewhat of an emergency because being in debt means you're going backwards and it's compounding against you. And being broke means that you're just not putting in the time and putting in the work and the extra effort to be able to increase your income because it can be done by anyone. Now, if you're broke and you're just running the cycle because you have multiple jobs and you have three kids and you're a single mother, that's a different story because you're not watching Netflix all day. You're not surfing social media all day. You're working your butt off. But if you're broke because you're being lazy with your free time,

then you need to go ahead and use that free time to get rid of your problem. And your problem is being broke and being in debt. Cancelling Netflix would be the very first thing that I would do. Now you don't have something to watch at night. All of a sudden, it's possible for you to be able to create a business that can change your life. And I did exactly this.

It was actually shortly after my son was born, I just stopped watching TV all together. And I realized that time not spent watching TV, I could use to grow my business and my productivity increased significantly because of that. So if you're broke or you're in debt, consider this option. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me.

All you have to do to enter is subscribe to this podcast and leave a rating or review on Apple podcast, then send it over to Andrew at dollar after dollar.com and you'll be instantly entered to win the one-on-one one-hour coaching session with me. Again, thank you guys so much for listening. We truly appreciate it and we'll see you on the next episode. Have a great day. It's what Warren Buffett puts in his wife's Roth IRA. It's what Warren Buffett puts in his wife. It's what Warren Buffett puts in his wife's Roth IRA. It's what Warren Buffett puts in his wife's Roth IRA. It's what Warren Buffett puts in his wife's Roth IRA.