What's Happening
1 hour ago

Mark Zuckerberg Follows Elon Musk's Footsteps As Meta Reportedly Plans Major Investment Into AI-Powered Humanoid Robots

benzingabenzinga.com
2 hours ago

Do You Know How Long $1 Million Will Last If You Retire At 65? Here's A Hint – Longer Than You're Led To Think!

benzingabenzinga.com
2 hours ago

IRS Reportedly Gears Up To Lay Off Thousands Of Workers Elon Musk's DOGE Looks To Shrink The Tax Agency

benzingabenzinga.com
3 hours ago

TRADEPULSE POWER INFLOW ALERT: PALO ALTO NETWORKS INC. (PANW) MOVES UP OVER 5% AT ITS HIGH AFTER TRADEPULSE ALERT

benzingabenzinga.com
3 hours ago

Jeff Bezos-Backed Anthropic Fights US Proposal Blocking Google From Investing In AI Startups, Says It Would Benefit Rivals OpenAI, Mark Zuckerberg's M...

benzingabenzinga.com
4 hours ago

Trump Administration 'Unlikely' To Support TSMC's Control Of Intel's US Chip Factories: Report

benzingabenzinga.com
5 hours ago

Trump's 'Liquid Gold' Plan: Can He Really Make America Rich Again, or Do Oil Giants Hold the Real Power?

benzingabenzinga.com
6 hours ago

Elon Musk's Government Gig Has No Salary, No Job Title, And Plenty of Power

benzingabenzinga.com
7 hours ago

Why Altcoins Were Winning This Week

foolfool.com
7 hours ago

Russell Vought Orders Pause On All CFPB Activity, Critics Say This Gives Corporations 'The Green Light To Scam Families'

benzingabenzinga.com
7 hours ago

Prediction: Zillow Will Beat the Market. Here's Why.

foolfool.com
7 hours ago

$1000 Invested In Super Micro Computer 15 Years Ago Would Be Worth This Much Today

benzingabenzinga.com
7 hours ago

'We're Going To Find Billions' – Trump Targets Pentagon For Deep Spending Cuts

benzingabenzinga.com
7 hours ago

Here's How Much You Would Have Made Owning Meta Platforms Stock In The Last 10 Years

benzingabenzinga.com
7 hours ago

If You Invested $1000 In This Stock 15 Years Ago, You Would Have This Much Today

benzingabenzinga.com
7 hours ago

Why Siemens Stock Crept Higher on Friday

foolfool.com
8 hours ago

Here's How Much You Would Have Made Owning Regeneron Pharmaceuticals Stock In The Last 15 Years

benzingabenzinga.com
8 hours ago

This Magnificent Artificial Intelligence (AI) Stock Delivered Stellar Gains in 2024. It Can Jump Another 60%

foolfool.com
8 hours ago

Here's How Much You Would Have Made Owning American Tower Stock In The Last 20 Years

benzingabenzinga.com
8 hours ago

Why Federal Realty Investment Trust Stock Just Tanked by 6%

foolfool.com

Want to Be a Roth IRA Millionaire? 4 Tips Smart Investors Should Know

American investors are flush with choices in how they save for their retirement. In the late 1990s, Congress created a doozy of a retirement account with the Taxpayer Relief Act of 1997. It’s so good that the government limits who can use it and how much you can contribute yearly.

I’m talking about the Roth IRA. It offers something almost unheard of: A pass on paying taxes on your investment returns.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Those who use it correctly could retire as Roth IRA millionaires, and the consequences could be generational wealth. Want that to be you? Here are the top four Roth IRA tips investors must know.

1. You pay the taxes now instead of later

It’s not easy to get out of paying taxes on any form of money. Your earned income is taxed, as well as just about any returns when you profit from selling any asset. You still pay some taxes when you use a Roth IRA.

When you contribute to tax-deferred retirement accounts, such as a 401(k) or traditional IRA, you deduct the contributions from your yearly taxable income. After you retire, you pay taxes on any funds those plans distribute. Roth IRAs work backward. You contribute take-home pay, meaning the government has already taxed that money. Additionally, your Roth IRA contributions don’t reduce your taxable income during your working years.

Here’s where the magic happens: Your distributions are tax-free in retirement (assuming you’ve followed all the rules). In other words, your investment gains are also untouched by taxes. That can equate to tens (even hundreds) of thousands of dollars in avoided taxes, as investment returns tend to account for a more significant portion of a portfolio’s value over time, thanks to compounding.

2. Consider your investment strategy carefully

Consider the tax perks of a Roth IRA when deciding what type of assets to invest in. Roth IRAs are very flexible; you can even own individual stocks. Try to think about what could compound the most over time. For example, growth stocks could generate tremendous long-term gains. Wouldn’t it be nice to sell a multibagger and owe zero taxes on your profits? Dividends, which would typically add to your annual tax bill, are another way to use a Roth IRA to your advantage.

Whatever your investing style, stay mindful of the risks you take. Roth IRAs have strict contribution limits, so catastrophic investment losses are tragic because they could set you back years’ worth of contributions.

3. Don’t delay starting, and don’t skip years

As I was saying, Roth IRAs have pretty low contribution limits. Someone can contribute tens of thousands of dollars to their 401(k) plan yearly, but the limit on a Roth IRA is only $7,000 if you’re younger than 50. Those 50 or older can contribute an additional $1,000, bringing their annual limit to $8,000.

That means you’re leaving money on the table each year you skip contributing or don’t contribute up to the allowed limit. It takes about 30 years to hit $1 million if you contribute $7,000 annually and earn a 10% annualized return on your money. Want to be a Roth IRA millionaire? Make each dollar count.

Person throwing cash in air.

Image source: Getty Images.

4. Know your limits and your backdoor options

The government doesn’t want everyone to have a Roth IRA. There are income limits to keep high earners out.

Based on your modified adjusted gross income (MAGI), your allowed Roth IRA contributions for individual filers begin phasing out at $150,000 to $165,000 in 2025. Rules prohibit individuals earning more than $165,000 from directly contributing. For married couples filing jointly, the 2025 phase-out range is $236,000 to $246,000. Couples earning over $246,000 are prohibited from contributing.

Make too much money? That’s a good problem. But worry not, for not all hope is lost. High earners can contribute to a traditional IRA and then convert it to a Roth, a technique known as the backdoor Roth IRA. Want to go a step further? A mega backdoor Roth IRA uses a similar method but involves maxing out your 401(k) contributions.

Of course, these things can get complicated, so be sure you’re following the proper rules and regulations, and don’t hesitate to ask a tax professional for advice if needed.

A Roth IRA can be a lucrative retirement account. You can retire as a millionaire and pay minimal taxes on your fortune. If you maximize your allowed contributions, keep at it, and use the Roth IRA’s tax perks to your benefit, you could have the retirement of your dreams.

The $22,924 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.

Related Posts

Social Security is an essential piece to most American’s retirement plans. Without their monthly benefits, some 16.3 million seniors U.S, would be living below the

The average retirement age in the U.S. was 62 in 2023, but that number’s been slowly ticking up over time. Rising life expectancies and rising

While the stock market is still thriving, some investors may be feeling wary about the future. Spiking inflation could cause the Federal Reserve to shift

There are plenty of ways to become a millionaire, like starting a successful business, being a professional athlete, or becoming a movie star. For most