$5,500 Per Year to Tax-Free Millionaire: Why You Need a Roth IRA

December 4th, 2019


A Roth Individual Retirement Account (IRA) is a type of investment account that you can set up where you invest your monthly money today — up to $5,500 per year with no immediate tax deductions — and can pull out your profits and earnings tax-free when you’re 59.5 or older and have had the Roth IRA for longer than 5 years. This means you pay NO TAX on YEARS of compound interest and earnings. Your tax-free profits just makes you MORE tax-free profits. And it snowballs into a LOT of money.

It must be noted that if you are under the age of 59.5 or you have had the Roth IRA for less than 5 years than any withdrawals above the amount of your initial contribution will be taxable.

This is best done when you’re young for a few reasons…the money you invest in a Roth IRA is post-tax, which means taxes are already taken out of the money that you earn at the time you invest it. So if you make $20,000 from a job, you might be left with only $17,000 after paying taxes… so this $17,000 is now “post-tax” money.

The reason this is best when you're young because chances are, you’re not earning a ton of money compared to what you WILL be earning. When you’re earning a lot of money, it’s about reducing what you owe in taxes because the more money you make, the more money you’re generally taxed. When you’re not earning a lot of money, you’re already in a lower tax bracket, so it’s advantageous to take advantage of that and pay the taxes now to invest — because, in the future, you’ll hopefully earn a lot more money.

Especially if you’re 18–30 and not earning a lot of money, this is PERFECT for you. When you start earning more money, there are other accounts that might make more sense for your situation.

So here’s what I would do:

If you’re under the age of 18 and have a job that you’re making money with, you can ask your parents to open a Roth IRA account for you.

From there, you contribute your money from your job — keep in mind you cannot contribute more than you earn, so if you earn $1,000 that year, you can only contribute $1,000.

If you’re over the age of 18, right after reading this post, just go online and sign up for a Roth IRA. I use Charles Schwab and they’re awesome, many people use Vanguard or Fidelity — just make sure the account has low fees.

You can contribute up to $5,500 of earned income every year — if you make too much money, you can look into doing a backdoor Roth IRA contribution. I recommend putting in as much as you can afford and forgetting about it. It can be as little as $100 a month, slowing increasing it the more your income increases.

The advantage is that since there’s compounded interest, the sooner you put your money in, on average, the more money you’ll have by the time you retire.

Is this a boring investment strategy? Yes. But it’s effective. I recommend just doing this on the side with what you can afford while continuing to invest elsewhere or investing in yourself.

Just to give you some ideas, if you invest $1,000 per year at age 18 and retire at 60, you’ll have $264,000…of that you only contributed $43,000 over 42 years, meaning you just made $221,000 of TAX-FREE money.

If you invest the maximum right now of $5,500 per year at 18 years old, you’ll have invested $231,000 and made over $1,200,000 in tax-free money. If you just do $5,500 per year at 18 years old, you can retire a millionaire without doing anything else. This average figure includes inflation, by the way.

I hope this helps and that this sets you up for future financial independence.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.