The Roth IRA (individual pension account) is one of the most desirable accounts available for retirement, especially since ProPublica published information on Peter Thiel five billion dollars Roth IRA. But if you have no idea how it works and if you are not armed with a game plan for success, you will miss the true power of the Roth IRA.
Although I had a general idea of how it worked when I opened an account in college, there were some key points that I missed and why I left thousands of dollars on the table.
Below I will break down my three biggest mistakes to turn my blouse into a waterfall of tax-free income in my Roth IRA.
1. I did not contribute max
The IRS publishes pension contribution limits each year. For 2021, the Roth IRA limit is $ 6,000 for savers under the age of 50. To contribute directly, your modified adjusted gross income must fall below annual threshold. However, you can never give more than gross income for a year.
Although I made contributions throughout the year, my annual total never came close maximum amount I could have come in. Instead of hearing the benefits of maximizing my account, they are bombarded with warnings about the penalties I would receive if I contributed too much.
Let’s say in my twenties I would give a total Roth IRA contribution of $ 40,000. With an annual rate of return of 7%, my portfolio would be worth almost $ 60,000 when I turn 30.
Since I had a Roth IRA during the longest bull market in history, a six-figure bill would not have been unavailable had I contributed the maximum amount each year and exploited explosive returns with inventory growth.
2. I did not contribute
Even to give the maximum every year in my early 20s, another piece of the Roth IRA puzzle was missing that would have stopped my growth: I hadn’t invested my contribution.
I knew the power of investing, but I assumed that my contributions would be automatically put on the stock market. After examining the growth of my account, I realized that my money was not being invested and that my investment opportunities were limited because of where I had opened the account.
Here are a few to take away. First explore and consider opening a brokerage account in the company that best suits your needs. Next, make sure you understand how to invest in your account. Choose options that are consistent with your risk tolerance or work with an expert who can help you make those decisions.
3. I didn’t create a long-term game plan
It’s never too early to start thinking about your future goals. The Roth IRA has no age limits, but you had to earn to contribute.
When thinking about your retirement goals and game plan for success, ask yourself the following questions:
- Do I expect to make more money in the future, facilitating higher contributions?
- When do I want to retire?
- What kind of life do I want to live during retirement?
- How much money will I need for a comfortable retirement?
- Does my risk tolerance meet my long-term expectations?
- How much do I have to save and invest today to achieve my long-term goals?
This is a questionnaire I would love to have at the beginning of my Roth IRA journey. It helps you be strategically better towards your Roth IRA, and motivates you to track your retirement goals even when that special moment separates you for decades. Had I answered these questions, I could have calculated how much I have to save each year to achieve my ultimate goal and tax-free fund my dream lifestyle.
Turn your mistakes into millions
If you have made any of these mistakes, don’t fight. As long as your income does not exceed the annual threshold, you can still contribute directly to the Roth IRA. All you have to do is donate dollars after tax to fund your Roth IRA and invest in assets that will lead to tax-free growth. You will then be entitled to a 100% withdrawal tax-free after you fill 59 1/2.
One lesson I’ve learned on my financial journey is that there are always opportunities to come back stronger. You can’t be so focused on what you’ve missed that you don’t see the opportunities coming. As long as you continue to grow, opportunities will continue to evolve.