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How to become a Roth IRA millionaire

Even though the broader stock market has fallen over 20% in spots over the past year, there’s still every reason to believe you can become a Roth IRA millionaire. With enough discipline, time, and focus, achieving a tax-free seven-figure retirement is within reach.

Let’s go through the four key behaviors to ensure you’re a Roth IRA millionaire when it’s time to retire.

1. Deposit the annual maximum in January

While this won’t be possible for all investors, contributing the annual maximum to your Roth IRA as soon as the new year begins gives your money the longest time to earn tax-free interest. If you can’t give $6,500 (or $7,500 if you’re 50 or older) at once, consider spreading your contributions over 12 months. But make a commitment to invest regardless of how the stock market performs.

The longer your money is invested, the more dividends it earns and the longer it needs to grow. While the benefits of investing in January are limited, it’s still an effective way to ensure your money is working as hard as it can.

2. Stick to a single, broad market index

The elegant beauty of growing your Roth IRA is that it only requires a single investment. When pondering which one, consider a broadly diversified, low-cost index fund that has a solid track record of performance. In this conversation funds are like that Vanguard S&P 500 Index ETF and the Vanguard Total Stock Market Index ETF.

The logic here is that you don’t need anything overly complex, expensive, or difficult to manage. Other than transferring money into the account once (or more) a year and investing the money, no ongoing administration is required. As the money in your Roth IRA grows, you can focus on more pressing matters in life – as you define them.

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3. Determine dividends and capital gains to be reinvested

Dividend reinvestment is one way to take advantage of market downturns, much like the ones we’re currently experiencing. If you receive a dividend in a down market and wish to reinvest it, the money received will automatically be reinvested in the same asset at lower prices. In the long run, you’ll end up with more than if you just took the dividends in cash. If you own mutual funds, reinvesting any capital gains distributions you receive will also have the same boosting effect.

The positive effect of dividend reinvestment only becomes apparent over a period of many years. However, you must be particularly patient when the market falls as your investments may suffer losses at times. The key to making the most of dividend reinvestment is to set the process in place and let time take its course.

4. Rely on the math

If the emotions involved in investing sometimes get to be too much for you, you are certainly not alone. 2022 was one of the worst years for broad financial markets in over a decade. Still, the math behind becoming a Roth IRA millionaire still applies.

Assuming an annual January contribution to your Roth IRA of $6,500 and an average long-term investment return of 8%, you can expect to become an IRA millionaire in just under 34 years. In reality, it could be even quicker as contribution caps typically increase over time and markets could show long-term returns in excess of 8%.

Nonetheless, the math proves that persistence and time will inevitably make you a seven-figure IRA owner.

Control what you can control

While there is no guarantee that financial markets will do well over a year or two, the odds that they will do well for several decades are very much in your favor. For this reason, regular contributions to your retirement account and a simplified investment plan make a lot of sense when trying to turn your wealth into a sustainable nest egg.

If you’re unsure or hesitant about how to begin, consider working with a qualified financial planner who has your best interests at heart, or consult a knowledgeable family member or friend. As with most long-term goals, the sooner you start investing, the better.

Sam Swenson, CFA, CPA has positions in Vanguard Index Funds-Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds, Vanguard Total Stock Market ETF, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

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