- So if I told you I
could show you exactly how to stash away $1 million tax free, would you be interested in
finding out how to do that? If the answer to that is yes, you're gonna wanna stick around
for the entire video today. So what I'm going to be doing here is I'm going to be showing
you guys step by step exactly how to build a $1 million Roth IRA retirement account, which is essentially a
type of retirement account that allows you to stash away your money and allow it to grow completely tax free. And not only that guys, I'm gonna be showing you
exactly how much money you need to invest and
we're gonna be going over the major age groups
ranging from 20 to age 50 to show you guys step by step exactly how you too can do this as well. But before that, it is
important to mention guys, this is for entertainment purposes only and I am not a financial advisor and you should always do
your own due diligence before you begin investing
in anything out there. Alright, so now let's go ahead
and answer the question here of what actually is a Roth IRA? Most people out there
have heard of the 401(k) and I often get people asking me, is it the same thing or are
you allowed to have both? So let's clear some of
those things up now. The 401(k) is a retirement plan that is set up by your employer and it allows you to
contribute pretax income. So you're able to lower your
taxable income each year by contributing to the 401(k) and the contribution limits
are significantly higher. So with the 401(k), you end up paying the
tax bill at the very end after your money has grown for
many years or many decades. Now the Roth IRA on the other hand is something you set up on your own. Your employer doesn't set
up the Roth IRA for you, and you are able to have
both a 401(k) and a Roth IRA. With the Roth IRA however, you're not contributing pretax money, you're contributing money that
you've already paid taxes on. And there's a huge advantage to this because after your money has grown for many years or many decades, well you don't have to pay taxes on it because you paid taxes on the way in. So my favorite analogy
here for the Roth IRA versus the 401(k) is
that the 401(k) gives you the instant gratification of
having a lower taxable income. However, with the Roth IRA, it is more of a delayed gratification of you pay the price now of
contributing post-tax income, but then years later you can
take that money out tax free. So that is exactly why the
Roth IRA is this powerful tool that can literally make
you a tax-free millionaire. And I'm gonna show you guys exactly how to do that in a little bit. So just how much money can you contribute to a Roth IRA retirement account while the IRS sets limitations on this and every couple of years
they will raise the amount of money that you are
allowed to contribute to your Roth IRA every single tax year. So for 2019 and 2020 that
limit is $6,000 per year or $7,000 per year if you are 50 or above. And the only stipulation other than that is that this has to be earned income from a job or something like that. Now there's also income limitations where if you're making above
a certain amount of money you are not allowed to directly
contribute to a Roth IRA. However, there is a
very simple work around called the backdoor Roth IRA and I'll go ahead and
put those income limits up on the screen right now. It's significantly higher than
what most people are earning, but if you are somebody who
makes above that dollar amount, all you have to do is look up the backdoor Roth IRA strategy. And this is not some
kind of illegal trick. It's a 100% legal strategy
that allows you to contribute to a Roth IRA even if you make
above the income limitations. Alright, so now let's
answer the next question you probably have here, which is when can you
actually touch the money and start withdrawing
money from the Roth IRA? Well, the good thing is
you're able to withdraw your contributions at any point in time and that is simply the money that you use to fund your Roth IRA. So let's say for example, you put $5,000 into a Roth IRA every single year for 10 years. That means you have contributed $50,000. Well, you are allowed to withdraw $50,000 at any point in time from the Roth IRA tax
free and penalty free. You just cannot touch the
earnings because if you do that is when you will
pay taxes and penalties. Now as far as withdrawing the
earnings from the Roth IRA, you can begin doing that
tax free and penalty free as long as you are age
59 and a half or older and you have had that Roth
IRA retirement account for five years or more. So what should you
invest your Roth IRA in? Well, what most people are
going to follow is a strategy of investing in something
called an index fund, which allows you to have
diversified exposure to the entire stock market as well as the entire bond market. And so most people who follow this passive investing strategy are investing in both bond
ETFs as well as stock ETFs. Because the stocks are
going to be higher risk, higher potential return, while the bonds are
going to be lower risk, lower potential return and obviously as you get
closer to retirement age, you don't want as much
risk in your portfolio. So since a Roth IRA is
a retirement investment, it's a very long-term investment. And that is why most people will just put their money in low-fee ETFs, but you can put your money
in whatever you want to. Later on in this video I'm
gonna show you guys an option for a completely fee-free
Roth IRA retirement account that lets you invest in
whatever you want to. So if you want to invest in ETFs, you can do that on this platform, or if you want to invest that
money in individual stocks, you can do that with the Roth IRA as well. Now for the examples we're going to be going over in this video, we're going to be looking at
two ETFs offered by Vanguard. One is going to be a bond
ETF and the other is going to be a stock ETF giving
you diversified exposure to the stock market
and to the bond market. And the whole idea
behind these ETFs is that you're paying as little
in fees as possible and rather than trying to beat the market, you just own the entire market and you do well when the
market does well as a whole and most people are more
successful following this strategy, than investing in mutual funds
or actively picking stocks. So the stock ETF we're going
to be using is called VT and it is offered by Vanguard and this is the Total World Stock ETF, which is going to give you
a small piece of ownership of all of the publicly traded
companies in the world. Now for the bond ETF, it's going to be B and D
offered by Vanguard as well, which is the total bond market ETF, which is going to give you a piece of all of the US investment grade bonds. And investment grade simply means that credit rating agencies have deemed these bonds investment worthy so it doesn't hold any junk bonds. Alright, so now let's answer the question of where do you actually
open up a Roth IRA? And to be honest with you guys, I know it may sound like
a complicated subject, but it is extremely simple. And I'm gonna give you guys
my favorite option right now, which is M1 Finance. Now for full transparency here guys, I am affiliated with M1 Finance
so I do earn a commission if you decide to sign up under my link, which I do certainly appreciate as it allows me to make
more videos like this and it just helps support my channel. Now the main reason why I like M1 Finance is because they are
commission free and fee free, which means you do not pay any commissions for trading stocks or ETFs on
the platform and you pay $0. Nothing in fees to M1
Finance for setting up and hosting your Roth IRA. Not only that, the minimum to
get started is extremely low, which is just $500. Now beyond that, the other
reason why I like M1 Finance is because they have pre-built portfolios that you can invest in. So with M1 Finance,
you're not stuck choosing your investments and building
a portfolio from scratch, you can simply invest in some
of these pre-built portfolios. And what I'm gonna use
later on for these examples is basic stock and bond portfolios and these are coming right
from the M1 Finance app and they're completely free to invest in. And I know the whole process of opening up a brokerage account can be
a little bit intimidating at first and that is why I put together a completely free 30-minute video training showing you guys step by
step how to get started and open up an account with M1 Finance. So if you're ready to get started guys, the link is down in the description below or if you're looking for a
little bit of handholding, that free training link is in
the description below as well. Alright, so now we're gonna
run through the numbers and I'm gonna show you guys exactly how you can build a $1 million
Roth IRA by the age of 60. And as I'm sure you guys could guess, if you know anything about investing, the sooner you start
investing and contributing to this Roth IRA the better because that is how
compound interest works at the end of the day. The longer you allow your money to grow, the more growth you see with that money. And with the growth of
your money from investing, it's going to be exponential
growth, not linear growth. So if you're a young
person watching this video, you're gonna wanna pay attention because this can literally turn you into a tax-free millionaire. And the other thing I
wanna mention here guys is that you have to remember that returns are never
guaranteed with the stock market. We're gonna be looking at
10 years of historical data when we're doing our estimated
annualized returns here, but do keep in mind you're not gonna see that return every single year because the stock market has
times where it's going up and other times where it's going down called bull markets and bear markets. But if you're a long-term
investor, historically speaking, these returns are what you may expect. When you get closer to retirement, you want to invest more
of your money in bonds and less in stocks in
order to have less risk in your portfolio and
this is something called your portfolio allocation. Now as far as what
percentage of your money goes in stocks and bonds, we're going to be using
a helpful table I found on Financial Samurai and I will go ahead and link up to that down
in the description below. It'll tell you more
about these allocations and why these percentages
are the way that they are. Typically every five
years you're going to want to adjust these allocations because what a 20-year-old invests in is gonna be a lot different than what a 45-year-old invests in. But that is where something called a TDF or target date fund comes in handy and I'm gonna show you guys
exactly how you can invest in this TDF completely free through a brokerage called M1 Finance. But a target date retirement fund is going to automatically
adjust your allocations as you get closer to retirement. So all you have to do is put in the year that you're looking to retire and they are going to automatically adjust your allocations as you get
closer to that retirement date. Alright guys, so if you
started following this strategy at age 20 according to that chart, you would have 100% of your
money invested in stocks and 0% in bonds because
you have so much time to allow your money to grow,
you can take on more risk. So we're going to assume you have 100% of your money invested in stocks in that Vanguard Total Stock Market ETF. And over the last 10 years, the annualized return
from that has been 8.81%. So if you simply invested $260 per month or $3,120 per year from age
20 to age 60 at that return, you would have a portfolio
worth $1,001,949.52 so you don't even need
to max out your Roth IRA at this 8.81% return in order to build up a
$1 million portfolio. And obviously guys, if you
did max out that contribution, this would be a multimillion
dollar Roth IRA, not just a $1 million Roth IRA. Next up, let's assume
you started at age 30. Well according to that table
from Financial Samurai, you would have 70% of your money
in stocks and 30% in bonds. And if you had that 70 30 split of these two Vanguard ETFs. Over the last 10 years, the annualized return has been 7.23%. So let's assume you maxed out your Roth IRA contribution from age 30 to age 50 at 6,000 per year. Then from age 50 to 60 you invested that for $7,000 per year. Well, based on that 7.23% return, your IRA would be worth $623,578.89. So obviously guys, based on the
current contribution levels, it's not really possible to build a $1 million Roth IRA investing passively, you know, above the age 30. But still to have over
half a million dollars is nothing to shake a stick out. Now let's assume you start at age 40 and based on that table
you would wanna have 60% of your money in stocks and 40% in bonds. Well over the last 10 years
based on those two ETFs that has been an
annualized return of 6.69%. So again, we're going
to assume you max out your Roth IRA contributions including the additional $1,000 per
year from age 50 to 60. So if you went ahead and did that, your portfolio based on that 6.69% return would be worth 257,618.86 so just over a quarter
of a million dollars. And then finally, let's assume you started this at age 50. Based on that table, you would wanna have half of your money in stocks and half of your money in bonds. And over the last 10 years, based on those two funds that has had an annualized
return of 6.16% per year. So let's assume for those 10 years you contributed the
maximum that you could, which is $7,000 per year. That means after those 10 years, by age 60 you would have a
Roth IRA value of $92,961.25. Now, obviously guys, there are a few things
we are not factoring into these calculations. Number one, we haven't
factored in inflation here and then number two,
obviously as you get older, these allocations are going to change. But this just gives you a general idea of how much money you need
to invest in your twenties in order to build a
million dollar Roth IRA. Or it shows you by age 30 40 and 50 how much you can have by maxing out your Roth IRA contributions. And the other thing that
we haven't factored in here that's impossible for
us to tell is whether or not the IRS will raise
these contribution limits as time goes forward. And as they raise those
contribution limits, this allows you to follow
more money into your Roth IRA. So anyways guys, at the
end of the day here, the truth is if you're looking to build up a $1 million Roth IRA, because
of the contribution limits, you really have no choice but
to start as a young person. So if you're somebody who's in their 20s watching this video, time is on your side and
it's entirely possible to build $1 million Roth IRA for yourself. But even if you're an
older person, you know, don't get discouraged
because you still have the ability here to set
aside some money for yourself and allow it to grow completely tax free. So if you guys wanna go
ahead and get started with a completely fee-free Roth IRA, the link is down in the description below to get started with M1 Finance, as well as the link for that
30-minute video training, which will show you guys step
by step how to get started. But thank you guys so much
for watching this video. I hope you enjoyed it. If you're interested in seeing
more videos just like this, make sure you subscribe and hit
that bell for notifications. And I hope to see you
guys in the next video.
