- Becoming an IRA Millionaire takes patience and consistency.
- Know your retirement plan options.
- Alternative investments provide greater diversification.
According to the most recent quarterly analysis by Fidelity, the number of 401(k) and IRA Millionaires have risen to 441,000 of the 17.2 million accounts the company manages. We wrote about 401(k) millionaires after the last analysis, so we will focus on IRAs, and how to become an IRA millionaire in this article.
IRA Millionaires by the Numbers
Here’s some statistics from the analysis:
- The average Fidelity IRA balance sits at $115,400, a record.
- One third of savers increased their contributions by an average of 3%.
- Baby Boomers have an average balance of $210,400
- However, the median balance sits just under $70,000
We can see that not only are there a record number of IRA millionaires, but the average IRA balance is at an all time high at Fidelity. This is in part to a booming market along with an increase in savings. It’s very positive news when we see people contributing more towards their future.
On the flip side, the older generation, the Baby Boomers, don’t have enough to live off of based on IRA and 401(k) balances alone. Obviously, a $70,000 balance is not going to take one very far when they quit working. That income will be supplemented by Social Security, pensions and/or other retirement plans. However, it shows how ill prepared many older Americans are for retirement. We must learn from them, and not rely on the government to take care of us as we age. It’s up to each and every one of us to be proactive in saving for retirement.
How to Save for Retirement
Although this article is about becoming an IRA millionaire, it’s important we talk about the other big retirement plan – the 401(k). For many of us, this is the first taste of retirement planning we get, generally from our first “real” job. Two factors make the 401(k) such an important part of retirement planning. First, the annual contribution limit is more than three times that of an IRA. For 2020, you can contribute up to $6,000 to an IRA, if under age 50. However, a 401(k) allows you to stock away $19,500. These limits increase a bit once you hit 50 years old. Secondly, an employer 401(k) match is one of the best returns you can get on your retirement savings. A typical match is 50% of your contributions, up to 6% of your salary. It’s hard to find a better return on your money. Most experts will agree that contributing enough to receive a full match is priority number one.
Once you’ve hit that goal (or if your employer doesn’t offer a match), it’s time to look towards an IRA. What’s so great about an IRA is that you make the decisions. Your options are limited with a workplace plan. You don’t get to choose the provider or the investments offered. Plan fees may also eat more into your savings. IRA stands for Individual Retirement Account, meaning you, as the individual, make all the decisions. It pays to do the legwork to find an IRA custodian that fits with your financial goals, which may not always be easy.
To Roth or Not to Roth
Now that you have a start to a plan, it’s time to make some decisions. One of the first things to decide is whether you want to fund traditional plans, Roths or both. Traditional plans are funded with pre-tax money, which give you the benefit of a tax deduction. Taxes are deferred until you start taking out money during retirement. On the other hand, Roth plans are funded with after-tax money, meaning no upfront deduction. However, all qualified distributions, once you reach age 59 1/2, are tax-free.
Since many workplace retirement plans do not offer a Roth option, you might not have a choice there. Again, you are in control of you IRA, and can opt for a traditional plan, a Roth IRA or both. It’s good practice to have money in both types of plans. This helps you diversify yourself and hedge against future tax increases. If a traditional plan is your only option at your job, a Roth IRA may make a lot of sense to you. Therefore, you will see a tax-break every year you contribute to your 401(k) and can take advantage of tax-free income with a Roth IRA. The path to becoming an IRA millionaire starts to open up to you.
Generally speaking, the more money you make, the more an upfront tax break makes sense. However, the idea of not paying taxes ever again on your retirement savings is appealing to everyone. It’s up to you to decide when you want to pay taxes – there’s no avoiding them completely!
Becoming an IRA Millionaire
The next step to becoming an IRA millionaire is being consistent. Throwing $100 here and there into an IRA won’t help you achieve your goal. You need to start early and dedicate a portion of your earnings towards retirement funding. Obviously, the earlier you start and the more you save, will lead you to IRA millionaire status much faster.
Contributing to your IRA consistently is most important. Furthermore, once you leave your job, you should take your retirement savings with you. Old 401(k) plans may be forgotten, so it’s best to roll them over to a new workplace plan or into your IRA. There are very few reasons to leave your funds at an old job.
The next step in your journey is deciding on your investments. To reiterate, you don’t have much choice in investment options with a workplace plan. Choosing the right IRA provider is increasingly important. While most financial institutions have broader investment menus, they’re usually based in traditional assets, such as stocks, bonds and mutual funds. While you can invest in different ways, such as large-and mid-cap, foreign or domestic, and across different classes, non-traditional, or alternative assets are not included.
Self-Directing Your IRA
This is where choosing the right IRA custodian, such as IRA Financial, comes in. We believe our clients should never be limited in what they can and cannot invest in. The IRS already has those restrictions in place. We believe the only true way to properly diversify your portfolio is by investing in alternative assets, such as real estate, precious metals and private businesses. And the only way to do this is with a Self-Directed IRA.
While many financial institutions claim to offer self-directed retirement accounts, you are still limited in your freedom to make investments. Generally, you will need permission, known as custodial consent, before making an alternative asset investment. With IRA Financial, and other similar custodians, you never need consent to invest. You are afforded complete autonomy of your IRA funds with our “checkbook control” structure. If you see see an investment you want to make, you can access your funds without asking first. No need to wait for permission and miss out on an investment.
The Final Word
By following some simple strategies, anyone can become an IRA millionaire. It’s essential that you work with a qualified financial planner to help get you on the right track. Be sure to check out our blog for more tips on how to make the most of your IRA.