My wife and I have contributed to the 401K and ROTH Individual Retirement Account (IRA), both discussed in below recent blogs.
DO YOU WANT TO JOIN THE 401K PLAN MILLIONAIRE CLUB? {KINDA OF LIKE THE MILE HIGH CLUB – BUT A LOT LONGER LASTING!}
https://wealthbuildingpowers.com/2019/06/10/401k-millionaire-club/
RETIREMENT PLANS OTHER THAN THE 401-K, TO GENERATE > $1 MILLION PORTFOLIO!
THE TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA)
This week let’s add another RETIREMENT WEALTH BUILDER the Traditional IRA. For the remainder of this blog I will simply refer to the Traditional IRA as an “IRA”
TWO POTENTIAL REASONS YOU MAY CONTRIBUTE TO AN IRA:
- No access to a 401K plan. The IRA offers an attractive alternative, which has some similarities to the ROTH IRA, but two key advantages.
- A few frugal and financially literate people will be capable of saving more than the 401K Plan annual limits of $19,000 or $25,000 for those 50 and older. The IRA is one such place to put more savings.
IRA ADVANTAGES
- TAX SAVINGS:Contributions are deductible as long as you meet the modified adjusted gross income (MAGI) requirements.
- ZERO INCOME LEVELS RESTRICTIONS:
Anyone with earnings can contribute to an IRA, regardless of their income. Once your income exceeds MAGI limits, you no longer qualify for a deduction. Therefore, Bill Gates (with a Net-Worth of >$100 Billion) can contribute to an IRA. Mr. Gates simply cannot deduct his contributions from his taxes. Guessing he may not bother with an IRA, but would love to ask him!
WHAT ON EARTH IS A MAGI?
{For most of my professional career, I dealt with a number of federal agencies: EPA, DOT, OSHA, NRA, and a lot more torturous regulations I had to read. Something I quickly realized – NO federal agency shall be allowed to speak in plain English. I believe that is a law!}
You calculate your MAGI (most tax software programs do this for you and will determine how much if any of your IRA contribution is deductible.) by adding back to your adjusted gross income (AGI) any deductions you took for student loan interest, foreign earned income and housing exclusions, savings bond interest, and employer adoption benefits. Got it? Yep, your tax dollars at work!
TAX DEDUCTION LIMITS
MARRIED COUPLE FILING JOINT RETURN OR
Can deduct 100% of contributions, if you MAGI, is less than $103,000.00. Your deductions drops to $0, when your MAGI exceeds $123,000.00
SINGLE INDIVIDUAL OR HEAD OF HOUSEHOLD
Can deduct 100% of contribution if your MAGI is no more than $64,000. The deductions phase to zero when you exceed $74,000
MARRIED INDIVIDUAL FILING SEPARATE RETURNS
Can deduct 100% of contribution if your MAGI is less than $10,000. (I always wonder who files this way. I have never seen any advantages.)
2019 IRA CONTRIBUTION LIMITS
You can contribute to an IRA, a Roth IRA, or both, but the total annual contributions cannot exceed $6,000 ($7,000 if you’re age 50 or older) or your taxable compensation for the year if your compensation was less than this dollar limit.
IRA Contribution Requirements
You can make regular contributions to a traditional IRA up to age 70 1/2, provided that you have earned income. If 50 or older, you can make catch-up contributions of an additional $1,000.
Note: Roth IRAs have no age restrictions.
DEADLINES FOR MAKING CONTRIBUTIONS TO THE IRA:
You can contribute funds to your traditional IRA at any time during the calendar year, and you can also make contributions to an IRA by April 15th of the next year.
IRA Deduction Phase – Outs
Contributions to a traditional IRA might be fully deductible, partially deductible, or entirely nondeductible, depending on whether you and/or your spouse are covered by a retirement plan through your employer.
TWO EXAMPLES – IRA CONTRIBUTIONS – WEALTH BUILDING POWERS
EXAMPLE 1
Starting at the age 25 and contributing $6,000 ANNUALLY until age 65. Assume 7% return, based on average S&P 500 ETF return.
Monthly Deposit: $500.00 (Starting at age 25)
Number of Months: 480 (Stopping at age 65)
Annual Interest Rate: 7%
Compound Method: Monthly
BALANCE AT AGE 65:
Total Principal: $240,000.00 {YOUR CONTRIBUTIONS}
Interest Earned: $1,080,062.38 {GLORIOUS COMPOUND INTEREST!}
Maturity Value: $1,320,062.40
EXAMPLE #2
Starting at the age of 25 and contributing $6,000 annually until age 50, then increase contributions to $7,000 annually until age of 65. Assume 7% return, based on average S&P 500 ETF return.
Principal Amount: $407,400.00 {YOUR CONTRIBUTIONS $6,000/year for 25 years; assuming 7% return}
Monthly Deposit: $584.00
Number of Months: 180 (15 years)
Annual Interest Rate: 7%
Compound Method: Monthly
BALANCE AT AGE 65
Total Principal: $512,520.00 {YOUR CONTRIBUTIONS}
Interest Earned: $834,326.69 {GLORIOUS COMPOUND INTEREST!} : = Maturity Value: $1,346,846.66
CONCLUSION – WHAT ARE YOU WILLING TO GIVE UP FOR >$1 MILLION?
I can read minds, just ask my wife and daughter. Actually ask my daughter! I know some; hopefully not most of you are thinking I cannot afford to save an extra $500 a month! Once again you believe I Iost my mind! But my question still stands: What are you willing to give up to become a millionaire?
All of us, me included, spend money on things we want, but do not need. In my case, I will admit I overspend at Costco? I’m like a kid in a comic book store, looking at all these delightful tempting items. And often I lack the will power to resist. I could save at least $200 each month by simply sticking to my list at Costco. Another example – I buy 50+ books a year at an average price of $18 each. That averages to four books per month @ $18 each, equaling a savings of $72 per month if I simply use my library (less than five miles from my house).
SO- WHAT ARE YOU WILLING TO SACRIFICE TO SAVE >$1 MILLION?
In the past three blogs, I outlined the 401K, ROTH IRA and Traditional IRA Plans. The key to building wealth regardless of the plan or plans you select – START EARLY! By starting early you can build the net-worth you NEED for YOUR retirement.
IRAs are an alternative for those without access to a 401K Plan or those wishing to save more than the 401K contribution limits.
So again I have to ask you – WHAT ARE YOU WAITNG FOR TO GIVE UP SOME, NOT ALL, BUT SOME OF YOUR WANTS? Get started today!
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DISCLAIMER
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I started my first business at ~13 years of age. I am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or financial advisors.
