How to Become a Tax-free Millionaire

We have almost made it to December, the twelfth month. What I love about this time of year,  aside from the holidays, a great time to gather with family and friends, is that it brings us closer to the end of the year and provides an opportunity for reflection and adjustments. Mostly, I think of financial adjustments. You are on your own with personal and spiritual adjustments; that is out of my wheelhouse. But, financial adjustments and goals are my forte’. So now, as we get closer to the end of 2022, it is a good time to make changes and adjust your budget. MAKE time before you begin a whole new year with vast opportunities to construct objectives for improving your financial status and becoming financially secure..  

Amidst the rush of preparing for the holidays, take some time to look at your finances and see where you need to make improvements.  Do this now before the new year. Start 2023 with a solid financial plan. One account you need to consider adding to your portfolio is an IRA, specifically a Roth IRA. A Roth IRA can help you become a tax-free millionaire. Want to learn how? 

As I stated, If you do not already have one, your financial plan for 2023 should include an IRA. Only 6.6% of Americans have a Roth Individual Retirement Account also called a Roth IRA. This is a travesty and such a wasted opportunity. As you may know, there are two types of IRA’s: a traditional IRA and a Roth IRA. Today I will be specifically diving into the Roth IRA option and how this account can make you a tax-free millionaire.  

Many people have some type of 401(k) plan through their employer. Some simply have these because it is something their employers provide for them. Amazingly, many who are given the opportunity to have a 401(k) still don’t take it, but that is fodder for another blog. Unlike a 401(k), an IRA is something that YOU have to initiate with a broker. Some of the best brokers for IRAs are Fidelity, Vanguard, and Charles Schwab. Once you decide on a broker, you will contribute money that you have already been taxed on; this is where the Roth distinction comes into play. The money is then invested. A common misconception is that a Roth IRA is an investment, but that is false. A Roth IRA is merely an account. You select investments to buy within the account.  

The aspects that make Roth IRAs such good investments are that the money provides tax-free growth AND tax-free withdrawals. This means that you are able to buy and sell stocks within the Roth IRA when and as often as desired without getting taxed. Moreover, you can withdraw accrued money without paying taxes. While all of this sounds like only a win-win, there are a few rules attached to Roth IRAs, which I will explain below.   

Restrictions on Roth IRAs set parameters to age, income, and investment amounts. Specifically the limitations to Roth IRAs are as follows:

1. Earned Income Limitations – Beginning 2023, those who are single making $153,000.00 or those married filing jointly making $228,000.00, are NOT able to contribute to a Roth IRA. Period. But wait!. There is a workaround. It is a Backdoor Roth IRA. Those earning too much can contribute to a Traditional IRA then convert that money to a Roth IRA. Simply this means you open a Traditional IRA, contribute money to that account without investing it, then convert it to a Roth IRA. At that point, you can invest the money within that account. Those in this situation will want to work with a professional to be sure this is done appropriately.  

2. Tax-free withdrawals after age fifty-nine and a half – After reaching fifty-nine and a half, a person is able to withdraw gains without incurring taxes and penalties. Before that age, you will have to pay taxes and penalties unless you are withdrawing money due to a death, disability, education expenses, birth or adoption expenses, unemployed health insurance expenses, unreimbursed medical expenses, or for a first-time home purchase with a limit of $10,000.00. As long as the withdrawal falls under one of those reasons, you can withdraw contributions with no penalties. 

3. The annual contribution limit in 2023 is $6,500 – with exceptions based on age. First, this is an increase of $500.00 from 2022. For individuals who are 50 or older, the contribution limit currently is $7,000.00, but it increases to $7,500.00 in 2023.  

4. Account Time Frame – The Roth IRA account must be open for five or more years before money can be withdrawn without interest and penalties. This is in addition to the age fifty-nine and a half age requirement and includes contributions. Note that the same exceptions for Rule Two apply to this as well. 

Over and above the restrictions, which are minor and easy limitations to stay within, Roth IRAs are important to include in your financial portfolio. This is especially necessary for anyone expecting his or her tax bracket to be higher in the future. You will pay taxes now when your tax bracket is lower rather than paying later when the tax bracket is higher. Mathematically think of this which will drive home the real WHY for having a Roth IRA. If you invest $540.00 a month for thirty years beginning in 2023, you will have 1.1 million tax-free dollars. As you are planning that 2023 budget and creating your new financial plan, see if you can find an extra $540.00 a month to invest in a Roth IRA that will set you up to be a millionaire in the not too distant future. Plan now before we pop the champagne bottles and ring in the New Year. Plan ahead and reap the financial rewards and all of the benefits that go along with financial security and wealth.  Oh, and also enjoy the holidays!

Published by Budgetdog

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