How to Become a Retirement Account Millionaire in 2024 (with New Contribution Limits!)

Transcript:

On this episode of the personal finance podcast, how to become a retirement account millionaire in 2024. And we're going to be talking about the new contribution limits.

What's up everybody. And welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney. co. And today on the personal finance podcast. We're going to be talking about how to become a retirement account millionaire in 2024, we are going to go over those new contribution limits. If you guys have any questions, make sure to hit us up on Instagram, Tik TOK, Twitter at master money co and follow us on Spotify, Apple podcast, or whatever podcast player.

You love listening to this podcast on it. If you want to hop out the show, consider leaving a five star rating and review on your favorite podcast player. Can I thank you guys enough for leaving those five star ratings and reviews. They truly mean the world to me. Now. We're going to be diving in to a bunch of different things when it comes to your retirement accounts.

And obviously investing in retirement accounts is a huge staple here at the personal finance podcast. And one big thing that we talk about. And so we're going to go through a, the new updates to retirement accounts. So the IRS has now released their brand new up. dates and the contribution limits have increased once again.

And so it seems like the past couple of years, they are increasing these contribution limits over and over again. And part of that is because of the inflation rate, which we'll talk about in a second. In addition, we're going to talk about how each account works. So if you're new to retirement accounts, you've never even heard of them before.

We'll go through how each of them works as we're talking about these contribution limit increases. Then what we're going to do is talk about, Hey. Are these actually a good deal? Are these pacing inflation? Did the IRS do the right thing by increasing these? We will go through that proportion, and we're also going to talk about how to become a millionaire with each of these accounts, and if you max them out, how fast you can become a millionaire based on different rates of return.

So we'll go through 7%. 8 percent 9 percent and 10 percent rate of return and how fast you can hit that point in time where you become a millionaire. So this is a action packed episode. I love when these updates come out because we can go through each and every single one of these things. And these are so incredibly important for your wealth building journey along those same lines.

Now, one thing I want to know before we dive right into this is you're going to hear on maybe tick tock or Instagram or any other social media site. You're going to hear all these people preaching. Hey. Retirement accounts are a scam, but typically what I'm finding out is that when people say that online, typically they're trying to sell some sort of other scam to you when they're doing that.

So make sure that you are very cautious about who you listen to online because I'm seeing that message spread more and more and more. And typically on the back end, there's somebody with a real estate course, or there's somebody trying to sell you an IUL life insurance or a whole life insurance policy.

So I want you to be very, very cautious who you're listening to when it comes to this, because there have been. Plenty of studies done. And one of the most recent ones was by Ramsey solutions. Dave's Ramsey's company did a study of a bunch of different millionaires, over 10, 000 millionaires. And guess what?

80 percent of them became millionaires in their companies. 401k simple as that. That is a massive number when it comes to becoming a millionaire. So that is why it is so important to understand how these accounts work and make sure that you are taking advantage of these accounts in order to be able to build wealth.

So if that's something you're into without further ado, Let's get into it. All right. So we are going to dive into these retirement changes for 2024 that the IRS has released. And the first one that we're going to go through is the 401k, the 403b 457 TSP contribution limits. And this is going to be those pre tax accounts.

So inside of these pre tax accounts for 2023, the contribution limit was 22. 7, 500 and there was a catch up contribution of 7, 500. Now let's pause it right there, because if you don't know what a catch up contribution is, it is when you are age 50 or older, the IRS allows you to put additional money inside of these accounts so that you can accelerate your path to getting to retirement.

So anybody aged 50 or older can utilize the catch up contribution, which means that last year, this puts you at 30, 000 per year. In 2023, that you could add to these pre tax accounts against the 401k, the 403b, 457 TSP. In 2024, it's going to go up 500. So it is now 23, 000 per year that you can put in these accounts with a 7, 500 catch up contribution.

So the catch up contribution stays the same throughout every single year. And for all of these accounts, you're going to see the catch up contribution did not change for most of these, but the annual contribution limit did change. So the IRA contribution limit now is the next one we will go through. And that is 6, 500 in 2023 is what the limit was and a 1, 000 catch up contribution.

Now this goes for your Roth IRA, your traditional IRA, all of those different pieces. And for 2024, it has gone up another 500 for 7, 000 per year in the Roth IRA or the traditional IRA and a 1, 000 catch up contribution. Now for simple plans, the 2023 limit was 15, 500. And there was a $3,500 catchup contribution, and it went up another $500 to $16,000 and a $3,500 catchup contribution.

And then lastly, we have the health savings account or the HSA. Now their catchup contribution on the HSA, by the way is h. 55 and up. So that's the only differential when it comes to the HSA and we have two different types of plans. When we're talking about an HSA, you have an individual plan and you have a family plan.

So an individual plan is obviously if you have that specific individual plan for 2023. was 3, 850. So it has gone up in 2024 to 4, 150. This is great news for folks who love the HSA. Someone like me, because I think it has those triple tax benefits that you can truly take advantage of. And for the family plan, it is 7, 750.

And it jumped up to 8, 300. So a big jump there when it came to the HSA contribution limits, really, really excited about that. That is just going to keep going up over time where you can keep adding money to the HSA. One big question we always get on the HSA, by the way, is where should I open an HSA? If my employer doesn't offer one fidelity has the highest ratings as from what we've seen in all the research that we have done, and they have the lowest fees.

So fidelity is a great place to do that. Plus they have fantastic funds and we just had an episode on a Q and a episode talking through that. So if you want to check that. episode out, we will link it up down below so that you can check that one out. But we dive into that deeper as we go through that, but that's a great place to open one up now, which one of these is a better deal.

And I want you to kind of look and think through this for a second, because the 401k max contribution increased by 500 for 2024. And so it went up to that 23, 000 mark. That's only 2. 2 percent versus the 12 month inflation rate. Of 3. 7 percent where the IRA max increased 500 to 7, 000 per year. And that is a much better increase of 7.

7%. This is why it's really important. Make sure you max out both your IRA and your 401k contributions. If you are privileged enough to do so, because. You can make sure that your investment rate is keeping up. So make sure you're maxing out both of them. If you are big into retirement accounts and you've got those extra funds to be able to do so to make sure that your investment rate is catching up because I always like to increase my investment contribution by the inflation rate, at least at minimum every single year.

So for folks who are new to this or have never heard this before. One big thing I like to do is, Hey, if you can't increase the amount, if your income didn't increase year in and year out, at least try to increase your investment about by the inflation rate. This means that you will keep the same buying power over that timeframe, but in addition, your account will grow to that same buying power.

So always increase it by that inflation rate so that you can make a differential long. Term. So now what we're going to do is we're going to dive into based on different rates of return, how long it would take you to become a millionaire with these brand new contribution limits and these retirement accounts.

So let's do that next. All right. So first I'm going to get into some of the. For each of these accounts and how they work because I need you to understand that before we dive into some of these contribution limit increases and how you can take advantage of those increases to accelerate your path to millionaire status.

Now, here's what we're going to look at first is we're going to look at how each account works. And the first one I'm looking at is the Roth. 401k now, the Roth 401k might be my favorite account out there outside of something like an HSA because the Roth 401k means that you can get more money into a Roth.

So here's how it works. If you open a Roth 401k, anything with 401k is typically going to mean that you have to. Open it through your employer. And so what that means is that you go to your employer's HR department and say, Hey, do you have a 401k option? And typically they'll say yes or no. And if they do ask also, if they have the Roth 401k option, because the Roth 401k option has post tax contributions, meaning that you're going to put 401k.

That's already been taxed. It was already taxed when it came out of your paycheck. Okay. So your money goes into the Roth 401k, then your money can grow tax free. Once you invest those dollars in the Roth 401k and you can pull the money out tax free. So withdrawals are tax free and penalty free after age 59 and a half.

And if you have held it for at least five years in that account. So one big thing with Roth accounts is that if you have your money in that account for at least five years, you can also pull the contributions out penalty free prior to that. Now, are there mandatory distributions with a Roth 401k? There are starting at age 72 and also in a Roth 401k.

One big thing that you can get here and you want to make sure that you were asking your employer, this is, do you have what is called an employer match? An employer match is one of the. Best benefits you can get for working at a company because it is a 100 percent rate of return on your money. This is a extremely powerful thing to understand because if you take advantage of these employer matches, if you have a three, four or five, 6 percent employer match, that's a hundred percent match.

Then you are definitely going to really see a massive difference in your retirement accounts over the course of 30 years. And we've done some calculations where based on your rate of return, sometimes it can be up. To a million dollar differential by taking advantage of those employer matches. It is definitely a six figure decision for sure.

And depending on your rates of return and how high that employer match is, it can be much more than that. So you got to make sure that you are taking advantage of those employer matches and ask your employer if they have the match for each of these different accounts, maybe they only have it for the traditional 401k.

I want you to make sure that you're always taking that employer match. Always, always, always do that. Even before paying down high interest debt, because it is a 100 percent rate of return. You can not get that anywhere else. So that's the Roth 401k. Now let's look at the traditional 401k, which is going to be very similar to something like a 403b, depending on where you work or a TSP.

So it just kind of depends on where you work. If you're a government worker or you work for a private company, but the traditional 401k is what most people have offered to them when it comes to retirement plans at their employer. So this is also opened through your employer. Remember 401k means it's most likely open through your employer.

Unless you're self employed, you can open something like a solo 401k. And it is pre tax instead of post tax meaning money going in is not taxed. Then your money grows when you invest your money and then you can pull the money out, but your tax, when you pull that money out, your withdrawals are taxed. So there are no penalties after the age of 59 and a half on this money when you pull it out, but you still will have to pay taxes on that money.

And you also have mandatory distributions starting at age 72. Now in a traditional 401k, your employers can also match your contributions. So you want to make sure you're asking that and taking advantage of it. Cause it's like I said, it's that 100 percent rate of return. Your boy loves free money. I don't know if you love free money, but I love free money.

So you always take advantage of those matching those contributions. And there's no annual. Income limit, which is really, really important to understand because some of these will have income limits as you'll see in a second. Now, next we have the Roth IRA. One of my favorite accounts out there, and no matter where you work, you can open yourself up a Roth IRA and get that bad boy rolling.

So it was one of my favorite accounts that are out there and you have to open it up yourself. It's not offered through your employer. Your employer would only offer the Roth 401k. They would not offer the Roth IRA. Now this is also post tax contributions. It works very similar to the Roth 401k, but after age 59 and a half.

You can also pull that money out without penalties or taxes. So you're not paying taxes when you pull this money out because your money has already been taxed going into the Roth IRA. It grows tax free and then you could pull the money out tax free because you've already been taxed on that money. Now, are there mandatory distributions?

There are no mandatory distributions in the Roth IRA, which is another reason why I love it. You can keep that money in there. They're not going to try to make you pull that money out. And one big benefit to the Roth IRA is you can withdraw those contributions. So once you contribute money into a Roth IRA, those contributions can be pulled back out if you had an emergency.

Now, I don't recommend you doing this. You don't want to interrupt compound in the interest unnecessarily, but you can withdraw those contributions at any point in time. Lastly, we have the traditional IRA, which works like a 401k. It's just, you can open it yourself, not through an employer. It is pre tax.

So your contributions go in before they're taxed. So your taxable income is lower withdrawals are penalty free, but taxed as current income after age 59 and a half, and you're going to have mandatory distributions at age 72, but there's no annual income limit. Whereas with the Roth IRA, there is an annual income limit every single year.

And it is going to be in 2024. Spoiler alert is going to be 161, 000 for singles and 240, 000 for married filing jointly on the Roth IRA, which we will go through here soon. So we're going to go through all of these. We also have something which is called the health savings account. And the health savings account is one that we're going to go through those changes as well.

The HSA has changes that are massive, but the HSA also has triple tax benefits, meaning money goes in tax free. You can invest the money in an HSA and it can grow tax free and you can pull the money out tax free as long as you have a qualified medical expense. And the IRS has a very long list of qualified medical expenses and there is no time limit to when these qualified medical expenses had to have occurred in order for you to reimburse yourself tax free, meaning that you could have something 30 years ago.

Where you had to go to the doctor for bronchitis and you can reimburse yourself for that medical visit because you have that receipt and you have that available to you. So the HSA is a really, really powerful account. It has triple tax advantages, allows you additional flexibility if you have that built up with some receipts on there.

And then if you don't use the money in the HSA, it turns into the same thing as like a traditional IRA when you turn age 65, so. A lot of cool stuff with the HSA. Love that account. And for a lot of people who come on this podcast, if you hear them talk about that, they always say, Hey, the HSA is probably my favorite account.

And the reason is those triple tax benefits. So that is another great one that we will be talking about here as we go through this. So now let's get into. The retirement changes for 2024 that the IRS announced and are official as of this point in time. All right. So we're going to go through the 401k and the IRA based on your rate of return to see how long it's going to take you to become a millionaire.

If you max to these things out now, before we go into this, if you cannot max out your retirement accounts yet, maybe you are just starting out, you're working on increasing your income. You know, you're doing the best that you can just invest as much as you can there and try to get your. Savings rate or your investment rate to about 20 percent of your income or more.

Once you get to that point in time, you're going to really accelerate your path to being able to be financially free. And so we always want you to try to target that 20 percent rate. Now, if you can't do that, what you want to do is start at whatever amount that you can start at the max you can start at and try to.

Increase that amount by 1 percent every month or every two months or every three months so that slowly you're going to grow your investment percentage over time. It doesn't hurt as bad to be able to do that. And during that timeframe, you can focus on ways to increase your income and or decrease your expenses so that you can invest more dollars towards your freedom.

Cause that's exactly why we do. This is for our freedom. It's freeing with our time, energy, and everything else so that we can spend more time with the people we love and spend more time doing the things that we love. That is exactly why we do this and why. We get so excited about going through these numbers.

Now we're gonna see, hey, 7%, 8%, 9%, 10%. How long with these different rates of return is it gonna take me to become a millionaire? Let's start with the 4 0 1 K. So with the 4 0 1 K, we could put 23,000 bucks per year inside of the 4 0 1 K. So if you had a 7% rate of return. It would take you 20. 6 years to become a millionaire.

If you invested that 23, 000 per year. Now, if you've got an 8 percent rate of return, it would jump down almost a year to 19. 4 years before you became a millionaire. Now, if you got a 9 percent rate of return, it would be 18. 4 years before you became a millionaire. And if you got that 10 percent rate of return, it would be 17.

59 years before you became a millionaire. So you can really accelerate your path to wealth by maxing out your 401k. And a lot of folks who became financially independent really, really quickly or retired early, they use their 401k as a huge asset. Now, why is this so important to do? Because you're not getting taxed on your money on the front end, and then you're putting your money into these accounts so it can grow faster.

This is a really, really powerful tool that you can utilize high income earners. The 401k is your friend because you are not paying taxes now while your income is super high. It's very important to look into this and talk to your CPA. Say, Hey, is the 401k a great option for me? Because if you are a high income earner in a lot of situations, it can be a fantastic option for you.

So make sure you are talking to a CPA. Or if you have a financial planner in your life, that is somebody else that you could be talking to, to see for your specific situation. I've talked to my CPA about this stuff. And so we kind of go through these options each and every single year. Now let's go to the IRA because the IRA is really powerful and I'm specifically going to be talking about the Roth IRA in these examples.

And the numbers are going to be exactly the same if you have a traditional IRA or a Roth IRA. But I want to talk about why this is so powerful so that you can see this over this time frame. Now it's going to take longer, obviously, because we cannot put as much money into these accounts as we can with a Roth 401k, for example.

So if you max this out, if you maxed out a Roth IRA, that means you're putting 7, 000 per year. And if you had a 7 percent rate of return, it would take you 35. 4 years before you became a millionaire. But here is where the. Power comes into play because what that means is over those 35 years, you would only have put in 248, 000 at that 7 percent rate of return.

And what you would have gotten back as an additional 751, 970 is the amount of money that your money would have made. But here is what is mind blowing because in a Roth IRA, what did we say earlier in a Roth IRA, your money grows tax free. So once you have that money in there, it's going to grow tax free.

And when you pull the money out, you're not going to be taxed on that money because you were already taxed on those contributions. So what this means is that you have. 751, 000 that grew in this account that you will never have to pay a dime of tax on. That is incredibly powerful. That is something that we got to take advantage of, especially if you have a long time horizon, because this gets more and more powerful as time goes on.

If it at an 8 percent rate of return, it would take you 32. 7 years to become a millionaire, a Roth IRA millionaire. Your total contributions would be 229, 000 and the amount of money that your money would have made 770, 000 tax free. dollars. Amazing stuff there. Let's look at the 9 percent rate of return.

At a 9 percent rate of return, it jumps down even more. It would only take you 30. 5 years to become a Roth IRA millionaire, and your total contributions would only be 213, 000. And the total amount of money that your money would have made would have been 786, 000, adding up to 1 and 786. 1, 000 would be tax free.

Now, the last one, a 10 percent rate of return, it would take you 28. 6 years to become a millionaire and your total contributions would only be 200 grand. The amount of money that that 200 grand would have made would have been 800, 000 tax free. Dollars. This is some incredible stuff that you can do by maxing out these accounts and really getting your money working for you.

It is so powerful to get your money working for you because over time, compound interest is going to take over and compound interest is your best friend. It can work way harder than you can, but you got to get it rolling in the early days so that you can make sure that you get to that point in time, the early days, your first hundred K, the majority of your money is going to be made through your savings rate.

The amount of money that you're actually putting inside of that account. Then after that first hundred K you're going. see it to start to ease up a little bit and it's going to allow you to actually build wealth over that time frame and you're going to see it really really speed up over time. Now the cool thing about these is you can run these numbers beyond these dates and see what's going to happen and what you're going to notice is say for example you're maxing out that 401k 23 grand per year in 17 years after a 10 percent Rate of return you hit that million dollar mark.

Well, now you're going to hit 2 million really, really quickly. And then you're going to hit 3 million. So if you think you're going to work for 30 years, for example, you're going to have a really big 401k that you can use in retirement. And remember how much money can you draw down in retirement inside of some of these accounts?

4 percent is the rule that we like to talk about. So the 4 percent rule means that. Every million dollars, you can live on 40, 000 per year in retirement and preserve your wealth and preserve your capital over your retirement. So this is really, really powerful stuff. And so that you can work backwards to figure out, Hey, how much money do I need per year?

This is how much money I need in my retirement accounts. That's how you do the math on that. Listen, thank you guys so much for listening to this episode. I truly appreciate each and every single one of you. And thank you for investing in yourself because it's exactly what you're doing when you listen to this podcast is investing in yourself.

I truly hope you guys have an amazing week, and I will see ya on the next episode.