According to a recent Charles Schwab survey, Americans believe they need a net worth of $2.2 million to be considered wealthy, “but the 48% of Americans who currently feel wealthy have an average net worth of $560,000.” In the current climate of inflation, rising housing costs, and job insecurity in many industries, saving and investing may not seem like a viable option.
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But with the right planning and smart financial decisions, it's achievable. According to a Ramsey Solutions study of more than 10,000 millionaires, most of America's millionaires come from “lower middle-income families.”
“The vast majority of American billionaires (79%) did not receive any inheritance from their parents or other family members. One in five millionaires (21%) received some kind of inheritance, but only 3% received inheritances of more than $1 million,” the study claims. If becoming a millionaire is your goal, here are three ways the rich make their money that the average investor can follow.
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Take advantage of tax benefits with a Roth IRA
A Roth IRA is an attractive retirement account because, if you meet certain requirements, you can withdraw your contributions tax-free, helping you keep more of the money you earn. According to Business Insider, “Roth IRAs have income limits, but that doesn't mean they're not available to the wealthy or high-income earners.”
“A backdoor Roth IRA allows you to turn a traditional IRA into a tax-advantaged Roth IRA account by moving funds from one type of account to another. Although you may have to pay taxes on the growth as you move the account, this method offers people who earn above the income limits the opportunity to contribute to a Roth IRA,” Business Insider details.
learn more: 5 ways to become a millionaire in your 50s
The wealthy use their employer's 401(k) to build their wealth
401(k) accounts are one of the most common ways people, including millionaires, save for retirement. According to a Ramsey Solutions survey, eight in 10 millionaires invest in their company's 401(k) plan. “This simple step was key to their financial success.”
The wealthy use securities accounts
Brokerage accounts allow you to buy and sell a variety of investments, including stocks, mutual funds, bonds, etc. They can be a good option for people looking to retire early, because unlike other investment accounts, you don't have to reach a certain age or meet certain requirements to make tax-free withdrawals (at least for certain retirement investments).
“retirement [brokerage] The accounts grow tax-deferred, meaning no taxes are paid on earnings in the account. Instead, you pay taxes when you withdraw money from the account. Non-retirement brokerage accounts (also known as taxable brokerage accounts) don't offer the tax-deferral benefit. In these accounts, “investment income and capital gains become taxable income to the account owner in the calendar year in which they are incurred,” Jeff Craig, senior wealth advisor and principal at Colony Group, details in U.S. News & World Report.
Millionaires use brokerage accounts for low-cost index funds: “Buying and holding index funds in your brokerage account can help you preserve and grow your wealth over the long term,” according to Business Insider.
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This article originally appeared on GOBankingRates.com: Want to invest your money like the rich do? Here are the 3 accounts they use
