When it comes to building a seven-figure nest egg, one account type stands out above all the rest: A Roth 401(k). By virtue of its structure and thanks to new rules in place in 2024, a Roth 401(k) can be a tremendous way to both build a substantial retirement balance and to manage your money once you reach that goal.
Indeed, a Roth 401(k) has so much going for it that it is my favorite account for building a millionaire retirement. Here are four reasons why.
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No. 1: Automatic investing, direct from your paycheck
Perhaps the most powerful benefit of a Roth 401(k) is that you fund your account, directly from your paycheck. Once you sign up, you contribute from every paycheck until you manually turn it off or reach your maximum for the year.
That automatic investing effectively puts you in the mode of dollar-cost averaging. In a rising market, your existing investments are worth more, while in a declining market, each new investment buys more shares.
Investing like that in a broad-based index fund is a decent way to get returns that are about in line with market returns overall during the time you invest. It's a great way to get started for those worried about going "all in" during what might end up as a near-term market peak.
No. 2: Decently high investing limits
In 2024, people under age 50 can contribute as much as $23,000 to their Roth 401(k) for the year, while those aged 50 and up have limits as high as $30,500. Those limits make it feasible to reach millionaire status within a Roth 401(k) within a typical career for people who are able to sock a decent amount away.
Indeed, if the market delivers returns near its long-run 10% historical rate over time, you can potentially reach millionaire status in under 17 years. That gives you flexibility to build up over time to a contribution closer to the limits and still have a decent shot of building that $1 million nest egg.
No. 3: Tax-free compounding for life
As of 2024, Required Minimum Distributions are no longer required from Roth 401(k)s during the original account owner's lifetime. This means that once you get your already-taxed salary inside your Roth 401(k), it can stay there, growing completely tax-free, for the rest of your life.
Not only that, but once your account has been open and funded for at least five years and you've reached age 59 and a half, any withdrawals you do make are also free from income taxes. Especially if you start contributing early in your career, you can potentially build a nest egg worth well over $1 million that you can ultimately access tax-free. That's an outstanding place to potentially wind up -- and one that is most easily reached in a Roth 401(k).
No. 4: Possibility of an employer match
Many companies that offer 401(k)-type plans will match their employees' contributions to the plan. Matches vary by employer, but a typical one is $0.50 for every $1.00 the employee contributes, up to 6% of the employee's salary.
Say you're eligible for that type of match and earn $60,000 per year. 6% of your salary is $3,600 -- or $300 per month. If you contribute at least $300 per month to your Roth 401(k), your employer's match will kick in what amounts to another $150 each month toward your retirement.
Note that often, those employer matches will be made into traditional-style retirement accounts. Recently, though, employers have been allowed to provide matches directly into an employee's Roth 401(k). Roth-style matches -- just like Roth-style contributions -- are first taxed before the money is contributed, but once inside a Roth account, that money can still compound tax-free throughout the employee's life.
Either way, an employer match is additional money compounding on your behalf for your retirement. Since you can only get an employer match by first making your own contribution to the plan, that match is yet another reason to prioritize getting something inside your Roth 401(k).
Get started now
Of course, even under the best of conditions, it will likely take nearly two decades to go from $0 to millionaire status in your Roth 401(k). The sooner you get started, the sooner you'll have your contributions and any match your employer provides working on your behalf.
So make today the day you sign up to contribute to your Roth 401(k). If you do reach millionaire status by the time you retire, you'll be glad you took that all-important first step.
