If you're looking for the best retirement account for growing wealth, the Roth IRA and the lesser-known Roth 401(k) might be the best choices. There are restrictions on each type of account, so the best one for you is whichever is available. There are pros and cons to any type of retirement vehicle, so it's important to consider their advantages in the context of your personal circumstances. However, Roth features make them especially great for asset appreciation.
Roths are designed for growth
Roths are great vehicles for holding your growth investments. Roth IRAs rose to prominence following their creation in the late 1990s, and the Roth 401(k) has gained popularity in recent years after debuting in 2006.
Unlike a traditional 401(k) or IRA, a Roth doesn't provide any immediate tax advantages. Roth contributions are made "post-tax", meaning that taxpayers can't claim deductions from taxable income. However, they offer perks down the road when assets are distributed. There are no taxes incurred on the returns that accumulate within a Roth, and qualified distributions are untaxed if you're over age 59 1/2.
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This tax treatment makes Roths ideal for your equity holdings, especially growth stocks that have the potential to deliver major long-term gains. People who use only tax-deferred accounts have growing tax liabilities as their returns compound. That issue is sidestepped with Roths, so you can ultimately spend more of the million that you amass over time.
Other benefits
Roth accounts offer flexibility and perks that aren't available with some of the alternatives. Contributions to a traditional IRA or 401(k) aren't fully accessible to holders. People who want to access those assets before retirement have to pay a 10% penalty on withdrawals in addition to applicable income taxes. There are exceptions, such as those for first-time homebuyers and people undergoing financial hardship, but savings in these tax-deferred vehicles are generally behind a penalty wall before age 59 1/2.
In contrast, the IRS allows Roth IRA holders to access their contributed assets without any penalty. That's because these accounts are funded with post-tax dollars. Roth assets are functionally more accessible than other popular retirement accounts.
Accessibility is an important feature. Withdrawing retirement funds early isn't a great way to maximize growth, but can be valuable when confronting obstacles that could otherwise derail a financial plan. Flexibility might keep Roth holders from turning to high-interest debt or other damaging financial instruments to meet unexpected cash needs.
Limitations
There are some limitations to Roth use. In 2024, an individual can contribute only up to $7,000 to Roth IRAs. Both spouses in a household can contribute up to that limit. People 50 or over have a catch-up provision that allows them to contribute an extra $1,000. The cap is much higher for a Roth 401(k) at $23,000, with a catch-up provision for the 401(k) version of $7,500.
These limitations are important to consider for anyone hoping to build a millionaire retirement. A married couple contributing the maximum amount to a Roth each year would need 23 years for the account to grow to $1 million, assuming that they averaged 10% annual returns. The higher contribution limit on Roth 401(k) accounts speeds up that timeline to 18 years.
Eligibility is also an important consideration. Individuals can't contribute to these Roth IRAs in years during which they earn more than the income threshold, which is $240,000 for couples and $161,000 for individuals in 2024. Contributions to Roth IRAs usually aren't available to high-income households as a result. A Roth 401(k) doesn't have an income limitation. However, they are employer-sponsored plans, so you can use them only if they're part of your employee benefits package.
Luckily, retirement planning isn't all-or-nothing when it comes to the full array of saving and investment vehicles available. Roths can serve as the high-growth engine for a comprehensive retirement plan. They can unlock lots of value when used in conjunction with a tax-deferred 401(k) or a regular brokerage account. You'll likely hold a diverse set of assets in a full retirement plan -- growth stocks, value stocks, dividend stocks, and bonds. Embracing Roths allows you to unlock the most tax-efficient strategy for each type of security.
