When it comes to trying to build a retirement nest egg to at least a $1 million balance, one account type stands out above all others: the Roth 401(k). Indeed, that type of plan has so much going for it that the Roth 401(k) is my favorite account for building a millionaire retirement.
Between high contribution limits, automatic investments directly from your paycheck, great tax benefits, and the possibility of an employer match, they can be an awesome way to build wealth. In addition, recent changes mean that Roth 401(k) plans are no longer subject to required minimum distributions for the original account owner. That change means that rather than just a great wealth-building tool, a Roth 401(k) can now be an incredibly powerful financial tool throughout your adult life.
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Contribution limits
In 2024, people under age 50 can typically contribute as much as $23,000 per year to a Roth 401(k) plan. Those aged 50 and up are generally eligible to put aside an additional $7,500 in "catch up" type contributions, making their annual limit as high as $30,500.
The table below shows how many years it would take to build a $1 million nest egg by maxing out a Roth 401(k) plan, depending on what rate of return you earn along the way.
|
Annual Contribution |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
$23,000 |
16.9 |
18.9 |
21.5 |
25.3 |
|
$30,500 |
14.6 |
16.2 |
18.2 |
21.0 |
Data source: author. Assumes monthly investments and smooth returns.
Of course, you don't have to contribute the maximum allowed to your Roth 401(k). If you're willing to take a longer route to millionaire status or can't quite come up with that amount of cash, you certainly can contribute less. Yet the fact that the Roth 401(k) plan has such high contribution limits is how it can be used to potentially get you from $0 to millionaire status in under 20 years.
Direct contributions from your paycheck
One of the most powerful features of a Roth 401(k) plan is the fact that you fund your investments directly from your paycheck. Once you set up your contribution amount, it will be automatically invested in your choice of available assets, every time you get paid, up until you hit your limit.
This is so important because once you make the decision to set up your contribution, it makes investing an automatic priority for you. You don't have to remember to transfer money into your brokerage account. You don't have to get over the fear of buying during a down market. All you have to do is stay employed, and you have an automatic process of dollar-cost averaging into the market every payday.
Great tax benefits
Similar to money you invest in an ordinary brokerage account, you pay income taxes on money you contribute to a Roth 401(k). Where a Roth 401(k) stands out, however, is how that money is treated inside that account and once you withdraw it.
While inside your Roth 401(k) account, your money will compound tax deferred, as dividends and capital gains inside the account are not taxed. In addition, once you qualify by having your Roth 401(k) funded for at least five years and being at least age 59 and a half, any withdrawals you make from your Roth 401(k) will be tax free.
In addition, recall that Roth 401(k) plans are no longer subject to required minimum distributions for the original account owner. That means that you can keep your money compounding in your Roth 401(k) throughout your life and never pay taxes on it.
Potential employer match
If your employer offers a match for 401(k) type contributions, that match will generally extend to Roth 401(k) type contributions as well. Such matches are required to go into a Traditional style 401(k) plan instead of a Roth one, but they still represent additional money compounding on your behalf for your future.
While matches vary by employer, a typical one is 50% of your contributed amount, up to 6% of your salary. If you make $50,000 a year, that's as much as $1,500 more money added to your account and working on your behalf each year, courtesy of your boss' match. That makes it easier for you to reach that millionaire retirement goal all that much faster.
Get started now
As incredible as a Roth 401(k) plan can be when it comes to building a millionaire retirement, you have to sign up to contribute to it for it to be able to work its magic for you. So make today the day you get your plans in place to be able to sign up for yours if you have one available. Once you get on track for that potential millionaire retirement, you'll be very glad you did.
