IRAs are one of the most popular retirement accounts for good reason. They're open to anyone who earns income during the year, and they give you the freedom to invest in just about anything. You can also choose when you'd like to pay taxes on your funds.
But IRAs have one big drawback: You can only put up to $7,000 here in 2024, or $8,000 if you're 50 or older. That's a far cry from the $23,000 ($30,500 for those 50-plus) workers can save in a 401(k).
This might be discouraging if you're saving exclusively in an IRA, especially since many Americans believe they'll need to amass close to $2 million for retirement. But don't worry. If you're saving diligently, it's possible to wind up with a lot of money in your IRA.
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Can you save $1 million or more in an IRA?
Saving $1 million or more might sound difficult when the IRA contribution limit is just $7,000 this year, but there are two key things to remember here.
First, IRA contribution limits rise over time. So just because you're limited to $7,000 now doesn't mean that ceiling will be there forever. And once you turn 50, you'll also be eligible to make catch-up contributions.
Second, you'll be investing your IRA funds for the future, and your earnings will likely make up the bulk of your retirement funds, assuming you've invested wisely and avoided early withdrawals. So it's possible to reach $1 million or more without actually saving $1 million of your own money.
If you set aside $7,000 in your IRA every year for 40 years, your account would contain $280,000 in personal contributions. But if you invested it all and your investments earned a 10% average annual rate of return during that time, your final balance would be $1.07 million. And again, this doesn't account for catch-up contributions or changes to the IRA annual contribution limits.
So becoming an IRA millionaire is certainly possible, but whether it's realistic for you depends on your income, your expenses, and how long you have until retirement. If you're 60 with no retirement savings, you probably won't reach millionaire status, although there are still some things you may be able to do to ensure a more comfortable retirement.
Don't limit yourself to just an IRA
An IRA can be a great place to put your retirement savings, but it's not always the best choice. Consider all your options before deciding where to invest your funds so you can get the greatest value out of them.
If you qualify for an employer match, for example, it's best to put your money in your 401(k) first until you've claimed the entire match. Then you can switch back to your IRA if you prefer. And if you max that out, you can return to your 401(k) for the rest of the year.
Or if you don't have access to a workplace retirement plan, you could put a chunk of your savings in a health savings account (HSA), assuming you qualify. You can technically use this cash at any age for medical expenses, but it's also a great place to stash retirement savings. Some HSA providers even enable you to invest your funds.
If your issue is a lack of funds rather than a lack of access to retirement plans, your road will be more difficult. You might be able to save intermittently in an IRA using year-end bonuses or tax refunds. But you may also have to think about other ways to bring in cash, like working part-time through retirement or delaying retirement longer than you originally intended.
Don't forget that you'll probably have some Social Security to rely on too. It's best to come up with a claiming strategy so you can estimate how much you'll get from the program. This will help you figure out how much you need to save on your own for retirement.
It's OK if you eventually outgrow your current retirement plan. The best plans change with you over time. Review which retirement accounts you're using and how much you're contributing annually, and do the best you can from where you're at now.
