I've dabbled in various retirement accounts, including IRAs, employer-sponsored plans, and options for the self-employed. These accounts offer tax advantages, providing either an upfront tax break or tax-free income during retirement. However, new rules have made one account type even more attractive.

Getting the best of both worlds with a Roth 401(k)

I've been a fan of the Roth IRA ever since college. Although I've made my fair share of bloopers with this account, its overall purpose has always captured my heart: Pay the taxes on your contributions now so you can enjoy tax-free income during retirement.

However, income limitations and lower contribution limits make it harder to reach the million-dollar mark quickly. While traditional 401(k)s offer higher contribution limits, they require mandatory withdrawals at a certain age, and those withdrawals are taxed.

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The Roth 401(k) combines the best features of the Roth IRA and traditional 401(k). Here are a few benefits:

  • Higher contribution limits: You can contribute up to $23,000 in 2024 if you're under 50 and $30,500 if you're 50 or older. Contributing $23,000 annually and earning around the historical 10% rate of return could help you reach your millionaire retirement goals in under 17 years. Your job may also offer a 401(k) match to help you boost your retirement savings.
  • Tax-free withdrawals in retirement: Since contributions are made with after-tax dollars, you won't have to worry about taxes later.
  • No income limit: Unlike a Roth IRA, there's no income threshold for contributing to a Roth 401(k).
  • No required minimum distributions (RMDs): Starting in 2024, Roth 401(k) accounts aren't subject to RMDs during your lifetime. This means your money can grow tax-free for as long as you want.

The Roth 401(k) may be one of my favorites, but it's essential to explore all available options to find the accounts that best meet your needs. But adding the Roth 401(k) to your portfolio is a surefire way to get closer to the million-dollar mark and enjoy tax-free money later.