9 Reasons a Roth IRA Is Your Key to Retiring a Millionaire

Retiring a millionaire may sound like an extravagant goal, but it's actually quite doable. Combine time, stocks, and tax perks, and you can generate serious wealth to fund your retirement.

Many retirement savers house their retirement investments in a workplace 401(k). If you have access to a 401(k), it's a no-brainer to take advantage of those employer matching contributions and high contribution limits. But the real hero in your journey to millionaire status could be a Roth IRA. Here are nine reasons why.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

In 2019, the U.S. Bureau of Labor Statistics (BLS) estimated that only 60% of workers had access to a defined contribution plan like a 401(k) or 403(b). That means there's a good chance you either don't have a 401(k) for yourself, or you know someone who doesn't have a 401(k).

Roth IRAs, on the other hand, are widely available and easily accessible. If you meet the income requirements and have a computer and an internet connection, you can open a Roth IRA with a major investment company in minutes. You can also open an account by walking into an office or making a phone call. All you need is a few identification and personal details.

ALSO READ: 3 Secret Roth IRA Benefits You Can Use Before Retirement

You don't get a current-year tax deduction on your Roth IRA contributions, but if you follow the rules, your earnings in the account are essentially tax-free. There are some exceptions, but the general rules are that you can't withdraw earnings before the age of 59 and a half or if it's been less than five years since your first Roth contribution.

That tax-free earnings growth shortens your path to millionaire status. Let's say you are saving $500 to a taxable account that's earning 7% average annual growth. Over the course of 25 years, you'd shell out nearly $65,000 in taxes, assuming a combined tax rate of 25%. Save to a Roth IRA, though, and those dollars stay in your account and continue to work for you.

Roth IRAs generally have affordable fee structures. Charles Schwab, for example, has no opening or maintenance fee on its Roth IRAs. You can also make online trades for free. Other brokers like TD Ameritrade also don't have annual maintenance fees but do charge commissions on trades.

Low fees are good for long-term savers because they put less downward pressure on earnings growth. If your retirement account is averaging investment growth of 7% a year but charges 2% in fees, your real return is 5%. And that 2% difference adds up over time. If you save $500 monthly for 25 years at 7% growth, your ending balance is about $410,000. When you reduce the growth rate to 5%, the ending balance drops to about $300,000.

Many Roth IRAs give you access to stocks, bonds, exchange-traded funds (ETFs), mutual funds, and even CDs. That means you can customize your Roth IRA holdings to suit your strategy and maximize your performance over time.

Here are two examples. Say you're saving only to a Roth IRA and a taxable account. To keep your taxes low, you might hold dividend-payers in the Roth and long-term growth stocks in the taxable account. Or, you might have a 401(k) with less-than-impressive fund options. You could invest in one or two funds of the best options in the 401(k) and then use your Roth to diversify as needed.

ALSO READ: How to Earn an Extra Stream of Income in Your Roth IRA

Roth IRAs are not connected to your employer. You can keep the same account and stay consistent with your contributions no matter what's happening with your career.

If you're not already maxing out your Roth IRA contributions, you can increase them when you're between jobs or fulfilling eligibility requirements for a new employer's 401(k). That strategy could be a difference maker in your retirement savings momentum. Some 401(k) plans don't allow you to contribute until you've been employed for a full year -- that's too long to forgo retirement contributions.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Because your Roth IRA contributions are not tax-deductible, you can withdraw those contributions at any time without penalty. The tax man only comes after you for withdrawing your earnings prematurely.

For that reason, you could realistically use your Roth IRA as a rainy day fund, knowing you can pull cash from it in a pinch. You don't have that same freedom with a 401(k) or a traditional IRA. Both of those accounts restrict withdrawals of contributions or earnings before you reach the age of 59 and a half.

Penalty-free withdrawals don't directly help you retire a millionaire, but they do encourage you to save more. And saving more is the most powerful strategy you have to ensure you grow your wealth to seven figures.

The earlier you start investing, the easier it will be to reach your wealth goal. Roth IRAs naturally encourage early saving because there are income limits on contributions. As a single tax filer, you can only make the maximum annual contribution if your modified adjusted gross income (AGI) is less than $124,000 a year.

You probably make less than that right out of college, but maybe you're targeting a six-figure income down the road. If you want to enjoy tax-free withdrawals from your Roth account in retirement, you have to start contributing before your income exceeds the threshold.

Plus, as noted above, you do have some flexibility to withdraw your contributions if your financial plan changes. That's also appealing if you're a younger saver who isn't quite sure what the future holds.

ALSO READ: This Lesser-Known Roth IRA Benefit Could Leave You Richer in Retirement

If you meet the income requirements, you can max out your Roth contributions even if you're also saving to a 401(k). You'd still enjoy the normal tax-free earnings growth and tax-free retirement withdrawals from the Roth.

Traditional IRA contributions, on the other hand, are affected by your participation in a 401(k). You can contribute to a traditional IRA and a 401(k) at the same time, but your IRA deposits may not be tax-deductible in the current year. Later, when you withdraw the money in retirement, you won't pay taxes on the nondeductible contributions, but you will pay taxes on the associated earnings. That's a disadvantage relative to a Roth distribution, which is fully tax-free.

Required minimum distributions (RMDs) are mandatory, taxable distributions you must take from your 401(k) and traditional IRA accounts, starting the year of your 72nd birthday. You have to take those distributions even if you're still working and contributing.

The Roth IRA is not subject to RMDs. You can leave the money in the account indefinitely if you wanted, and even pass it on to your heirs. Even better, if you're still earning income, you can keep contributing to your Roth at any age.

It's likely you're targeting retirement prior to your 70s. But if you fall behind on that schedule, you can keep contributing -- pressing on toward that millionaire goal -- as long as you're able to work. Note that "working" doesn't necessarily mean a commute and a 40-hour work week. It could involve an online business that generates passive advertising income or a consulting operation you can manage part-time.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The Roth IRA is flexible enough to support your millionaire retiree goal, either on its own or alongside a 401(k). Find one with a low fee structure and broad range of investment options. Then, make that Roth work for you by saving at the start of your career and maxing out your contributions any time a 401(k) is not available. That'll give you a solid running start toward a seven-figure savings balance.

The Motley Fool has a disclosure policy.