Report Says Warren Buffett Has Millions in This Type of Account. Should You Open One, Too?

Could an account favored by one of the world's best investors work for you?

Warren Buffett is a well-known investor who has made billions of dollars. According to a recent report from ProPublic, Buffett has millions of those dollars in a specific type of brokerage account called a Roth IRA.

Specifically, ProPublica found that Buffett has $20.2 million in his Roth IRA at the end of 2018, while his top lieutenant at Berkshire Hathaway, Buffett's holding company, has even more in a Roth -- $264.4 million.

Roth IRAs are intended to serve as a retirement savings vehicle and there are income limits for contributing to them. But there are also ways wealthy people can get tons of money into them such as using Roth conversions and buying stocks of startups in them, which see exponential growth.

If you don't have billions -- or even millions -- of dollars, though, Roth IRAs may still be a good investing choice for you. Here's why.

Why Roth IRAs are a good option for Buffett and other investors too

One of the big reasons why Buffett, and other Roth IRA users, have amassed so much wealth in Roth IRAs is that this type of account allows for tax-free gains. When you have money in a Roth IRA and make money on investments, you do not have to pay capital gains taxes on the proceeds as you would with investments in a taxable account.

And, unlike traditional IRA accounts, money taken out of Roth accounts can be withdrawn tax free too as long as you're at least age 59 1/2 and have followed rules regarding how long your account is open before making the first withdrawal.

Now, you don't get an upfront tax break with a Roth IRA like you would with a traditional 401(k) or IRA. You have to invest in this type of brokerage account with after-tax dollars. But it may be well worth forgoing the upfront tax savings if you see explosive growth in your investments. Especially if that money goes untaxed or if you end up in a lower tax bracket by the time you start withdrawing money from your account. If that's the case, your outsized returns would be free of tax consequences, and you'd have paid taxes early at a lower rate in exchange for being able to avoid being taxed at a higher rate later.

You also don't have to take money out of Roth IRAs on a schedule determined by the government, as you do with traditional 401(k) and IRA accounts. So, wealthy people who amass billions can leave their money to grow tax free as long as they want and ultimately pass the account onto their heirs.

Is a Roth IRA right for you?

Chances are good your situation is a little different than Warren Buffett's, but that doesn't mean you can't also benefit from using a Roth IRA.

If you think that you will end up paying higher taxes as a retiree than you currently are, you may want to opt to invest in a Roth. You'd be better off contributing with after-tax dollars rather than claiming your tax break up front if doing so allows you to enjoy more tax savings later.

If you don't want to have to worry about being taxed on retirement income, then a Roth is also a good bet. Not only can you make tax-free withdrawals from a Roth as a senior, but the money you take out won't count when the government determines if your income has become high enough that it's crossed the threshold at which Social Security benefits become taxable.

A Roth could also be a good option if you plan to leave a lot of the money in it to loved ones and don't want to have to make withdrawals you don't necessarily need.

Ultimately, you'll need to consider your likely future financial situation to decide if a Roth makes sense. But, for many people, just like for Warren Buffett, this account ends up being a great option for retirement savings.