Want to retire a millionaire? Here is why you should open a Roth IRA–even if you have a 401(k) plan

“Saving for retirement is not something that people are excited to talk about at a dinner party, but it’s the reason why smart people win with money,” says Marshall Nelson, wealth advisor at Crewe Advisors. “The [smartest investors] are willing to make the less sexy investment and be patient with their money,” he added. 

Utilizing accounts like a Roth IRA and 401(k) can supercharge your savings over the decades. For those who have an employer match with their 401(k) account, the first priority should be maxing out that match. “The 401(k) is the reason that most Americans that become millionaires become millionaires,” explained Nelson. “The reason is because it is pretty painless,” he added. If you have an employer match, meeting that match is the easiest and most effective way to see a return on your investment.

Yet for investors who have some extra cash or don’t have an employer match, opening up a Roth IRA can take your retirement savings to the next level. “If you have dollars left over and you qualify, it can be helpful to have both a Roth IRA and a 401(k) pre tax account,” explained Marguerita Cheng, advisor at Blue Ocean Global Wealth. “When I’m working with individuals and families, I want them to get some tax savings today, but I also like them to have some tax savings in the future so the benefit of having both is they get some tax diversification,” she explained.

“Roth IRAs can be a powerful tool for retirement saving and estate planning, even for those who have a company 401(k) match available,” said Joe Rosol, Senior Vice President at Bel Air Investment Advisors. “Roth IRAs typically offer many more investment options versus a 401(k), have lower fees, and provide more withdrawal flexibility,” he said.

The benefit of a Roth IRA is that the contributions are only taxed when they’re put into the account, so the money then grows tax free. Investors can only invest income into a Roth IRA, and there are income limits for who can contribute. If you file taxes as a single person, your yearly income must be under $144,000 for 2022’s tax year (under $153,000 for 2023) and if you file taxes jointly, your income must be under $214,000 ($228,000 in 2023) to contribute to a Roth. Investors can save up to $6,000 a year in 2022 in a Roth and up to $6,500 in 2023, which breaks down to $541 a month. Yet advisors emphasized that any amount investors are able to put in goes a long way and people should not be discouraged from opening investment accounts of any kind just because they can only contribute a small amount per month.

The power of compounding interest speaks for itself: Take a 25-year-old who in decides to contribute $200 a month to a Roth IRA beginning today. By the time they retire at 65 assuming a standard market growth rate, the accumulated savings would amount to $512,663. “The beauty of the Roth IRA is that a million dollars is a true million dollars and it’s not eaten up by taxes,” explained Nelson.

Another benefit of the Roth IRA is that investors can also help their spouse save with a spousal IRA. Unlike a traditional IRA, a Roth IRA does not have to be withdrawn within a week of retirement, so the money can continue to grow tax-free and even be passed down to another generation.

Slow and steady is the name of the game in terms of investing, so advisors explained its better to set aside a small amount per month of your income to invest than make big, risky investments. After paying down high interest debt and establishing three to six months of living expenses in cash reserves, investing will allow your money to work for you. “Any money that the younger generation–or anyone for that matter–is investing right now in the stock market while it’s at a favorable discount compared to thirteen months ago is going to be an investment that people are grateful they made,” says Marshall.