2 Secrets of Roth IRA Millionaires

Roth IRAs have a unique tax break you don’t receive from popular accounts like 401(k) or traditional IRAs. They allow you to contribute money that’s already been taxed and then take tax-free withdrawals in retirement, as long as you’re 59 1/2 years old and made your first contribution at least five years ago.

Taking tax-free withdrawals in retirement is one of the more surefire ways to save thousands in taxes. It’s even more beneficial when you have $1 million in the account waiting for you. And while hitting the million-dollar mark in a Roth IRA isn’t always a cakewalk, it’s also not as farfetched as some people may believe.

For those looking to hit that threshold, here are two secrets from Roth IRA millionaires you should know.

1. They understand it’s impossible without compound earnings

A Roth IRA has many great aspects, but one of the most noticeable downsides is the relatively low contribution limit. The most you can contribute to an IRA in 2024 (both Roth and traditional combined) is $7,000, or $8,000 if you’re 50 or older.

At $7,000 annually, it would take you over 142 years to reach $1 million. At $8,000 annually, it would take you 125 years. Needless to say, neither of these is a feasible way to reach the $1 million mark. No worries, though, because that’s where compound earnings come into play.

Compound earnings is when the money you earn on investments starts to earn money on itself. It’s a lucrative phenomenon that can reward consistency with huge payoffs. To see it in action, let’s assume you invest $7,000 annually and earn 10% interest each year. Here’s how your first five years would match up.

Chart by author. Numbers rounded to the nearest dollar.

By the end of year five, you will have invested $35,000 and already grown it to more than $47,000. By letting your money sit and benefit from compound earnings, you end up with thousands more than had you removed your profit each year. That’s the key to hitting $1 million. For perspective, here’s how long it would take to reach $1 million by investing $7,000 annually and averaging different annual returns.

Chart by author.

While becoming a Roth IRA millionaire may not be attainable by strictly saving, compound earnings can get you there with enough time.

2. They understand that ETF costs matter and shouldn’t be ignored

Because of their convenience, exchange-traded funds (ETFs) have become a popular way to invest in the stock market. Instead of investing in hundreds of individual companies, many investors can choose one or a few ETFs to achieve the same goal.

Not only do Roth IRA millionaires understand that ETFs are often the most effective way to invest for retirement, but they also understand that low-cost index funds are the way to go because of how much you can save in fees over a career.

There are thousands of ETFs to choose from in the stock market, and sometimes, the differences in fees (called expense ratios) may seem small and ignorable on paper. However, in real life, the smallest differences can really add up over time.

For example, let’s look at how fees stack up with three ETFs with 0.03%, 0.20%, and 0.75% expense ratios. Here’s roughly how much you would pay in fees if you invested $7,000 annually and averaged 10% annual returns over 15, 20, and 25 years.

Chart by author. Fees rounded down to the nearest ten.

I chose the above expense ratios because they represent the costs of three of the stock market’s most popular ETFs: the Vanguard S&P 500 ETF (VOO 0.94%), Invesco QQQ ETF, and ARKK Innovation ETF, respectively. By focusing on an S&P 500 ETF like the Vanguard S&P 500 ETF — which has historically had returns sufficient enough to get people to the million-dollar mark — you can ensure you’re keeping as much of your gains to yourself as possible.