2 Secrets of Roth IRA Millionaires

Roth IRAs have a unique tax break that you don’t get from popular accounts like 401(k)s or traditional IRAs. They allow you to contribute money that has already been taxed and then take tax-free withdrawals in retirement, as long as you are 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 surest ways to save thousands in tax. It’s even more beneficial when you have $1 million in your 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 far-fetched as some people might think.

For those looking to reach that threshold, here are two Roth IRA millionaire secrets you should know.

Image source: Getty Images.

1. They understand that it is impossible without compounding earnings

A Roth IRA has many great aspects, but one of the most noticeable drawbacks 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, none of these are a feasible way to hit the $1 million mark. Not to worry, though, because that’s where compounding gains come into play.

Compounding is when the money you earn from investments starts to earn money on its own. It is a profitable phenomenon that can reward consistency with huge gains. To see it in action, let’s say you invest $7,000 annually and earn 10% interest each year. Here’s how your first five years would fit.

Chart by author. Figures rounded to the nearest dollar.

By the end of the fifth year, you will have invested $35,000 and have already grown to over $47,000. By letting your money sit and benefit from compound earnings, you end up thousands more than you would if you eliminated the profit each year. This is the key to reaching $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 can’t be achieved through strict savings, compounding earnings can get you there with enough time.

2. They understand that ETF costs matter and should not 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 efficient 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 on the stock market, and sometimes the differences in fees (called expense ratios) can seem small and ignorable on paper. However, in real life, the smallest differences can really add up over time.

For example, let’s see how fees behave with three ETFs with expense ratios of 0.03%, 0.20%, and 0.75%. Here’s roughly how much you’d pay in taxes if you invested $7,000 annually and had an average annual return of 10% over 15, 20 and 25 years.

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

We chose the expense ratios above because they represent the costs of three of the most popular ETFs on the market: Vanguard S&P 500 ETF (VOO 0.94%), Invesco QQQ ETFand ARKK Innovation ETFrespectively. By focusing on an S&P 500 ETF, such as the Vanguard S&P 500 ETF — which has historically had enough returns to bring people to the million dollar mark — you can ensure that you keep as much of your gains as possible.