Retire a Millionaire: The Complete Guide to 401k and Roth IRA
What if you could save for retirement while getting tax benefits? And potentially build a multi-million dollar nest egg? Today, let's dive into America's most powerful wealth-building tools: retirement accounts. Used properly, you could be looking at $5 million or more by retirement.
🏢 Employer-Sponsored Retirement Accounts (401k/403b)
What Is a 401k?
It's a tax-advantaged retirement account provided by your employer. Typically called a 401k (private sector) or 403b (non-profits, schools).
Two Types:
- Traditional 401k: Pre-tax contributions → Save on taxes NOW
- Roth 401k: Post-tax contributions → Pay $0 taxes LATER
For 2026, the employee contribution limit is $26,400, and the combined employer + employee limit is $72,000.
Why Do You Need One?
1. Looking Out for Future You
When you contribute to a Roth 401k/403b, the money going in has already been taxed. But at retirement, you get ALL of that money back tax-free—including decades of compound growth!
2. Looking Out for Present-Day You
A Traditional 401k/403b reduces your current year tax liability. If there's one thing we know about money, it's that a dollar today is worth way more than a dollar in the future.
How to Use It
Early Career (Lower Income): Contribute to Roth
- Your tax rate is low now, so paying taxes upfront makes sense
Mid-to-Late Career (Higher Income): Contribute to Traditional
- Your tax rate is high now, so reducing taxable income is better
Must-Do's:
- At minimum, get your employer match! That's a 100% return on your money
- Ideally, max out contributions every year
- After contributing, make sure you're investing it! Low-cost broad-based market index funds recommended
3-Fund Strategy:
| Fund Type | Example Ticker |
|---|---|
| Total US Stock | VTI |
| International Stock | VXUS or VEA |
| Bonds | BND |
How Much Can You Save and Earn?
Current Tax Savings (Traditional 401k)
$120,000 salary, Massachusetts resident, $23,500 contribution:
| Tax Type | Savings |
|---|---|
| Federal (24%) | $5,640 |
| State (5%) | $1,175 |
| Total Savings | $6,815 |
Earning $300,000? Tax savings jump to $9,400!
Long-Term Wealth Building
| Scenario | Annual Contribution | Period | Return | Final Balance |
|---|---|---|---|---|
| $5,000/month | $60,000 | 30 years | 8% | ~$560,000 |
| Max contribution | $23,500 | 30 years | 8% | $2.66 million |
| Couple both maxing | $47,000 | 30 years | 8% | $5.32 million |
A couple both maxing out can have over $5 million at retirement!
⚠️ Mistakes to Avoid
1. Contributing Without Investing
Putting money in doesn't automatically invest it. You have to go in and select your investments.
2. Choosing High-Fee Funds
1% fee doesn't seem like much? Compounded over 30 years, that's hundreds of thousands lost.
3. Forgetting About Old 401ks
When you switch jobs, roll over your old 401k to your new employer or an IRA. Don't leave them scattered everywhere!
🏦 Individual Retirement Account (Roth IRA)
What Is a Roth IRA?
A retirement account you open as an individual. No employer needed!
You contribute post-tax money, and at retirement, you withdraw everything—including growth—100% tax-free.
2026 contribution limit is $7,500.
Why Do You Need One?
1. Start Without a Job
You can start before having a traditional W-2 job! Parents can hire kids into a family business and they can start a Roth IRA as young as 13-14 years old. Start early? Deca-millionaire potential.
2. Additional Savings on Top of 401k
The Roth IRA limit is in addition to your 401k/403b contributions. More retirement savings opportunity!
How to Use It
Apply the same investment strategy as your 401k:
- 3-fund portfolio
- Low-cost broad-based market index funds
- Long-term perspective
Open an account at Schwab, Vanguard, or Fidelity.
How Much Can You Earn?
| Starting Age | Period | Annual Contribution | Return | Balance at 60 |
|---|---|---|---|---|
| 30 | 30 years | $7,500 | 8% | ~$850,000 |
| 21 | 39 years | $7,500 | 8% | ~$1.8 million |
| 13 | 47 years | $7,500 | 8% | ~$3.7 million |
Start at 13 and you could have $3.7 million completely tax-free at 60!
⚠️ Mistakes to Avoid
1. Ignoring Income Limits
Single: Phase-out starts at $153,000, fully ineligible above $168,000 Married Filing Jointly: Phase-out starts at $242,000, fully ineligible above $252,000
Solution: Backdoor Roth Conversion
Make too much? There's a workaround!
- Open a Traditional IRA
- Contribute to the Traditional IRA
- Convert to a Roth IRA
A bit of extra steps, but legally gets you into a Roth IRA.
2. Contributing to Roth During High-Income Years
If your tax rate is high now, you might be better off with Traditional contributions (pay taxes later at a lower rate) than Roth (pay high taxes now).
💡 Key Takeaways
| Account | Tax Benefit | 2026 Limit | Key Points |
|---|---|---|---|
| Traditional 401k | Pre-tax in, taxed out | $26,400 | Get employer match, low-cost index funds |
| Roth 401k | Post-tax in, tax-free out | $26,400 | Better when income is low |
| Roth IRA | Post-tax in, tax-free out | $7,500 | Start early to maximize compound growth |
Use retirement accounts properly and a couple can build $5+ million for retirement. Start today!