With enough time, you can passively invest your way to the million-dollar mark.
You can take advantage of a handful of retirement accounts, but one of my favorites is the Roth IRA because of its unique tax break. Roth IRAs allow you to contribute money that’s already been taxed and then take tax-free withdrawals in retirement. It’s a benefit that could easily save you thousands.
Retirement savings goals vary by person, but using a Roth IRA can help you reach them in most cases — even if it involves hitting the million-dollar mark. If you’re aiming for that mark, here are three secrets of Roth millionaires you should know.
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1. They start early and let time do most of the work
Compared to 401(k)s, IRAs have much lower contribution limits. In 2024, the most you can contribute to an IRA (both Roth and traditional combined) is $7,000, or $8,000 if you’re 50 or older. This makes it impossible to hit the million-dollar mark strictly by saving, but luckily, there’s a phenomenon called compound earnings that can do most of the work for you.
Compound earnings occur when the money you earn on investments starts to earn money on itself. This snowball effect is responsible for much of the wealth created in the stock market, and a key to becoming a Roth IRA millionaire.
Below is roughly how long it would take you to cross the $1 million threshold by investing $7,000 annually and averaging different annual returns:
| Average Annual Returns | Years Until $1 Million |
|---|---|
| 10% | 29 |
| 11% | 27 |
| 12% | 26 |
| 13% | 25 |
| 14% | 24 |
| 15% | 23 |
Chart by author. Years rounded to the nearest whole year.
To offset the downside of the Roth IRA contribution limit, you must give yourself as much time as possible. The more time, the better, because the compounding effect becomes greater.
Roth IRAs also have income limits — $161,000 if you’re single and $240,000 if you’re married and filing jointly — so it’s helpful to take advantage of them while you’re eligible, because that might not always be the case. Luckily, your investments can continue to grow and compound even after you’re ineligible to contribute.
2. They understand the real-life benefits of low-cost index funds
I’m a huge Roth IRA advocate because of the virtually unlimited investment options. Despite these options, smart investors also understand the power of low-cost index funds.
Index funds might not be the sexy option, but they can be very rewarding and more effective than picking individual stocks. That said, you should never overlook their fees. For perspective, let’s imagine you invest $7,000 annually into different ETFs: The Vanguard S&P 500 (0.03%), Invesco QQQ ETF (0.20%), and ARKK Innovation ETF (0.75%).
Here’s how the fees paid would roughly stack up after 20 and 25 years if you average 10% annual returns:
| Expense Ratio | Fees After 20 Years | Fees After 25 Years |
|---|---|---|
| 0.03% | $1,360 | $3,100 |
| 0.20% | $8,990 | $20,360 |
| 0.75% | $32,580 | $73,040 |
Table by author. Fees rounded to the nearest ten.
A large part of becoming a Roth IRA millionaire is ensuring that you can keep as many gains to yourself as possible.
With an ETF like the Vanguard S&P 500 ETF, you likely won’t get the gains you could with individual companies that have seen their share prices soar over time. However, you get way more certainty investing in the S&P 500, because it’s essentially a bet on the U.S. economy.
This doesn’t mean the S&P 500 is a risk-free investment (those don’t exist), but it’s one of the more reliable choices you could make.
3. They know it’s helpful to use a DRIP until retirement
Virtually all major brokerage platforms have a dividend reinvestment plan (DRIP) that automatically takes dividends you receive and reinvests them to buy more shares of the stock that paid them. Receiving cash dividends is cool, but the long-term benefits of using a DRIP are often much greater.
By reinvesting your dividends, you add to the compounding effect by essentially increasing your annual returns. For perspective, imagine a scenario where your investments average a 2% annual dividend yield. As our first chart shows, this extra 2% in annual returns can knock years off your journey to hitting $1 million when reinvested.
By using a DRIP to increase your shares over a career, you can set yourself up for another source of retirement income. You spend a career working to maximize your number of shares and then receive higher dividend payouts in retirement.
If you had $1 million in a Roth IRA and averaged a 2% annual dividend yield, you’d have an extra $20,000 in annual income.
