Retire a Millionaire: Roth IRA & 401(k) Explained
Introduction to Roth IRA & 401(k)
If you want to retire a millionaire, all you need are two different investment accounts: A Roth IRA and a 401k. I’m going to walk you through everything that you need to know about these two different accounts so that you can retire a millionaire.
We’re going to cover what is a Roth IRA & 401(k), how taxes work in each account, the pros and cons of each, which is better, how to get started, and I’m going to show you my personal Roth IRA & 401(k) to show you this in practice.
Exactly what these two accounts are. Both the Roth IRA & 401(k) are retirement investing accounts. Both offer tax advantages.
The Roth IRA you open on your own, whereas the 401k you get through your employer. In the Roth IRA, contributions are post-tax and withdrawals are tax-free. Whereas the 401k contributions are pre-taxed and withdrawals are taxed.
How Taxes Work in Each Account
Now, the biggest difference between these two accounts is how they get taxed. And so, in order to utilize them to the fullest, it’s very important that you understand how they get taxed.
And so, let’s break that down in the next section: How taxes work in each account. Now, in order to help you understand how these different accounts get taxed, I’m going to give you a visual of how it works.
Roth IRA Taxation
Starting with the Roth IRA, let’s say you work at a job and your employer pays you $5,000 a month. Before they pay you, they will withhold your taxes, let’s say 20%, and then you get the remainder, $4,000.
This is post-tax money because the government has already taken their cut, and you can use this money to contribute to a Roth IRA. Over time, that money will grow, and by the time you retire, all the gains you earned will be tax-free.
The Roth IRA, in my opinion, for the average person, is the best of the two retirement accounts because, say you have invested $25,000 by the age of 30 in your Roth IRA.
Upon retirement, that might grow to $267,000, gaining $242,000 in interest, and that amount is completely tax-free. The Roth IRA is the most tax-advantageous account of the two.
So much so that the IRS sets limits on how much you can contribute each year. In 2025, the contribution limit for an individual under 50 is $7,000. And for an individual over 50, it is $8,000.
If you make over $165,000 a year, you’re not allowed to contribute to a Roth IRA. So, now that we understand how the Roth IRA works, let’s see how the 401k gets taxed, which is basically the opposite.
401(k) Taxation
There are two different types of 401ks: the traditional 401k and the Roth 401k. We’re only going to focus on the traditional 401k, as that is the more common of the two.
So, let’s see how taxes work with the traditional 401k. Like before, let’s say you work at a job and make $5,000 a month. This time, before your company withholds taxes, you decide that you want to contribute 5% of your salary to your 401k.
So, your employer will take out 5%, or $250, and put it in your 401k. Then that remainder, $4,750, will then be taxed again at 20%. And then you get the remainder of $3,800, and over time your 401k will grow.
However, this time, once you reach retirement age and start to withdraw, that money will be taxed as income. The thing that is most desired about the traditional 401k is something called the employer match.
This is how it works: say your employer offers a 401k match of 5%. That means if you contribute 5% of your salary, or $250, then they will also contribute 5% of your salary.
This is basically your company giving you free money because, let’s say you make $100,000 a year and your company has a 5% match, they are basically giving you 5% extra a year if you contribute to your 401k.
However, if you don’t contribute, then you are just leaving that money on the table. Just like the Roth IRA, the IRS puts limits on how much you can contribute to these accounts.
In 2025
In 2025, the contribution limit for an individual under 50 is $23,500, and for an individual over 50, it is $31,000. However, unlike the Roth, the 401k does not have any income limits.
To summarize this in the most simple terms, with a Roth IRA, you pay taxes now, but nothing later. With a 401k, you save on taxes now, but pay taxes later.
Pros and Cons of Roth IRA & 401(k)
Now that we understand the difference between these two accounts, the pros and cons of the Roth IRA & 401(k). Both the Roth IRA and 401k come with pros and cons, some of which we have already discussed.
Roth IRA Pros and Cons
Starting with the Roth IRA, the pros include tax-free growth. By retirement, you’re not required to withdraw a certain amount. You can withdraw contributions tax-free at any time.
Because you get to choose your broker, you generally have better and more investment options, and it’s not tied to your employer. The cons include a lower contribution limit, and there are some income limits.
All in all, the Roth IRA is the holy grail of retirement accounts.
401(k) Pros and Cons
So now, let’s talk about the pros and cons of the 401k. The pros include you can contribute tax-free. There is a higher contribution limit. It lowers your taxable income.
As we spoke about, there’s often an employer match, and your employer automatically deducts the money from your paycheck, making it easy. The cons include withdrawals at retirement are taxed as income.
Because your employer chooses your provider, your investment options could be limited. At 73, you’re required to begin withdrawing some money. If you withdraw contributions before retirement age, you will face penalties.
Which is Better?
There’s no one-size-fits-all answer to which of these accounts is better, and ideally, you’re going to want both of them, but let me share two quick examples of how these accounts can be used strategically.
Strategic Use Cases
Starting with the Roth IRA, let’s imagine a 25-year-old who makes $45,000 a year. They are in a pretty low tax bracket, so it makes sense for them to prioritize the Roth IRA because they don’t need an immediate tax break and have tons of time for their money to grow.
Investing more in their Roth IRA would allow their money to grow more tax-free. When you’re making an average income, you don’t have to try as hard to avoid taxes.
However, with the 401k, let’s imagine a 40-year-old who makes $140,000 a year. Their tax rate is much higher, so they might want to contribute more to their 401k to reduce their taxable income today.
However, as I said, at some point you are going to have to pay taxes. In the end, would you rather have a 401k that gained a million in interest that you have to pay income taxes on, or a Roth IRA that gained $850,000 that you don’t have to pay taxes on?
General Strategy
Now, I am not a financial adviser, and none of this is financial advice because we’re all in different life situations, and what works for me in my life might not work for you in your life.
But in general, for most people, the rule of thumb when it comes to a strategy is this: First, do the maximum 401k match with your employer. If they match 5%, then you contribute 5% so you don’t leave any money on the table.
Second, focus on maxing out your Roth IRA so more of your money can grow tax-free. And third, if you max that out, then go back to your 401k and focus on maxing that out.
If you don’t know what’s best for you, it’s best to speak to a tax professional, as they can give you advice on your own specific situation.
How to Get Started
Now that we understand these two accounts, how to get started. You are starting to understand these two accounts.
So, now let’s talk about how you open these accounts, which is actually extremely simple.
Opening a Roth IRA
Starting with the Roth IRA: To open a Roth IRA, you simply have to go to a brokerage. The most common ones are Charles Schwab, Fidelity, and Vanguard, and request to open a Roth IRA.
Once you have done that, you can then transfer money to your Roth IRA and start investing that money. So, that is how you open up a Roth IRA.
Opening a 401(k)
Opening a 401k is a bit different because it comes through your employer. To open a 401k, you first have to go to your employer and ask if they offer a 401k plan.
If you work for the government or a nonprofit, it will be called a 403b. Next, ask them to open one for you. And finally, decide how much you want to contribute each paycheck and choose your investments.
My Roth IRA & 401(k) in Practice
I think that what will be most helpful for you is to tell you about my 401k and Roth IRA to show you how all this works in practice.
So, let’s do that in the final section, my Roth IRA and 401k. If you’re a beginner, it all might sound very complicated. However, the truth is, once you get going, it’s actually incredibly easy.
My Roth IRA
Starting with my Roth IRA, which is held at the brokerage Charles Schwab.
It currently has about $29,000 invested. $20,000 has come from my contributions, and $6,000 has come from interest gained. The entire portfolio is invested with the Schwab S&P 500 index fund SWPPX.
When we look at my transactions, every now and then I will contribute $200 here, $300 there, as well as get my credit card reward points deposited in this account. All that immediately gets invested in index funds.
Last year, I contributed the full $7,000. So far this year, I have contributed $4,500. Very quickly, I just want to give you a live example on how I buy investments for my Roth IRA.
This is going to look different depending on what brokerage you choose, but this is what it’s going to look like on Charles Schwab. So, at the top here, I will click trade and then all-in-one trade ticket, which will take me here.
Then I will choose my account, which I’m choosing my Roth IRA. As you see, I have $100 in this account. The next thing I’ll do is put in the ticker symbol that I invest with, which is SWPPX.
Then I will click select action, buy, put in $100, and then review order and place order. I have just contributed $100 more to my Roth IRA and invested that money. It is very simple to do.
My 401(k)
Now, let’s take a look at my 401k, which was with my last job that I’m no longer working with and is held at TIA. This account has about $25,000 in it. All of which is invested in the State Street Index Fund.
Now, let me stop right here and say that this is a live example of one of the cons of a 401k that we discussed. This index fund I’m invested with cost me a bit more in comparison to my Schwab one because TIA has a lot less options to choose from.
Next, I want to tell you about my match at my last job. At my last job, I had a very good match. If I contributed 2%, then they’d contribute 10%. Which is a very good match.
That is it. That is what you need to know about a 401k and a Roth IRA.