Can You Become a Millionaire Retiree With Just an IRA?

Lost your workplace retirement plan? Or maybe you have one, but its high fees and lackluster investment options make it about as appealing as reading the federal tax code? I have good news: You don’t need a workplace plan to become a retirement millionaire. You can get there with just an IRA. But it isn’t quite as easy as you’d hope. Let’s take a look at what you have to do to become an IRA millionaire and what other accounts are open to you if the IRA isn’t enough.

How to become a millionaire with an IRA

The biggest challenge to becoming a millionaire with an IRA is its low contribution limits compared to 401(k)s. You can only contribute up to $6,000 to an IRA in 2021, or $7,000 if you’re 50 or older, compared to $19,500 and $26,000, respectively, with 401(k)s. Reaching millionaire status with these constraints is possible, but you have to start early if you want it to happen.

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If you contributed this year’s IRA maximum of $6,000 every year and earned a 7% average annual rate of return, it would take over 37 years to hit the $1 million mark. That’s problematic if you got a late start on retirement savings and don’t plan on being in the workforce for another 37 years.

It may not take quite this long if you were to see a higher average annual rate of return. Plus, once you hit 50, you’re allowed to contribute more money each year if you can afford to do so. The government also raises annual contribution limits from time to time, so you may be able to put away more money in future years, again assuming you can afford to.

But even if you reach $1 million, that might not be enough for you to retire on, depending on the lifestyle you want to have and how long your retirement lasts. To save as much as you actually need, you may have to max out your IRA for more than 37 years.

Supplement your IRA savings

If you’re unable to save as much as you want to each year with just an IRA, consider using one or more of these accounts as well.

Workplace retirement plans

Workplace retirement plans, like 401(k)s and 403(b)s, have higher contribution limits. Some companies also offer matching where your employer will give you extra money toward your retirement. That’s a perk you don’t get with an IRA, and it’s worth taking advantage of, even if you don’t like the fees or investment options associated with your workplace plan. You can contribute just enough to get your match, switch to an IRA until you max it out, then switch back to a 401(k) if you want to set aside more money for the year.

Health savings accounts (HSAs)

While not technically retirement accounts, health savings accounts (HSAs) can offer many of the same benefits as IRAs. Money you contribute to these accounts reduces your taxable income for the year. You can use the funds for non-medical withdrawals too, though if you do this, you’ll pay taxes on the withdrawals, plus a 20% penalty if you’re under 65. Medical withdrawals are always tax-free at any age.

You need a high-deductible health insurance plan to open an HSA. That’s one with a deductible of $1,400 or more for individuals or $2,800 or more for families. The contribution limits for HSAs aren’t much better than IRAs. You may contribute up to $3,600 in 2021 if you have an individual insurance plan or $7,200 if you have a family plan. But that little extra in conjunction with your IRA may be enough to help you reach your savings goals.

Taxable brokerage accounts

A taxable brokerage account doesn’t offer the same tax benefits as the accounts listed above, but there are no limits on how much you can contribute, what you can invest in, or when you can take your funds out.

If you hold onto your investments for at least a year before selling, you may also be able to shave a little off your tax bill because then your earnings become subject to long-term capital gains tax. These tax brackets range from 0% to 20%, but whatever yours is, you’ll end up owing less than you would if you had to pay income tax on the same amount.

By all means, max out your IRA every year, but crunch the numbers before you rely upon that exclusively for your retirement savings. You may not be able to save quite as much as you’d hoped that way, especially if you don’t have that many years left until retirement. Ultimately, where you save for retirement doesn’t matter as much as saving enough to cover your costs, so start by figuring out how much you need to save and then decide which accounts you need to make that happen.

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