max your retirement account early
When it comes to building wealth, 401(k)s and IRAs are two of the most powerful tools you have. These retirement accounts offer tax advantages that significantly amplify your ability to save and grow money over time. Among them, Roth accounts stand out for their unique benefits, allowing you to enjoy tax-free income in retirement—a game-changer when your investments have grown significantly.
If you’re serious about maximizing your financial future, here’s why you should prioritize maxing out your 401(k) and IRA, especially Roth options, before focusing on taxable brokerage accounts.
The Power of Roth Accounts: Tax-Free Withdrawals
Imagine you’ve invested in three accounts—a traditional retirement account, a Roth retirement account, and a standard brokerage account. Over decades, your contributions grow into a $5 million portfolio. When you reach retirement, here’s what happens when you withdraw:
Traditional 401(k)/IRA: Every dollar withdrawn is taxed as ordinary income because you deferred taxes on your contributions and gains.
Standard Brokerage Account: You’ll pay capital gains taxes on the growth, which can still take a significant chunk of your portfolio.
Roth IRA/401(k): Withdrawals are completely tax-free because you paid taxes upfront on your contributions.
📖 Key Insight: With a Roth account, you keep the full $5 million, while the traditional and brokerage accounts require you to pay taxes—potentially reducing your nest egg by hundreds of thousands (or even millions).
🔑 Takeaway: The ability to withdraw tax-free makes Roth accounts incredibly powerful, especially if you expect significant growth in your investments.
Roth vs. Traditional Retirement Accounts
Both Roth and traditional accounts offer tax advantages, but they work differently:
Traditional Accounts
Contributions are made with pre-tax dollars, reducing your taxable income in the year you contribute.
Taxes are deferred, meaning you pay income tax on withdrawals in retirement.
Best for: People who expect to be in a lower tax bracket during retirement.
📖 Example: If you contribute $10,000 to a traditional 401(k), you avoid paying taxes on that $10,000 now. But when you withdraw it (and its growth) in retirement, it’s taxed as ordinary income.
Roth Accounts
Contributions are made with after-tax dollars, meaning no immediate tax break.
Withdrawals of both contributions and gains are completely tax-free in retirement (if rules are followed).
Best for: People who expect to be in a higher tax bracket during retirement or want tax-free income later in life.
📖 Example: Contributing $10,000 to a Roth IRA means you pay taxes on it now. But if that $10,000 grows to $50,000 by retirement, you pay no taxes on the growth when withdrawing.
Why Max Out Your Roth 401(k) and IRA First
Tax-Free Growth: Every dollar of growth in a Roth account stays yours, untouched by taxes, making it ideal for long-term compounding.
Limited Contribution Space: Roth IRAs and 401(k)s have annual limits:
Roth IRA: $6,500/year (or $7,500 if you’re 50 or older).
Roth 401(k): $22,500/year (or $30,000 if you’re 50 or older).
Once the year ends, you lose the opportunity to contribute for that year, so maxing out is critical.
Flexibility in Retirement: Having a tax-free account gives you the freedom to withdraw without worrying about tax liabilities, especially if you have significant growth.
How to Invest Within Roth Accounts
To maximize the growth of your contributions, focus on:
1. Index Funds
Low-cost index funds that track the market, such as the S&P 500, offer diversification and strong historical returns (7–10% annually).
📖 Example: Investing $6,500 annually in an S&P 500 index fund starting at age 25 could grow to over $1.6 million by age 65, assuming an 8% return.
2. Dividend Stocks
Dividend-paying stocks provide regular income that can be reinvested for compounding growth. Trusted options include companies in the S&P 500 with a history of reliable payouts.
📖 Example: Companies like Procter & Gamble, Coca-Cola, or Johnson & Johnson offer consistent dividends, making them excellent for long-term Roth IRA investments.
Consider YieldMax ETFs for diversified dividend income if you want broader exposure.
When to Focus on Standard Brokerage Accounts
Once you’ve maxed out your Roth 401(k) and Roth IRA, additional investing can go into taxable brokerage accounts. These accounts offer:
No Contribution Limits: You can invest as much as you want.
More Flexibility: Withdraw funds at any time without penalties.
However, brokerage accounts lack the tax advantages of Roth accounts, meaning gains are subject to capital gains taxes.
📖 Example: A portfolio with $5 million in gains might incur hundreds of thousands in capital gains taxes, significantly reducing your returns compared to a tax-free Roth.
Building Your Strategy: A Step-by-Step Guide
Max Out Roth Accounts First:
Contribute the maximum allowed to your Roth IRA and Roth 401(k) every year.
Prioritize Diversified Investments:
Focus on index funds and high-quality dividend stocks within your Roth accounts.
Invest Excess in Brokerage Accounts:
Use brokerage accounts for additional contributions, emphasizing tax-efficient investments like ETFs.
Start Early:
The earlier you start contributing, the more time compounding has to work its magic, turning modest contributions into substantial wealth.
Conclusion: Lock In Tax-Free Wealth
Maxing out your Roth 401(k) and Roth IRA is one of the smartest moves you can make to build long-term wealth. With their tax-free growth and withdrawals, these accounts give you unmatched advantages, especially if you start young and allow your investments to compound.
Don’t leave tax-advantaged contribution space on the table—once the year is over, it’s gone for good. Prioritize your Roth accounts, invest in trusted options like index funds and dividend stocks, and watch your wealth grow with minimal tax burden.
