I’m a Financial Advisor: These Are 7 Key Habits of 401(k) and IRA Millionaires
Some self-made millionaires earn their futures through real estate. Others do it through entrepreneurialism or by investing in other peoples’ business ventures. But some people build seven-figure wealth by contributing to tax-advantaged retirement accounts slowly and steadily over years and decades.
It’s not the fastest way, but with the right approach and consistency over time, even average earners can leverage their retirement accounts to build impressive fortunes.
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“Becoming a 401(k) or IRA millionaire is often the result of disciplined habits like maximizing contributions, maintaining a diverse investment portfolio and resisting the temptation to withdraw funds early,” said Mike Crews, MBA, certified financial planner, founder and CEO of North Texas Wealth Management and author of “Saturday Everyday: 9 Simple Steps to Live Your Best Financial Life.”
Here are the secrets of IRA and 401(k) millionaires, as told by Crews and another seasoned financial advisor, both of whom have seen ordinary people get rich through standard retirement funds alone.
1. They Contribute the IRS Maximum — or at Least As Much as They Can Afford
In 2023, the IRS allows employees to shelter up to $22,500 in their 401(k)s — $30,000 if they’re 50 or older. For IRAs, it’s $6,500 or $7,500 with catchup contributions.
Many workers don’t earn enough to sock away the maximum, but they should get as close as possible with every paycheck. The more you have growing and compounding, the faster you’ll get to $1 million — and every dollar you contribute is one that’s not counted toward your taxable income.
“Regularly contributing the maximum allowed amount ensures optimal tax advantages and potential employer matches,” said Crews.
That last point brings us to the second critical habit.
2. They Always Get Every Available Matching Dollar
Even if they can’t save the IRS’s maximum allowable amount, 401(k) millionaires never leave free money on the table by failing to max out their employer match.
According to Fidelity, companies in 2023 typically match between 4% and 6%. A 6% match on a $60,000 salary gives you a free $6,300 per year — and 401(k) millionaires do whatever they must to get every dime in matching funds.
It’s essential to know how your plan is structured. For example, Fidelity says the most common framework is a dollar-for-dollar match on the first 3% and then $0.50 on the dollar for the next 2%. In that case, employees could harvest an extra 4% by contributing 5% of each check (100% on the first 3% plus 50% on the remaining 2%).
Fidelity writes, “It’s important to note that not all workers contribute enough to get the entire match,” particularly younger workers, who are most likely to under-contribute or not contribute at all. They will almost certainly never become 401(k) millionaires — but 401(k)s aren’t the only game in town.
Historically, only employer-based plans offered matching contributions, but modern IRA millionaires shop around for the rare exceptions. SoFi, for example, offers a 1% match on qualified IRA contributions. Robinhood also offers a 1% match — 3% for Robinhood Gold members.
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3. They Start Early
As Fidelity’s data shows, young savers are most likely to miss out on some or all of their employer’s match — but they’re also most likely not to save at all. While retirement feels far away when you’re young, 401(k) and IRA millionaires know that compounding takes time to work its magic, and that if they spend enough years saving, they won’t need to contribute a fortune to retire with one.
“When individuals begin contributing to these retirement accounts in their 20s or 30s, even modest contributions have decades to grow,” said Baruch Silvermann, financial advisor and CEO of The Smart Investor.
4. They Invest Consistently Over Time
It’s crucial to start early and to contribute as much as you can — but over time, consistency is what separates six-figure funds from seven-figure fortunes. The winners automate their contributions, treat savings as a bill and never miss a pay period.
“A commitment to saving a portion of their income consistently over the long term allows them to harness the power of compound interest, where their investments grow not just on the initial amount but also on the accumulated earnings,” said Silvermann. “This disciplined approach ensures a steady accumulation of wealth over time, ultimately helping them achieve their millionaire status in retirement savings.”
5. They Balance Their Portfolios With Diverse Investments
Different 401(k) plans offer different investment options, with choices varying based on age, target retirement date and/or risk tolerance. People with IRAs direct their own investments.
In either case, those who go on to become millionaires hedge their bets and spread their contributions among several different kinds of investments.
“A well-rounded portfolio of different asset classes mitigates risk and optimizes the potential for growth,” said Crews.
6. They Avoid Fees
Even small fees can take a big bite out of your nest egg over time. Plan administrators charge them, as do investment managers, funds and ETFs. Since they’re pulled from your portfolio, they’re easy to lose track of — and they can change over time, which is why setting and forgetting is never a good idea.
Either way, those who get the most out of their retirement funds do whatever they can to keep every dollar for themselves.
“401(k) and IRA millionaires have a habit of steering clear of expensive fees,” said Silvermann. “They carefully keep the costs of their investment portfolios low by picking affordable investment options and using their valuable portfolios to negotiate for lower fees. This way, they make sure that a smaller chunk of their earnings is taken away by fees as time goes on. This focus on minimizing fees is crucial because even seemingly small differences in fees can have a big effect on how much money they accumulate for their retirement, making it an important strategy for growing their savings over the long term.”
7. They Never Make Early Withdrawals
401(k)s and IRAs are retirement-specific investment vehicles meant to provide late-life financial security. If you tap funds before 59 1/2, you’ll pay income taxes on your withdrawals — plan administrators must withhold 20% by law — and pay the IRS an additional 10% penalty. That means you’ll get just $7,000 on a $10,000 early withdrawal — and, of course, that $10,000 will no longer be waiting and growing for you in retirement.
401(k) and IRA millionaires don’t treat their retirement funds as a potential cash source no matter how dire their financial straits become.
“By avoiding premature withdrawals, these investors allow their retirement funds to grow undisturbed over time,” said Crews.
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: These Are 7 Key Habits of 401(k) and IRA Millionaires
