There's More 401(k) 'Millionaires' Than Ever - Here's Why

If you're planning for retirement, a 401(k) is likely one of the first options that comes to mind. It's a safe, reliable investment vehicle often bolstered by an employer match, providing millions of Americans with a path to a comfortable retirement.

Now, thanks to a booming stock market, the number of 401(k) 'millionaires' has reached a new record high, with Fidelity Investments reporting nearly 500,000 accounts now holding balances of $1 million or more — a 2.5% increase from the prior quarter. According to Fidelity, the average balance hit $1,595,200 at the end of June.

Not all participants are enjoying such impressive growth, though. While the average 401(k) balance rose to $127,100, up 1% from the previous quarter, these numbers hide big differences across age groups and savings habits. Gen Xers, in particular, face mixed prospects — those who have diligently saved for 15 years or more have an average balance of $554,000. Yet, the average balance across all Gen Xers is just $182,100, with a median balance of $55,500, raising concerns about their financial preparedness as they near retirement age.

Despite the positive trends in savings rates — with the average participant saving 14.2% of their income — many workers, especially those without access to a workplace retirement plan, may rely heavily on Social Security to maintain their standard of living in retirement. Here's what you need to know about the surge in 401(k) millionaires.

A 401(k) is a tax-advantaged retirement plan offered by employers that allows employees to automatically deposit a portion of their paycheck into an investment account. Employees choose from a number of investment options based on their risk preferences, and employers can match either part or all of the contribution.

There are two different types of 401(k) plans, traditional 401(k)s and Roth 401(k)s — both with unique advantages.

In a traditional 401(k) plan, contributions come from pre-tax income. As a result, contributions decrease taxable income, lowering the employees' tax burden for the year, and only withdrawals are taxed.

In a Roth 401(k) plan, contributions are made after funds have been taxed, so there is no tax deduction the year contributions are made, but retirees can withdraw those funds tax-free.

The eye-popping increase in 401(k) millionaires is due in part to a strong market in 2024, but that might not be the only contributing factor — people are saving much more aggressively than in years past.

According to a Fidelity analysis, nearly 80% of savers met the minimum contribution to qualify for a full employer match. Employer match amounts vary from employer to employer, but an average of 14% have met that threshold and benefit from a full employer match.

Many employees also chose to increase their 401(k) contributions without waiting for their plans to increase automatically.

"The key to saving for retirement is playing the long game and maintaining consistent contributions over time," Michael Shamrell, vice president of thought leadership for Fidelity Workplace Investing, told Yahoo Finance. "The increase in the number of 401(k) millionaires is a perfect example, as the majority of these savers aren't necessarily doing anything special other than saving at a high rate in the same plan over a long period of time."

According to Fidelity, the average life of a retirement account is 25 years — meaning it pays to invest consistently. It may be tempting to withdraw money early, but this could decrease your overall earning potential due to lower balances available to invest and earn dividends. 

There may also be tax penalties for early withdrawal. If you're under 59 ½, a 10% penalty is assessed at the time of withdrawal, and, depending on the type of plan, Roth or traditional, you could get pinged with additional taxes come April.

Almost half of Fidelity's saving millionaires are Boomers, demonstrating that disciplined, long-term may help you reach that millionaire status.

While a 401(k) can be an efficient option to save for retirement, taking part in other financial options, such as finding ways to supplement your Social Security, can bolster your retirement savings and have you sipping champagne in retirement instead of eating ramen.