401K vs Roth IRA vs Traditional IRA vs Brokerage Account. In this video, I compare the difference investment accounts and whether you should open a Roth IRA or Traditional IRA, and why you should have an IRA along with your 401K.

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Tax-Deferred Accounts
These include Individual retirement accounts (IRAs) and company-sponsored retirement accounts, such as 401(k), 403(b), and 457 plans.
Remember that the money has to be from employment; you can’t invest other money you might have, from an inheritance perhaps, into a retirement account.
In the case of a traditional IRA, contributions are made in a similar fashion to a 401(k), with pre-tax dollars, and can be tax-deductible. An IRA or a 401(k) contribution might be one of the few tax breaks available for a younger worker, an added benefit for doing something you should do anyway.
401(k)
A 401(k) is an employer-sponsored retirement plan. It is what’s known as a “tax-deferred” investment account, meaning the money you contribute to it — up to $19,500 for individuals in 2020 — lowers your taxable income for the year. That tax break is meant to encourage you to save for retirement now. You pay taxes on your withdrawals in retirement.

You can begin withdrawing money penalty-free at 59½ in most cases. If you withdraw money before then, you will pay a 10% early withdrawal penalty and income taxes on the distributions.
Individual retirement account (IRA)
A traditional IRA is similar to a 401(k), but anyone can open one on their own at a financial institution like Vanguard or Fidelity. If your employer doesn’t offer a 401(k), or offers one but does not include a contribution match, you can consider an IRA for retirement investments.
Like a 401(k), you contribute pre-tax money — up to $6,000 in 2020 for those under 50 — and select investments based off of what the financial institution offers.
One benefit of IRAs is that you will typically have many more investment options than in a 401(k). That can help you properly diversify and keep costs low.
Taxable Accounts
Roth IRA
Roths are a type of IRA, except that instead of contributing pre-tax money, you invest income that’s already been taxed. Then, when you make withdrawals in retirement, you don’t pay any taxes. You lock in your current tax rate when you contribute, which makes Roth IRAs an attractive investment account for younger people, who are likely in a lower tax bracket now than they will be later on.
Another benefit: Contributions can be withdrawn at any time, tax- and penalty-free, since you’ve already paid taxes on the money you contribute.
That said, unlike traditional IRAs, Roths have income limits: Individuals must have a modified adjusted gross income (MAGI) of under $139,000 in 2020 to contribute to one.

Brokerage account
Brokerage accounts are taxable investment accounts that an investor can contribute to and withdraw from at their discretion. They are ideal for savings or goals that are five or more years down the line.
You can buy stock in individual companies and other types of alternative investments through these accounts, and typically there is a much wider selection of investment options than those available through your retirement investment accounts. You pay taxes when you make money on an asset in the account, such as selling a stock. But you can still invest in less risky options, like index funds, too.

DISCLAIMER: Colette Bishogo (The Money Tea), including but not limited to any guests appearing in these videos, are not financial/investment advisors, brokers, or dealers. They are solely sharing their personal experience and opinions; therefore, all strategies, tips, suggestions, and recommendations shared are solely for entertainment purposes. There are financial risks associated with investing, therefore, do not act or refrain from acting based on any information conveyed in this video, webpage, and/or external hyperlinks. For investment advice please seek the counsel of a financial/investment advisor(s); and conduct your own due diligence….(read more)

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