Here’s a topic that’s been coming up a LOT recently, and this is an extremely confusing decision: What’s better to invest in – Roth IRA or a Traditional 401k? Here’s my thoughts, enjoy! Add me on Instagram: GPStephan
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So lets first start with some background on the almighty Roth IRA:
First, like I just mentioned, all of the profit generated in this account is tax free after the age of 59.5. That could save you a LOT of money by the time you retire, especially if you begin investing in this early on.
Second, with a Roth IRA, you can withdraw whatever money you contribute to this account, at any time, tax free, without paying any penalties.
However, here are the downsides:
First, with a Roth IRA, you contribute POST TAX MONEY – this means the money that’s left over after you’ve already your paid taxes on it. And as we all know, the money you have left over AFTER taxes is a LOT smaller than before the taxes were taken away…this means you’ll have LESS of your money to invest upfront, all things considered.
Second, if you want to withdraw your PROFIT from this account before the age of 59.5, you’ll be subject to a 10% penalty, and you’ll have to pay normal taxes on that profit.
Third, the contribution limit for a Roth IRA is capped at $6000…so if you want to contribute more than this, well, you can’t.
But how does this all compare to the Traditional 401k?
Well, the 401k is an employer sponsored retirement account where you contribute PRE TAX money…meaning you won’t pay any taxes on the money you invest in this account. Now because you don’t have to pay taxes on the money you contribute, you have even MORE money left over to invest instead of paying it to the IRS, allowing that extra money you saved in taxes to make YOU even more money.
Pros of a Traditional 401k:
You contribute pre-tax money, meaning you don’t pay taxes on the money you put in this account, and can be a huge tax deduction.
Secondly, you can contribute up to $19,000 per year in a 401k…that’s more than 3x HIGHER than you can contribute to a Roth IRA.
Third, some employers offer a 401k employer match – which means they actually match your contribution, dollar for dollar
Downsides to the traditional 401k:
The first is that you’ll end up paying taxes on your money when you begin withdrawing it from your account after the age of 59.5. With a 401k, you’re basically saving money on taxes NOW so you have more to invest upfront.
Secondly, if you want to withdraw the money prior to the age of 59.5 for anything other than financial hardship, you’ll be subject to paying a 10% penalty on your money and you’ll owe taxes as though this money is ORDINARY INCOME.
Third, you’ll be forced to begin withdrawing your money at the age of 70 1/2…and for some people who prefer to continue saving it and letting it grow, well…you can’t.
And the right mix is – in my opinion – a slight balance between the two. I still contribute a bit to my traditional 401k just to hedge my future options, even if I have no idea if it’ll be the smart choice in the future…again, JUST IN CASE. I also go heavy on the Roth option, too, because I know it’ll be tax free in the future, and I don’t have to question what future tax rates may or may not be.
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Hmmmm. My real estate ROI makes me more money than stock will ever make me.
I will forever be indebted to you you’ve changed my whole life I’ll continue to preach about your name for the world to hear you’ve saved me from a huge financial debt with just little investment thanks so much Mrs. Elizabeth Graham
easy to follow. thanks
I'm investing in my Roth IRA right now in my 20s, since I'm in grad school and working fairly low paying jobs right now. The 401k will probably come into play more in my 30s
If you want to increase your net worth, investing is an excellent way to make that dream a reality. The stock market isn’t just a get-rich-quick scheme; it can be a way to build sustainable wealth. However, it is possible to lose (rather than gain) wealth through compound interest. It’s essential to have a strategy in place and to invest in suitable securities at the right time.
Porque no los dos?
Why didn't you compare Roth 401ks with traditional ones? Also you didn't mention that the employer controls the terms of the 401k even after retirement.
i like how he said when you retire you should have your home paid off and stuff… if the government does there job right yeah i shouldnt need so much when im older
I’m a dividend investor, my wife and I have invested in the s&p500, both through my TSP with the government and through fidelity in her 401-k. Cashed out 370k from the S&P and invested with a full service broker.. Until about 3years ago we were 100% in the s&p after over 30 years. I’m retiring at the end of the month at 59, while my wife will retire next year at 54. We currently have 5.7 million in our tex deferred savings.
This is a very frustrating video to watch as you didn’t compare apples to apples. Traditional 401k should be compared against Roth 401k, not Roth IRA. You also said you contribute to a Roth IRA, yet your annual income would make you ineligible for such contributions. Either you’re lying about your contributions or ignorant to your ineligibility. Income limits, while slightly different, apply to both Roth IRAs and Traditional IRAs. You also didn’t mention catch-up contributions after reaching age 50. Stick to real estate and stop giving financial advice on topics you don’t know enough about.
Hey man, I hate to be that guy, but Ima be 59 in 2059. How do I know that Climate Change wont wipe us out by then? its an actual concern I have not a joke whatsoever. Is there actual value to invest money into an account I wont have access to until 59? Which by then, life on Earth could very much be gone?
uhhh so why not just do both?
Damn, Vampires would want a Roth IRA I imagine. Or would the forced withdrawals not be too much of a bother from the 401k?
Can you have multiple Roths?
My question is why I would need a Roth IRA / 401K if I already invest into the S&P 500 (VOO) monthly? I understand that one is for “retirement investments” and the other is just for “investments” but to me it just seems redundant to do both?
I like the overview. However, he kinda compares apples to oranges a bit. There are both Roth and Traditional 401Ks at work (he alludes to this at the end of the video) and PERSONAL Roth and Traditional IRAs. You can (usually) contribute to EITHER kind through work OR with your own money. Work limits the contribution to your 401K to around 19k (more if you are over 50) and you can contribute to this REGARDLESS of income. Personal IRAs are limited to like 6k (again a bit more if you are older) and you can contribute to Roth OR Traditional. The PERSONAL account is income limited, and will phase out around 140k, or if you are married around 210k.
Great info Graham! Thank you!
Can you have both a Roth IRA and a 401k?
How does he contribute to a Roth IRA? Surely he makes more than 200k? Back door?
This video is fantastic. Hes not telling you what to do hes just telling you what you can do and he did a good job describing which is best for different situations. He even noted on the UNCERTAIN FUTURE with 401ks. Little did he know a year later that little detail would be more important than ever.
Thanks for this video! What exactly does it mean "post-tax", though? Is that referring to income tax that has already been collected? So, could I just flat-out put $6k in there at the beginning of each year with the cash I have on hand? I figure if I've got it – I've already paid income tax on it, right?
401k is out!!
Roth is NOT tax free. It's no taxes on gains. You already pay taxes on that money before it hits the Roth
What if you are already maxing out your 401k contributions annnd in a higher income tax bracket? Im maxing both out
Fund your 401(k) up to your company’s match. Take some monthly surplus you have and fund a traditional IRA. When you retire just simply roll over your 401(k) into the the traditional IRA you have been funding (it’s free and tax free to do this). Deciding between having a 401(k) and a Roth IRA shouldn’t even be a debate and idk why this dude is making a video about it lol everyone should take advantage of their employers 401(k) program especially if they match. Then fund another retirement vehicle that it can be rolled into. For example if your company has a Roth 401(k) program then fund a ROTH IRA so it can be rolled over at retirement tax fee
Great video Graham!
How do you deal with CALIFORNIA STATE taxes?
Basically Roth iRA is a bank account that you can pull your money any time at not cost? You only pay taxes/penalties on the earnings??
I'm 35 and contributing 20% of my income in a Roth 401k…changed to Roth after I noticed I ended up investing MORE with post tax vs pre-tax
One aspect no one seems to consider is that if you have both Roth and traditional when you are in retirement you can use more of the Roth in a year you are going to withdrawal more money to keep your traditional withdrawals in a lower tax bracket. I am going to end up about 50/50 Roth and Traditional it gives a lot of options, especially when a large purchase or house repair comes up.
what a bout vesting ?
I do not get $1 for $1 I get 25 cents for the first 5% I put 50%from my Roth 401k
Hello, I'm new to Biticon trade and I've been making losses but recently I see a lot of people earning from it. Please can someone tell me what I'm doing wrong
So from what I gather a roth401k > roth ira > 401k
0:08 That pic of Miku!
Good video, I graduate this August and anticipate making around 80k, I plan to invest right off the bat.