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In this short video, we’ll compare and contrast the Roth 401k and Roth IRA, answering the question: “What’s the biggest advantage of a Roth 401k over a Roth IRA?”

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Celestial Wealth Management, LLC is registered as an investment adviser in the State of Maryland and Texas.

Neither the information nor any opinion constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instruments.

This video is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person.

Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment and planning strategies discussed in this video and should understand that statements regarding future prospects may not be realized.

Nothing provided here constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.

Investments in securities entail risk and are not suitable for all investors. This is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction. All investment strategies have the potential for profit or loss….(read more)

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As a certified financial planner (CFP®), it is essential to guide clients towards making sound financial decisions. One such decision is the choice of retirement accounts, particularly between traditional 401(k)s and Roth 401(k)s.

While both offer tax benefits, the Roth 401(k) offers unique advantages that make it the preferred choice for the CFP®. Here’s why:

Tax-free withdrawals in retirement:

With a traditional 401(k), contributions are made pre-tax, meaning you don’t pay taxes on your contributions or investment gains until you withdraw the money in retirement. On the other hand, Roth 401(k) contributions are made after-tax, meaning you pay taxes upfront. However, withdrawals in retirement are tax-free, including the investment gains. The benefit here is that you can strategically manage your withdrawals to minimize taxes, giving you more control over your retirement income.

No Required Minimum Distributions (RMDs):

With a traditional 401(k), you’re required to start taking withdrawals (RMDs) at age 72, even if you don’t need the money. Failing to do so will result in hefty penalties. However, with a Roth 401(k), there are no RMDs, allowing you to leave the money in the account to grow tax-free for as long as you wish. This feature is particularly attractive for retirees who don’t need the money immediately and plan to pass on assets to their heirs.

Protection against potential tax hikes:

Tax rates are unpredictable, and they can change in the future, leaving traditional 401(k) owners vulnerable to higher taxes in retirement. On the other hand, Roth 401(k)s offer protection against potential tax hikes, as the taxes are paid upfront, regardless of what happens in the future.

Flexibility with contributions:

Another advantage of Roth 401(k)s is that they offer flexible contribution options. As of 2021, you can contribute up to $19,500 annually. If you’re over age 50, you can contribute an additional $6,500 in catch-up contributions. The contribution limits for Roth 401(k)s are the same as traditional 401(k)s, and you can also have both a Roth 401(k) and a traditional 401(k) if your employer offers both.

In conclusion, CFP®s prefer Roth 401(k)s over traditional 401(k)s for several reasons, including tax-free withdrawals in retirement, no RMDs, protection against potential tax hikes, and flexible contributions. When choosing between the two, it’s essential to consider your retirement goals, tax bracket, and financial circumstances to make an informed decision that aligns with your long-term objectives.