Ever wonder what the differences between a 401k, Roth 401k, IRA, and Roth IRA are? Roth requires you to pay tax up front whereas 401k and IRA requires you to pay tax when you take the money out much later. That advantages of a Roth 401k or Roth IRA is that the money that gains from compounding is not taxed. In a 401k however, you get to put in a larger sum that can help in compounding but you have to pay taxes when you take it out. Your tax bracket when you retire as compared to when you put the money in matters a lot in which one you should lean towards. Its of course still good to have options later on so having both with different weights is a great idea.
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When it comes to saving for retirement, there are a variety of options to consider, including 401(k), Roth 401(k), IRA, and Roth IRA. Each of these accounts has its own unique features and benefits, and understanding the differences between them can help you make the best decisions for your financial future.
401(k) and Roth 401(k)
A 401(k) is a retirement account offered by an employer, where employees can contribute a portion of their pre-tax income, which is then invested and grows tax-deferred until retirement. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing the employee’s taxable income for the year.
On the other hand, a Roth 401(k) is also offered by an employer but with after-tax contributions. This means that the contributions are made with post-tax dollars, and while the contributions do not provide any immediate tax benefit, the withdrawals in retirement are tax-free.
IRA and Roth IRA
An IRA, or Individual retirement account, is a retirement account opened by an individual and not tied to an employer. Like a traditional 401(k), contributions to a traditional IRA are made with pre-tax dollars, providing an immediate tax benefit. The growth of the investments in the account is tax-deferred, and withdrawals in retirement are taxed as ordinary income.
In contrast, a Roth IRA, like a Roth 401(k), requires after-tax contributions. While contributions do not provide an immediate tax benefit, the withdrawals in retirement, including the investment earnings, are tax-free.
Differences and Considerations
The key difference between the 401(k) and IRA accounts is that one is employer-sponsored and the other is individually opened. Similarly, the key difference between the traditional and Roth versions of these accounts is the tax treatment of contributions and withdrawals.
When deciding between these accounts, it’s important to consider factors like current and future tax brackets, employer matching contributions, and personal preference for tax treatment. For example, individuals who expect to be in a higher tax bracket in retirement may benefit from a Roth account, while those in a higher tax bracket currently may prefer a traditional account to reduce their tax liability.
It’s also important to note that there are contribution limits and eligibility requirements for each type of account, so it’s essential to review and understand these limitations when making savings decisions.
Additionally, many people have the option to use a combination of these accounts to take advantage of different tax treatments and benefits. Consulting with a financial advisor can help individuals make optimal decisions based on their unique circumstances and goals.
In conclusion, 401(k), Roth 401(k), IRA, and Roth IRA accounts each have their own advantages and complexities, and understanding the differences between them is essential to making informed decisions about retirement savings. By carefully considering factors like tax treatment, contribution limits, and personal financial circumstances, individuals can make the best choices for their long-term financial security.
Do you know if someone can get the tax advantage of Trad IRA AND roll it over to Roth IRA if their income is low enough?
Question: In 2020, I did a 401K conversion to a Roth IRA. I understand I need to pay taxes on the amount I moved over. I also did a backdoor ROTH IRA as well for $6K. My question is, do I pay taxes only on the 401K conversion to Roth IRA or do I need to pay taxes on both the 401K conversion as well as the backdoor ROTH IRA.
Thank you Sir!
I still don't know which one to create. I'm dumb
The crucial thing you are missing is RMDs. A Roth 401k can rollover to a Roth IRA and forego RMDs entirely. The 401k will have RMDs, potentially forcing you into a higher tax bracket whether you need the money or not. That will also kill you on Medicare premiums.
What happen to you? Are you still alive?
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Why do you assume that if someone puts $1000 in a roth account that they are putting in the after tax money ($750 or so)? The taxes dont take effect until tax season, and the account will still have $1000 to grow interest. Am I missing something?
Can you invite in all 3 retirement?
Definitely helped make the differences more clear, thanks for sharing!
Can I have more than 1 IRA account?
So what if you roll over your roth 401k to your roth ira? Is the roth 401k also taxable income and added to your gross income?
Helpful!
WELL EXPLAINED!!!
this basically just convinced me to stop contributing, pull out all my savings, and hold the cash or buy gold on hand. who the hell came up with this crap? no wonder corporations are tanking all around the world and nobody trusts the stock markets.
watch 20 seconds. rewind 10 seconds. rinse. repeat. He's actually explaining it pretty well, it's just so stupid complex
Great information, I would suggest just slowing down. I also had to stop, replay and pause many times to process what you were saying.
Cleared everything thing up thank you!
Hola, I have Roth IRA and traditional IRA both together i have 4500, maximum contribution is 7000 for my age and in my job I have retirement IRA the limit in this one is 20,000 and I have 1500 contribution until now, tell me how much I should put in without surpass the limit, I don’t understand one ask for 7000 and the other for 20,000. Thank you.
enjoy your videos!
This was explained so clearly and without assuming the viewer knows everything… Thank you!
Amazing video very very good information, thank you very much
roth 401k has RMD's ?
Wow, thank you so much for this video. I'm going into sales and am trying to increase my financial literacy, so this really helped a lot with understanding how IRAs and 401ks work.
Thanks for this video. Really good information. Question: so if you roll over your old company's 401k to a Roth 401k, you are taxed at your current tax bracket. Then, you let that money sit in the Roth 401k account for 5 years and take it out (principal only), you don't get taxed or any penalty of 10%… Is that right? Does this hold true (no penalty) if we take out the profit amount too after 5 years?
It's a complicated subject. I think you handled it well. I really like that you had a well-organized visual aid. Your broad eye-view of retirement accounts helped me see the intent behind the creation of these accounts and it actually makes sense in a way. Thank you!
Can you have a 401k at work and also put money in a ira account?
withdrawl lol
Can you do both? Roll over your 401K into a Roth Ira and still take advantage of 6% 401K match too? In other words throw the bulk of your 401K monies into Roth Ira but still take advantage of employer 6% match too?
If you are a low wage earner for a major company and you have $25,000 in your 401K should you roll it over to a Roth Ira now! This way it's tax free when you take it out years later? Does this make sense?
What is HSA?