How to use the Roth 401(k) to help you save for retirement and reduce your taxes. Using the Roth 401(k) works very similarly to the Roth IRA but it’s an employer-sponsored plan and it has the contribution limits of the traditional 401(k).
The balance between the Roth 401(k) and the traditional 401(k) are similar to the IRAs. Using both can help reduce your taxes today and tomorrow. The Roth 401(k) can help you reduce your taxes in retirement and enhance the amount you can live on. The Roth 401k is also a great way to invest for growth since the growth isn’t taxable when you pull it out in retirement.
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Roth 401k Explained in English
The Roth 401k is a retirement plan option that has been available to individuals since 2006. It is similar to a traditional 401k plan in that both allow you to save for retirement through contributions made via payroll deduction. However, they differ in how the contributions are taxed. With a traditional 401k, contributions are made with pre-tax dollars, meaning you don’t pay taxes on them until you withdraw the money in retirement. With a Roth 401k, contributions are made with after-tax dollars, meaning you pay taxes on them upfront, but the money grows tax-free and you don’t pay taxes on withdrawals in retirement.
One of the main benefits of the Roth 401k is the tax-free growth. With a traditional 401k, you will pay taxes on both contributions and earnings when you withdraw the money. With a Roth 401k, your money grows tax-free, meaning you get to keep more of your money in retirement. This can be especially beneficial if you’re in a higher tax bracket during retirement than you were when you made the contributions. Additionally, by paying taxes on contributions upfront, you won’t have to worry about potentially higher taxes in retirement.
Another benefit of the Roth 401k is that there are no required minimum distributions (RMDs) during your lifetime. With a traditional 401k, you are required to make withdrawals starting at age 72, whether you need the money or not. With a Roth 401k, there are no required withdrawals during your lifetime. This means you can leave the money in the account to continue growing and potentially pass it on to your heirs tax-free.
It’s important to note that not all employers offer a Roth 401k option, so it’s important to check with your employer to see if it’s available. Additionally, there are contribution limits for Roth 401ks, just like with traditional 401ks. For 2021, the contribution limit is $19,500, or $26,000 if you’re age 50 or older.
In summary, the Roth 401k is a retirement plan option that allows you to save for retirement with after-tax dollars, meaning you pay taxes upfront but the money grows tax-free and withdrawals in retirement are tax-free. This can be especially beneficial if you’re in a higher tax bracket during retirement than you were when you made the contributions. Additionally, there are no required minimum distributions during your lifetime, meaning you can leave the money in the account to continue growing and potentially pass it on to your heirs tax-free. It’s important to check with your employer to see if a Roth 401k option is available and to stay within annual contribution limits.
I respectfully disagree with your example. I think the correct way to display it would be the following:
You invest $1 into a 401k Roth and are taxed 20%, so you pay $0.20 in taxes which is taken right out of your pay check but you still have the full $1 invested in the 401k Roth. $1.20 total taken from your gross income.
To keep apples to apples, let’s say you invest $1.20 into a traditional Roth and it is not taxed from your income at all.
Now say you’re ready to retire and they both grew 10x. Your 401k Roth is worth $10, tax free and clear. Your traditional 401k is worth $12 but you still have to pay your 20% taxes on it, which is $2.40. So now you’re down to $9.60.
Even taxed at the same amount, a 401k Roth is the better option.
Does the rule of 55 apply to roth 401k or just trading?
Can someone do my math for me.I told them I just want to contribute 100 every paycheck for my roth 401k
you look like artificial intelligence and I cannot trust you, Terminator.
I am contributing to a Roth 401k. I understand that all of my contributions are made after taxes have been paid. So when I withdraw the money I will not have to pay any taxes on my contributions andon the earnings. I get a company match every time I contribute to the Roth 401K. Why can't they or wont tax the company match? Thanks
So would I be right in saying:
* If you think your tax liability will be less when you retire than while working – do 401(k)
* If you think your income will be higher in retirement than now and your tax liability will therefore by higher when you retire – do Roth 401(k)
?
The idea (assuming I got you right) is to kind of guess when you think you're going to have less money and pay taxes then.
So, for example, let's say
* while working, you average $50K a year in salary
* when you retire, however, you have $1million saved up. You use the 4% rule and take out $40K.
In this scenario, it would be better to have done the 401(k) because you're making less in retirement (because you pulled out $40K) as opposed to when you were working (earning $50K).
Does that make sense?
I make 100k year w2 ( full-time job) and the income limit is 140k(single) to contribute to Roth IRA, if my self employed income before tax is for example 50k, is a total gross income of 150k, so I can’t contribute to my Roth IRA ? Only if the total w2 + 1099 is less than 140k?
Hi Travis,
Thanks for the video! Quick question, did you mean the money goes in post tax since the tax already is being withheld? You said in the video, about a minute in, that the money goes in pre tax.
Just verifying.
Thanks in advance.
What about inflation? 20% loss of dollars (roth) today will be much more harmful than a 20% loss of dollars (traditional) tomorrow, correct?
Hello thank you again all your videos are awesome!!! I have a question for you you if someone left the job and take that was the reason why that person is taking the money out, must that person pay the 10% penalty anyways? If so, what can that person do in order to not pay penalties. Also, that person received two 1099-R one has code 1 and the other one code 1M, what is that mean?? If you can answer me my questions, I would really appreciate it. Thank you !!
Would I get penalized for taking money out before a certain age with Roth 401k????
Nice video !
In need of your assistance, to get a better grasp on how this is calculated.
My gross income is $2,000 and my contributions or Roth 401k is 6% (to which the company match 100 of the first 4%), tax deductions are 24% and benefits are 3%.
My 6% contribution is calculated from my $2,000 gross pay. I was under the impression that considering the Roth 401k is an after tax basis contribution, the 6% will be calculated after the 24% tax deduction – which is $1,520.00 out of my gross pay of $2,000.
Also, I receive commissions as well. The company takes out 4% from my commission for 401k on top of the standard 6% that i contribute. So let’s say my commission is $500.00 they deducted 4% and then the remaining $480.00 will be included with my standard gross and the 6% I contribute for Roth 401k is calculated from the two incomes combined – gross income.
Do you by any chance know why?
Looking forward to your comments.
I have the Roth 401k and the same amount goes in. So I contribute 4% and it is 4% of my gross paycheck, the taxes are just paid then. I thought it was 4% of my after tax paycheck but it’s not. The way you explained $1 to the traditional vs $.80 to the Roth isn’t correct in my case. Hope this is clear, basically if I contribute $100 to traditional and $100 to Roth, they take $122 out of my paycheck in the Roth case because I’m in 22% tax bracket. I like the idea of 35 years tax free growth, so I chose Roth!
Very concise and clear. Thank you!
hey so are you saying i can take out money from my Roth 401k and don't have to pay it back?