Ever wonder which retirement account would make you the most money? Depending on your situation either an IRA or a 401k may make the most sense for you, let’s talk about that.
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Retirement accounts are basically legal ways to not pay taxes, at least temporarily, and they give us a huge advantage that we would otherwise not have. It’s very important to familiarize yourself with the different options we have when it comes to these retirement accounts, because that could be the difference between many thousands of dollars. Lets break down what the retirement accounts are and their different quirks and features(;

– 401(k)
This is the granddaddy of all retirement accounts because it is usually the one people are most familiar with. It is only accessible through an employer and can arguably be the best option in case your employer matches your funds. This simply means that they literally add free money to your account anytime you put money into the 401k, of course this is limited to a certain percentage of your income usually. The max you can put into a 401k yearly is $19,500 currently, and the investments inside that account are limited to the options given to you by your employer. The money you invest into this must be pre-tax money, and you do not pay any taxes on that money until you start withdrawing money after you turn 59.5 years old. If you withdraw money before then you will pay a penalty, in addition to taxes on that money.

– Common Factor Between IRAs
Both a Traditional IRA and a Roth IRA have a combined limit of $6,000 that you can currently put into these accounts. In case you are 50+ years old then this is raised to $7,000 a year between both accounts. This means you have to pick which one you want to use, as if you fill up a Roth then you can’t use a Traditional IRA for that year. Also these accounts are self-managed, meaning you can open them yourself without an employer and you have a lot of freedom when it comes to picking out your investments within those accounts.

– Traditional IRA Quirks
The money you put into this account must be pre-tax, just like for a 401k. And just like a 401k you cannot withdraw any money until you are 59.5 years old, unless you want to pay a penalty which is very much not worth it. The idea is that if you think you will be in a lower tax bracket in the future, this is worth the investment. Also, any money put into this account is tax-deductible for that year.

– Roth IRA Quirks
The money you put into here has to be post-tax money, and since you already paid taxes on it, when you are able to freely withdraw your money at 59.5 you do not have to pay any taxes at all. The problem for some is that a Roth is not available for those of us that make more than $139k in 2020, or more than $140k in 2021 for example. This number tends to change, but essentially this is a “tax-haven” that is only available for the middle class and lower. 100% Take advantage of this if you qualify.

My personal thoughts that should not be taken as financial advice:
1. If you have an employer that matches your 401k contribution, fill it up until you hit the match limit. This is literally the easiest way to make money because you are immediately getting a return on your investment for free.
2. If you apply for a Roth, fill that up to the limit. If not, focus on filling up your traditional IRA to the limit.
3. If there is any money left you want to put towards retirement, go back to topping off your 401k account.
4. In case you filled up the 401k and IRAs fully, which is like $25,500, I think you can chill out a bit and spare some money for yourself at this point. You will definitely be millionaire if you do this consistently.

Thank you so much for watching and reading if you got this far!
– Frank…(read more)

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