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. What’s better a Roth 401k or a Traditional 401k? In this video you will learn the pros and cons for both a Roth 401k and a Traditional 401k so you know what’s better for you.
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Will You Retire Richer With A Roth 401k Or A Traditional 401k
0:11 – There are so many ways to do your retirement planning
1:00 – I’m not a big fan of the 401k
1:35 – How the 401k works | traditional 401k
2:30 – Put some numbers on the traditional 401k example
3:00 – How taxes work on your 401k
5:20 – The tax risk for your 401k
5:59 – Historical perspective on high taxes
6:56 – How the Roth 401k works
7:50 – Taxes on 401 Roth 401k
9:43 – What’s better for you? Traditional 401(k) or Roth 401(k)
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LEARN MORE ABOUT: 401k Plans
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Saving for retirement is something we all know we should do, but with so many options available, it can be hard to figure out which one is best for you. When it comes to retirement savings, there are two main types of employer-sponsored accounts: the Roth 401k and the traditional 401k. Both have their pros and cons, but the question is, how will you retire richer?
The Roth 401k is a relatively new option for retirement savings that was introduced to the market in 2006. It works similarly to the traditional 401k, but with one major difference – the tax treatment. Roth 401k contributions are made after-tax, which means that you pay taxes upfront on the money you contribute. However, the withdrawals you make from the account when you retire are tax-free. Many financial experts believe that tax rates will rise over time, making the Roth 401k a smart choice for those who expect to be in a higher tax bracket when they retire.
On the other hand, the traditional 401k offers a tax-deferred benefit, meaning you can defer paying tax on the contributions you make until you withdraw them in retirement. The money you contribute to a traditional 401k is pre-tax, which lowers your taxable income, and you only pay taxes on the withdrawn amount in retirement. This makes the traditional 401k a suitable choice for those who expect to be in a lower tax bracket when they retire.
When assessing which option will make you retire richer, there are several factors to consider. These include your current tax bracket, your expected tax bracket in retirement, your retirement goals, and your personal preferences.
If you are in a low tax bracket, it may be beneficial to start with a traditional 401k as you will save more money upfront than with the Roth 401k. However, if you expect your income level to increase in the future, you may want to consider the Roth 401k since you will have to pay taxes on the funds eventually. An advantage of the Roth 401k over a Roth IRA is that there is no income limit for Roth 401k contributions, unlike Roth IRA contributions.
If you are already in a high tax bracket, the Roth 401k is likely the better choice. For one, you will pay taxes upfront but avoid paying them later, when you are in a higher tax bracket. Secondly, the Roth 401k has no required minimum distributions, meaning you can let your savings grow tax-free indefinitely if you wish.
In summary, determining which retirement saving account option will make you retire richer depends on your unique financial situation, your tax bracket, and your goals. It’s important to remember that neither option is inherently better than the other. Careful evaluation of both options and forecasting one’s expectation based on future tax rates and income levels can be highly beneficial in choosing the option best suited for oneself.
Thank you for watching! If you enjoyed this video, you should watch – The TRUTH About Your 401k That No One Tells You: https://youtu.be/4YdlcpxvF6c
MM you mentioned that while we are not taxed on the amount that our Roth 401k earns, we are taxed on the amount our employers contributed over time. My question is how does the IRS keep track of that amount over the years so they can tax us correctly and how do we know that the IRS is taxing us correctly? I've had several different employers 401k Roths and some employers have changed the amount they match from year to year. Great video. It made me consider things that I dont think I've considered before.
What is my employer doesn't match? How much should I contribute percentage wise? 401k and roth?
So how is the 6% calculated in a roth 401k from every paycheck? From the gross or net pay?
The big risk in all this madness is the ROI. Will stocks go up?
Can I invest in both Roth IRA and Traditional IRA? Meaning can I invest $6000 for Roth and another $6000 for Traditional IRA total $12,000 each year?
I think what people fail to tell others it wether to do Traditional or Roth it’s very situational. For instances if you have no Tax dedications and or very little considering using Traditional may be better. Another one is if your in a high income tax state and you know your going to go to a no state income tax state that has a lower cost of living. Remember we get taxed on what we take out and generally you don’t take all your money out at once. That being said Roth accounts are amazing and it’s wise to put some money into a Roth account.
I for one believe that you should think of tax diversification when you retire. Ideally if you can have a traditional, Roth, and an HSA account to pull from your covered in multiple ways. But like this has been said multiple times on this channel. Your mindset and lifestyle should be setting you up for success before hand. If you are building assets in the background and utilizing Retirment tools available for you. That way of thinking is what will set you up for a good life.
If you choose the Roth 401k and take a distribution, can you request it all be from the Roth side, or is it a mix between your contributions and your match?
Roth is good but having some Traditional IRA is optimal.
You're wrong..in roth pay taxes on interest
Thank you so much! You explained this clearly!
I believe you and others have touched on this . It really depends on a case by case basis . Other words it's not cut and dry for everyone. I believe in very strongly in the ROTH 401k and I do the traditional as well. Why ? The traditional I can play on a year where I want to bring my income down for tax reasons. Later on when I retire I love the ROTH . This gives me tax free money when I need or want it .Also if I don't need it I'm not force to do RMD ,so it can continue to grow tax free going forward. Plus in the event of death I pass it on to my children tax free. A BEAUTIFUL THING
my work doesnt offer a roth so my decision is easy lol
Skih always such badass and smart people! never met one who doesnt provide such great life advice.
With the things how is going in 2022, I think Roth is better.
Correction, when I deferred income into a 401k, I was surprised to find out that they took FICA & Medicare taxes out amounting to 7.45%!!!! Damn!
Why did you say 'it doubles' at 08:40? What is that factor based on?
If you put $200,000 in your 401k you're more likely going to have closer to $1million at retirement
The example @ 8:54 makes it look like you can withdrawal your half first, tax free, and then later take out your employer’s contribution and pay the tax on that half then. I don’t think this is the case. When you take any withdrawal, half (in this case) of the money is subject to whatever the future rates are. So if you take out a total of $60k, $30k (your employers half) will be subject to taxation at that time. And this will be true for every withdrawal going forward.
I like the part of future taxation but something else worst needs to be consider. Prior to 1983 social security retirement benefits were not taxed. The government needed more tax revenue so they starting taxing Social Security Retirement benefits in 1984. Some how I feel that eventually the civil servants that represent us will be changing the tax laws to include Roth accounts too.
14K at 46 yrs. Old. Now, 9 yrs. Later, it's at $45K. I got a Roth, but now they said it's a traditional.
So disappointing.
If your in a high income state retiring to a no income state
THE SECRETE TO MAKING MILLIONS IS SAVING FOR A BETTER INVESTMENT. I ALWAYS TOLD MYSELF
I DON'T NEED A NEW MASERATI OR AN EXPENSIVE VACATION JUST YET. THAT SINGLE MINDSET
HELPED ME TO MAKE MORE MONEY INVESTING. I MAKE STEADY WEEKLY PROFIT BY
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IT IS GOOD TO HAVE MORE THAN ONE STREAM OF INCOME.
Hello everyone, what do you recommend if my wife and me have both, Roth 401k's and traditional 401k's but without company matching ?
So Roth would
Be the best if you don’t want to pay for tax. Does that sound right?
Fantastic video. Roth is one of the last great blessings for us regular (not screaming rich) people. Couldn't agree more with all of it, especially the thought that most likely, someone is going to have to eventually pay for all those trillion dollar checks and guess who it will be. Yeah, taxes are probably going to go up by the time we retire, not go down. Lots of good stuff to consider here. Thank you so much.
I like the way you explain things. Have you done a segment on self-directed IRAs? I have an opportunity to invest in a business and would like to roll over my IRAs into this asset. A little guidance would be appreciated!
2 years ago ? I have some catching up today. At moment, i put away in a traditional one . Before taxes. But , my biggest fear is and was , not investing at all.
I cashed out the little I had on my 401k bought rental property and due to having more deductions paid very little to the fuzz. Also the property is worth a lot more now then the stocks ever would have been worth with limited choices in a company 401k.
The biggest problem I see with a 401K is those who don't throw a lot of money into it whether it's because they work at McDonalds or Starbucks or they didn't work at a job long enough (or both) the 401K doesn't let you keep say $2000 in the account once you leave the job. I think the 401K should automatically turn into an IRA and the assets should stay invested. This is where a lot of money is wasted.
I question your assumptions on the principal investment in the Roth 401k in this scenario. A 10% discount (100k to 90k) seems way too optimistic. Income Tax rates are closer to 20-33%