Let’s talk about retirement accounts! Is it better to max out your Roth 401k or your 401k? What about the Roth IRA? I break it down for you simply in this video.
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First we need to answer: What is a 401k and how does it differ from the Roth version?
A traditional or regular 401k is an employee sponsored retirement account, which means that it is offered by your employer. In a 401k, simply put – you can decide to set aside a portion of your paycheck, known as a contribution – to put into your 401k. All the money that you contribute to it is known as tax-deductible, which means that by contributing to your regular 401k, you are contributing to it with pre-tax dollars, and this contribution also will lower your tax bill. With a regular 401k, you’ll eventually pay taxes later on your withdrawals when you reach retirement age.
Contrast that to a Roth 401k. The Roth 401k is a different type of 401k that has different tax rules. In a Roth 401k, your contributions to this account are made with AFTER TAX dollars. So you pay taxes going in. But, the biggest advantage in my opinion is that all the earnings in a Roth account grow TAX free, and when you withdraw it later, you don’t pay ANY taxes. This could especially be important, for example, if you have a regular 401k, when you withdraw your money you’re taxed on your earnings by whatever your income tax rate is at the time.
One note I want to cover is that: to qualify for tax-free earnings, the funds need to be inyour Roth 401k for 5 years+ before it starts to qualify for that. But since these are long-term retirement accounts, this is generally not an issue.
One of the biggest benefits of having a 401k is what’s called EMPLOYER MATCH. If you work for a company, chances are they have some sort of benefit program that includes this.
You always want to max your employer match if you can, this is the most optimal way of contributing to retirement.
As of 2020, the contribution limits on 401ks is $19,500, but note that this is the TOTAL. So if you had both a 401k and a Roth 401k you can split that total up however you like.
So let’s talk about the 2nd priority: opening up a Roth IRA. After contributing as much as you would need to get the match with your employer, you’ll want to contribute the max to a Roth IRA every year if possible. There is an income limit to the Roth IRA however – if you make more than 139k a year, you cannot contribute to a Roth IRA. If you are making more than 139k a year, you may just want to skip to the investments portion of this video which I’ll put in a timestamp below.
Most 401ks will have a variety of investment options – including mutual funds, target date funds, etc – juts make sure you examine what you are investing in, make sure it’s well diversified, and the fees are low.
If you are trying to choose an investment in your 401k portfolio, always look at how much the fees are. Anything above 0.2-0.3% is what I would consider high. Vanguard index funds for example, have expense ratios of 0.04%, and those are the lowest in the industry.
Timestamps:
0:00 Start Here
0:59 What is a Trad. 401k
1:46 What is a Roth 401k
3:13 Employer Match
5:05 Roth IRA
7:30 What to Invest In
7:54 Expense Ratios
9:46 Priorities
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LEARN MORE ABOUT: IRA Accounts
INVESTING IN A GOLD IRA: Gold IRA Account
INVESTING IN A SILVER IRA: Silver IRA Account
REVEALED: Best Gold Backed IRA
Roth 401k vs 401k vs Roth IRA – What’s the BEST?
When it comes to saving for retirement, it’s important to understand the different investment options available to you. Three popular choices are the Roth 401k, traditional 401k, and Roth IRA. Each option comes with its own set of advantages and disadvantages, so let’s dive into the details and determine which one is best for you.
1. Traditional 401k:
A traditional 401k is an employer-sponsored retirement savings account that allows you to contribute a portion of your pre-tax income towards retirement. The contributions made to a traditional 401k are tax-deferred, meaning they are deducted from your taxable income, potentially reducing your current tax liability. However, when you withdraw funds from a traditional 401k in retirement, they are subject to income tax at that time.
Pros:
a) Tax savings: The immediate tax benefit of a traditional 401k can reduce your current tax bill, allowing your money to grow tax-free until withdrawal.
b) Employer matching: Many companies offer employer matching contributions, which is essentially free money towards your retirement.
Cons:
a) Tax implications: Withdrawals made in retirement are subject to income tax, potentially increasing your tax liability.
b) RMDs (required minimum distributions): After reaching the age of 72, you are required to withdraw a minimum amount each year, regardless of whether you need the money or not.
2. Roth 401k:
Similar to a traditional 401k, a Roth 401k is an employer-sponsored retirement savings account. However, contributions are made with after-tax dollars, meaning you do not receive an immediate tax benefit. The main advantage of the Roth 401k is that qualified withdrawals in retirement are tax-free.
Pros:
a) Tax-free withdrawals: Since contributions are made with after-tax dollars, qualified distributions in retirement are completely tax-free.
b) No RMDs: Unlike a traditional 401k, a Roth 401k does not have required minimum distributions, giving you more control over your money in retirement.
Cons:
a) Higher tax liability: Roth 401k contributions do not reduce your current tax bill, potentially increasing your overall tax liability.
b) Employer matching: While your contributions can be made to a Roth 401k, any employer matching contributions will be deposited into a traditional 401k, which is subject to taxes upon withdrawal.
3. Roth IRA:
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars towards retirement. It differs from the Roth 401k in that it is not tied to an employer and has lower contribution limits.
Pros:
a) Tax-free growth and withdrawals: Just like the Roth 401k, a Roth IRA offers tax-free growth and qualified withdrawals in retirement.
b) Flexibility: Roth IRA contributions can be withdrawn penalty-free at any time, making it a good option for those who may need to access their funds before retirement.
Cons:
a) Contribution limits: Roth IRAs have lower contribution limits compared to 401k plans.
b) No employer matching: As a personal retirement account, there are no employer matching contributions available for a Roth IRA.
So, which one is the best option for you? It ultimately depends on your specific financial situation, tax bracket, and retirement goals. If you’re unsure, it’s always a good idea to consult with a financial advisor who can help you make an informed decision based on your individual needs.
Remember, the most important thing is to start saving for retirement as early as possible. Choosing any of these options and consistently contributing to your retirement account will put you in a much better position financially when that day finally arrives.
I have a 401k from an old employer. Should i roll over to new employer or open a new account if the new employer has a better deal, i.e. company match
When you withdraw from either 401k & 401Roth , don’t you have to pay out an additional tax when you file for income taxes, since you are adding money to your income ?
I have looked every direction to open a "Roth 401(K)" I am self employed.. Who – where has them .Fidelity has articles however does not offer. Any help appreciated.TY
I honestly think this is a Government supplied, government link (you dhould do this) video.
He works for the government, maybe not in the IRS.
Still, paid employee… tThe Government is BROKE, BORROW AT near 2T a yeat and 1T in intrrest payment on its debt. Not sustainable and guess what they want NOW ? Your money, your taxed 401k roth.
So I should get both a Roth IRA and a 401k (or roth 401k) and try to max out both for each year ??
What if you have two full-time jobs that offer Roth 401k?
Is the limit still $19,500? Thank you!
I work in payroll consulting and never have seen a company match 2 dollars for 1 contributed
I have a Roth IRA, 403(b), and Roth 403(b), among other types of accounts (529 and Coverdell). Thanks for the video, as this helps my wife understand the priorities for her retirement saving strategy.
How do I find out if a previous employer set up a 401K for me? Ive tried a few online search engines and had no luck.
Keep up the excellent work, and Thank You! You have helped me get a grip on my personal and business finances.
Humphrey, thank you so much for this video! The difference between Regular 401, Roth 401, and Roth IRA has been so confusing
Good info , just talks to fast
I started a Roth IRA years ago when I was making under the limit. It has about $30,000 in it, however, I had to stop contributing when my income increased above the limit. My question is, what should I do with that account? Just leave it and let it grow?
Well done Yang
Very helpful – thank you!
Nice video, I am new to online investments, I have been practicing using a demo account. I like to
prepare for my future, I wanna start up a Roth IRA account. I don't know much about it or
which is better. I am scared that I don't know enough to start all by myself.
I am willing to try, but I need help with what to do next.
Great video. Very informative. You can still have a Roth if you're above the income limit. Open up as a traditional and transfer it to an IRA. A good financial advisor can make this happen pretty painlessly.
I try to use the full amount you are allow to contribute and split it between 401k and Roth 401k plan at work. Now that I already max out my Roth 401k plan, am I still able to open a Roth IRA on a medium like acorns and contribute up to 6k on that? Or would I subject myself to penalties?
when you roll over a 401k into a roth ira, do you only pay taxs on the money you moved or now do you pay on taxs on everything in your roth ira when you pull it?
You do pay taxes on the gains with the roth 401k correct?
Love your videos man. I'm 25 years old and have my entire Roth IRA (over $45K) invested in leveraged ETFs TQQQ and TMF. Using a 55%, 45% allocation respectively and rebalancing every three months. I'm absolutely convinced that this is the best long-term strategy out there. Results on my channel
Well explained, I can watch this all day, I must say having multiple sources of income is the best peace of mind anyone can get. I started my Roth IRA when I was younger, I also decided to go into investment in stock trading. During covid-19, I stayed home with no work but luckily for me I had my investment profit to fall back to, thanks to my financial expert Suzanne Stephens Ellis, I do not have to do anything, and I get my profit returns in due time. Get her valid information and contact online by simply searching her name online.
Thank you for the explanation
Enjoyed watching your videos! Humphrey, any suggestion where to put my $ once i Maxed out 19,500 to my 401-k? Btw, I already contributed 6,000 to my Roth IRA for 2021. Thank You!