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When it comes to retirement planning, two of the most popular options available are 401k and Roth IRA. Both the retirement plans offer tax advantages that are likely to help during retirement. Choosing between the two can be challenging, and it’s essential to evaluate the advantages and drawbacks that come with each one to determine the best-suited retirement plan for your needs.
What is a 401k?
A 401k is an employer-sponsored retirement plan structured to help employees save for their retirement years. Participants contribute pre-tax dollars from their gross wages to the 401k account, reducing their taxable income. Employers can also make contributions to the retirement accounts on behalf of the employees. The contributions made to a 401k account grow tax-free until the participant retires. Upon retirement, the withdrawals made from the account are subject to income tax.
What is a Roth IRA?
A Roth IRA is an individual retirement account that is funded with after-tax dollars. Unlike a 401k, the tax implications of a Roth IRA come into play during the contribution stage and not the withdrawal phase. The contributions made to a Roth IRA grow tax-free, and upon retirement, all withdrawals, including investment gains, are tax-free.
Which One to Use?
Now that we understand the differences between the two retirement plans, the next question that arises is which retirement plan to use? It’s essential to consider various factors before selecting the retirement plan that’s suitable for you. Here are some things to keep in mind:
Employer Match: One of the most significant benefits of a 401k is employer matching. If your employer offers a match, it’s recommended to contribute to the 401k account. This is because you’re getting free money from your employer and can significantly boost your retirement savings.
Tax Implications: The primary difference between the two retirement plans is when the taxes are paid. You pay taxes on the contributions upon withdrawing the money from a 401k account during retirement. On the other hand, you pay taxes on contributions to a Roth IRA upfront. Consider your current tax bracket, as well as your anticipated retirement tax bracket when choosing between the two retirement accounts.
Investment Opportunities: With a 401k plan, your employer chooses the investment options. In contrast, with a Roth IRA, you have more control and can invest in various investment options like stocks, bonds, mutual funds, and more.
Income Limits: Roth IRA contributions are based on your income, and there is a limit to the amount you can contribute. High earners are generally not eligible to contribute to a Roth IRA account, while there are no income limits on 401k contributions.
Conclusion
401k and Roth IRA are both great retirement plan options. Understanding the differences between these two plans can help you decide on the best-suited retirement plan for your needs. Consider factors like employer match, tax implications, investment options, and income limits before making your decision. It’s also beneficial to talk to a financial advisor to help you make an informed decision and maximize your retirement savings.
Seems like RMDs are one of many tax-avoidance reasons to have at least some Roth savings in retirement: ACA insurance premium subsidy during early retirement, taxes on Social Security in general, the Social Security tax torpedo, IRMAA surcharges on Medicare premiums, capital gains tax brackets, Net Investment Income Tax on capital gains, the widow's (survivor's) tax trap of becoming a single filer, choosing to bear the taxes yourself instead of inheritors paying any regardless of overall effective rate, etc.
It's very simple. 20 to 30 yrs from today. Do you want 1 million dollars tax free? Your future self will love you. Lol. I o ly do Roth if I can.
Must work by the hour. 8 minutes before talking about the subject.
I got my total in Roth iras to 80% by converting during lower earning years. All future earnings tax free plus withdrawals don't negatively effect other things like midi are premiums, etc. Don't want to pay taxes during retirement.
I guess I'm in good shape then i have a 401k and a Roth 401K from work, and a 401k at my Bank.
Hilarious that you mention getting married for a tax return. My parents friend just got married two weeks ago in their 80s. I’m convinced this is why! Lol
Dads, after they're gone they become your Hero again.
I'm a bit stuck here. Is the idea to put as much as possible in the pre tax account and convert after you retire or convert as the years go on. ? What about if i fill my Roth 6k for as long as I'm under the income limit and put the rest split between pre tax and a taxable account. And then when over the limit for the Roth then put that amount into the ore taxed account. I don't get where the -8% comes from? Not having a pre tax or having a pre tax and not converting soon enought.
Keep the great videos coming!!!
As Josh Scandlen would attest, your spouse will be forever thankful if you leave a big Roth amount vs Pre-tax to avoid the widow tax
50/50 401K/ROTH 401K. With a ROTH IRA where applicable.
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The final step in my retirement plan: Marry a couch. Lol
Do you have a video on what RMD are?
Hahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahhahahahahahahahahahhaahahahhahah
ROTH IRA
Love the finish!!
Definitely traditional is the majority of my investments.
22% today vs estimated 8.7% effective in retirement. The only reason I don't do more traditional is RMDS
One way to get around the Single status is to marry again. Find someone who needs the Married filed Jointly.
Yes, the Widow/Widowers Tax Bomb. At 62, I learned this and started a Roth. By 72 I will have moved 1M over, now 100K/year. Now in 22% bracket. Am 65 now. No Debt!
Great video. Wish I started sooner. I expect to have 0 RMD at 72, with 70K in SS and a boatload in a Roth.