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★ How to Earn 20% a Year in Your Roth IRA
★ TAXES on Investments EXPLAINED – Stocks & Dividends
★ Backdoor Roth IRA – How Does It Work?
★ Have an Old 401k? Should You Rollover to an IRA?
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What Is a 401(k) Plan?
A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.
How 401(k) Plans Work
There are two basic types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s, sometimes referred to as a “designated Roth account.” The two are similar in many respects, but they are taxed in different ways. A worker can have either type of account or both types.
Contributing to a 401(k) Plan
A 401(k) is what’s known as a defined-contribution plan. The employee and employer can make contributions to the account, up to the dollar limits set by the Internal Revenue Service (IRS). By contrast, traditional pensions [not to be confused with traditional 401(k)s] are referred to as defined-benefit plans—the employer is responsible for providing a specific amount of money to the employee upon retirement.3
In recent decades, 401(k) plans have become more plentiful, and traditional pensions increasingly rare, as employers have shifted the responsibility and risk of saving for retirement to their employees.
Employees are also responsible for choosing the specific investments within their 401(k) accounts, from the selection their employer offers. Those offerings typically include an assortment of stock and bond mutual funds as well as target-date funds that hold a mixture of stocks and bonds appropriate in terms of risk for when that person expects to retire. They may also include guaranteed investment contracts (GICs) issued by insurance companies and sometimes the employer’s own stock.
Contribution Limits
The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation. As of 2020 and in 2021, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up (including the $6,500 catch-up contribution).
If the employer also contributes—or if the employee elects to make additional, non-deductible after-tax contributions to their traditional 401(k) account (if allowed by their plan)—the total employee/employer contribution for workers under 50 for 2021 is capped at $58,000, or 100% of employee compensation, whichever is lower. For those 50 and over, again for 2021, the limit is $64,500.
Employer Matching
Employers who match their employee contributions use different formulas to calculate that match. A common example might be 50 cents or $1 for every dollar the employee contributes up to a certain percentage of salary. Financial advisors often recommend that employees try to contribute at least enough money to their 401(k) plans each to get the full employer match.
Contributing to a Traditional and Roth 401(k)
If they wish—and if their employer offers both choices—employees can split their contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).
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#401K #401KProblem #Retirement
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.
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LEARN MORE ABOUT: 401k Plans
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HOW TO INVEST IN SILVER: Silver IRA Investing
Thanks for watching everyone! If you found this video interesting then give it a LIKE to support my channel. Also check out my video that goes into more details on the difference between Roth and Traditional retirement accounts: https://youtu.be/XNqe7Utouzg
If debt is rising will some shares get sold?
Very informative. Thanks for sharing
You always enlighten me!
So I have a loan program with my 401k. I used it as a second position loan to buy my house with 0% money down.
Within the first year my financial position of my life completely changed.
I also understand that loan programs are not the norm with 401ks. If I had to buy a car, or a house. Most people suck at understanding how to do this stuff. I find most people want to be financially illiterate. I don't get it but there is a place for a 401k.
Honestly it seems like you should have all 3.
Yes
Let me get this straight an ordinary brokerage account has the same benefits as a Roth IRA with no limitations?
you're the man Broe!
One advantage to traditional 401(k) and IRAs: the funds are exempt from creditors.
Bologna! I can prove a 401K can make you 100% ROI. Make the full contribution that the employer will match, usually 6-7%, put the money into a cash account within the 401k plan at 0.01%, and you have 100% protection from the market, 100% deduction from taxes, and 100% profit from the match. GUARANTEED!!! All the $ you put in was doubled.
I think the traditional is better for us, it keeps us in the two lowest tax brackets of 10 and 12 percent. The next tax bracket jumps up another 10 percent to 22. We are saving from paying that 22 percent tax bracket by moving it to traditional. If we would move it into a Ruth instead we would be paying 22 percent on it to put it in and nothing to take it out. When we retire, we will have low income, so it should all fall into the lowest two tax brackets 10-12 percent. In our scenario with what we gross per year it works better, it will all fall into the 10 and 12 percent brackets. So we only pay a max of 12 percent instead of the roth at 22 percent.
My son took a sabbatical to volunteer for one year at a charitable NGO. He had almost zero taxable income that year but he had a nest egg. I suggested that he convert part of his retirement saving to a Roth. Of course that was a taxable event but at a very low or minimal tax rate. He switched the amount that would have been taxed at the lowest tax rate. That was 15 years ago and he said that switch was one of his most successful investment strategies. Of course one needs the lower or zero income plus a nest egg to successfully make this work.
Your regular brokerage account may very well be gone if you end up going through bankruptcy (e.g. due to medical debt). Your retirement accounts however are likely shielded in court (unless you're a criminal).
Great video! I love my Roth IRA and ordinary brokerage accounts!
In the 401k you can contribute to the Roth and Traditional at the same time. Up to $19,500 combined. In a brokerage you pay taxes on what you sell. If you sell it in less then a year of when you bought it then you’ll pay more then if you sell it after a year.
Any match of your contributions by your company is a base rate of return, not including gains in the value of your investment. It is a very good deal. Many ordinary working people are millionaires because if this.
Another thing to consider is the vesting period for 401ks. If you're vesting period is longer than you plan on working there, say no thank you
I spent extra cash in my home principle as part of my asset allocation…why? Cause it's a great source of leverage in retirement ( ownership,reverse mortgage,% value increase,peace of mind as a refuge) anywho….
2 things. 1 Roth is King no if ands or buts. 2 you are not quantifying the up front savings of the traditional 401k
I really appreciate
We start with an IRA, preferably Roth max it out each year into broad market low cost index funds and dollar cost average with a no fee brokerage app, 401k up to employer match and see if they offer a Roth 401k, and max out an HSA, never opt for a PPO or EPO.
Everyone forgets to mention that money in your retirement account is protected from bankruptcy, whereas money in a brokerage is not. Unless something has changed recently….
Oh, Jake, one more thing to point out. Contributions to IRAs, 401k, and TSP have to be from wages. The 401k and the TSP are kind of duh because they are deducted from your paycheck but a IRA and also a SEP which you didn't talk about, have to come from wages. A SEP can't exceed 25%(or $58,000) of self employed profits and an IRA can't exceed gross wages or $6000 ($7000 if over 50) whichever is less. I used tax year 2021 for this, I'm sure it has gone up since.
Oh, another thing to point out, this 0%/$0 is not limited to retirement. There is no age requirement, this can be done at any age. So if you are a married couple that is getting that $25,100 weather it be rental profits or other sources of passive income plus the $80,000 in long-term capital gains then, again there is NO tax on it. No income tax, no capital gains tax, and no payroll taxes. Yes, absolutely no tax!
JAKE, I think it's important to point out that many people don't know but many employers have a vesting time requirement for the funds they contribute/match. It's usually 3-5 years. If the employee leaves the organization/employer before fully vested the employer takes back their contributions.
I found this out a few years ago and shifted to investing more in my brokerage account to take advantage of this exact thing! I invest in stable dividend producing stocks. And I am getting tax free dividends right now!! And as long as we don't have a taxable income over that magical $80,800 we are golden!
After tax and or Roth 401k contributions grow tax free with tax free withdrawals. So no, a regular brokerage is rarely better.
Do you offer individual financial planning?
Hmmmm this reasoning seems a bit flawed because you’re applying the highest rate (marginal rate, not effective rate) to traditional plan withdrawals, while in the brokerage scenario, you’re applying the lowest rate that exists in the long-term CG tax brackets. Not sure if this was intentional or out of ignorance, but it’s certainly very misleading.
NOT ALL traditional 401(k) withdrawals are subject to marginal rate. Use the effective rate for comparison. If you limit 401(k) withdrawals to $100k as you did in your brokerage example, your effective tax rate will be significantly lower than the marginal rate.
And I don’t like the title of this video – I provide institutional retirement consulting advice for firms of all sizes in a lot of industries and sectors, and it almost wants to me to sue anyone who commits math crimes or makes false claims that there are anything better than 401(k)s.
I don’t know what you do or what motivated you to create these vids (YouTube algorithm took me here), but the fact that you’re saying nonsense like “401(k) plan has higher fees” makes me think you may be a commissioned FA who gets paid for hosting money in the IRA accounts in the custody of banks you’re associated with.
I simply don’t trust the government to not tax my Roth accounts twenty years in the future when I retire. I’ve been contributing to all three buckets: traditional 401k, Roth IRA, and a brokerage account but by far my money is in the 401k.
I will also say there’s a good reason you can live in a lower income bracket after you retire – you’ve hopefully got your mortgage and other loans paid and if you have kids then what costs associated with them are off the table.
401k match can’t be beat in any other investment, regardless what anyone tells you
Remember that a Traditional IRA can be recharacterized into a Roth in certain circumstances. In that sense, contributing to a "Traditional" is still better than an ordinary brokerage account outside of a retirement vehicle.
You don't pay taxes on traditional pre-tax account earnings. Assuming your marginal rate when contributing is the same as at distribution, the math shows that all you are paying in taxes are the DEFERRED taxes plus the earnings on those deferred taxes – nothing more.
However, if you are in a lower tax bracket in retirement – like you are trying to propose here – the traditional pre-tax account lets you keep some of the deferred taxes and their earnings. That's a huge win because it means you get to keep / spend money you would not have had otherwise.
The only ways you can lose with a traditional pre-tax account is if you wind up in a higher tax bracket in retirement (probably due to RMDs). Or if your employer's 401(k) plan sucked and it or the investment options charge outrageous fees.
The richer you get the less you get from social security seems goverment is broke
You can just quit at 55 (rule of 55) transfer your traditional 401k into your ordinary brokerage with no taxes or penalties. Place into a good monthly dividends stock and collect the cash. Simple
With my 100% employer match up to 8% of my salary I've gotta say that I don't see how my 401k is a waste of money.
Thanks Jake. Great video
Jake- glad you covered this topic. My wife and I retired at 52 and are funding the early retirement with a "taxable brokerage account". 2021 federal tax bill was $0 when we filed couple weeks ago. Keep in mind the $105000 limit is for the GAINS only. Alot of people think the limit applies to withdrawals. Its only on the gains in the account, not the money initially put into it. Hence in theory you will have the ability to withdrawal much more than $105,000 as a couple each year at 0%. Glad you covered this topic. Most people I have discussed this with are shocked and probably would have set up a "taxable brokerage account" if they had only known. I also find it funny it is called a "TAXABLE Brokerage account".
This video is for entertainment purposes only
You are wrong about the ROTH, you said only can take out after 59.5 so you could not retire until 60. But direct contributions to a Roth can be withdrawn anytime, without taxes.
I think it's best to have money in all three locations Roth, 401K and taxable account.
You will pay taxes inside of a taxable brokerage account when you realize a capital gain, Based on how long you held that position will determine if you pay short term capital gains which is income tax or long-term capital gains which is 0 to 20%
I’m confused are you saying that when you pull money out of a taxable account you won’t pay taxes? Because that is completely wrong
Of course you can invest on your own and you should. HOWEVER you will not get any employee match. Which is the big advantage of a 401k. You put in X dollars and you employer will match that.
I'm opening a brokerage account I like that one overall
Yes, but… if you treat the 401k in retirement as a checking account that you take smaller monthly withdrawals from, like a paycheck in retirement, you can also control the effective tax rate you pay over time in retirement. So yeah, don’t put everything in there, but using it as a tax advantage to lower income upfront, then using it as a component of income in retirement, I think makes a ton of sense. Great video though!
For standard brokerage, is that 0-40k treated separately from your regular income? For instance, if someone makes 70k in a year, and makes 40k capital gains, is that 40k still tax free? Or is it taxed as if someone made 110k?
This information is so helpful!
An employer matching contribution can make a 401k worthwhile at some level, at least up until that level is reached, which you agree with.
Also, if you are working in a state with an income tax, it can make sense as you can move to a state after retirement that does not have a state income tax. Thus you legally avoid ever paying state income taxes on the funds you put in your 401k. For example, you might be paying 25% of your 401k drawing to the Feds, but if you also have to pay state income taxes on it? Well, where I live, you would then be giving up a third of your drawings in taxes (after the first 20k per individual, which is excluded from state taxes for retirees here).
Finally, there are some real advantages to being able to convert 401k money into a Roth IRA, particularly if there is a substantial gap between when you retire and when you must begin RMDs (currently at age 72, probably moving to age 75), when your income will likely be lower than when you were working, and after you begin drawing RMDs (when it will just keep going up, according to values the IRS provides.
Also, know that the market has averaged 10% per year (averaged over the past 80 years or so) and this means that money invested in it will double just about every 7 years, on average. So be aware that a married couple with a reasonable amount in a 401k at retirement (say a couple of million at retirement at age 62, coupled with a solid passive income) could eventually be forced to take and pay taxes on RMDs totaling hundreds of thousands per year by the time they reach their late 80s and beyond, substantially driving up their tax brackets (and this will probably be at the same time their medical expenses and costs of living assistance are skyrocketing). Open a spreadsheet and work it out. And if that sounds like a lot of money now, keep in mind that by then it will be less so, especially with today's inflation rates.
Never feel guilty about looking for legal ways to pay less taxes. The government is essential, yes, but it wastes a lot of money. Give the government every penny it is due by law, always, but know the rules and make sure it is no more than you have to give it. After that amount is paid, everything you could have saved, but did not, is more in the nature of a charitable contribution to Congress (and/or your state legislature) and, if you want to make charitable contributions to society, those are probably not who you want to give them to.
I'm 24 with 120 dollars in my 401k. Thinking of other ways I can go about what should I do? I don't have anybody around me that is knowledgeable