hi I'm Brad Rasley today's hot topic is Roth 401 case I'm especially excited to
talk about these today is the Roth 401 k makes up a large percentage of my
personal net worth and where I put a good chunk of my money each and every
year so I always figure if it's good enough for me it's certainly good enough
for you my audience who I'm trying to teach some of the most important
financial skills to today I'm going to talk about what the Roth 401 K is how it
works how you can contribute to it and most importantly why I use it
what a Roth 401k is it's an employer-sponsored retirement plan most
people have heard of a 401k well a Roth 401k is simply a additional
option that hopefully your employer will allow you to use so step one is your
employer has to offer a Roth 401k otherwise you're out of luck you can
certainly ask them to allow that if they don't currently second who can
contribute to it well anybody that has this employer 401k Roth 401k can do it
all you have to have a certain income there's no rules to say that you make
too much income you can't contribute to it there are limitations to how much you
can't contribute it's based on the current tax law in 2017 it was $18,000 a
year if you're 50 or older you can contribute another $6,000 a year and
that's set to go up a little bit incrementally over time based on
inflation the government will update those numbers why do I use it well
before I tell you why I use it I'm gonna talk about how a traditional 401k works
and how I'm a little bit concerned about that on the one hand when you sign up
for a traditional 401k you get a tax write-off
for the money you put in into the plan usually what happens is you sign a piece
of paper when you start that's your place of work and you decide what
percentage of your income you're gonna put in your 401k
it could be Q percent 5% 10% up to the certain maximum amount which is like I
said $18,000 a year with the bonus if you're over 50 and from that your
employer may or may not choose to make a matching contribution when you go ahead
and put that money into your plan let's say for example you make $100,000 a year
you choose to put away $5,000 a year or 5%
that'll be divided over all your pay periods the money you put into the
traditional 401k is money that comes right off the top of your tax returns so
you do not pay tax on that money and that's one of the
main reasons that people do it I think the other reason that people do it it's
the only way that they're able to save any money as if they never see it their
actual check so they put the money away in a traditional 401k you do get an
upfront tax benefit as I said you don't pay any income tax in that money you put
in when the money is in the plan you choose between a number of different
mutual fund type of investments usually the money grows income tax deferred
which means you do not get a tax statement each year for your gains you
do that all the way until you retire okay after age 59 and a half you can
take money out of your plan without any penalty but when you take money out of a
traditional 401k there's a big problem when you see that balance each quarter
in your foreign case didn't whether it's fifty thousand or two million dollars
what no one talks about is that is not a true balance there's a surrender charge
that goes with that the surrender charge is in the form of an income tax sharing
mechanism when you take money out of your 401k is treated as ordinary income
so let's say you take out ten thousand dollars well that ten thousand dollars
just added on to your other income and let's just say you're in the twenty five
percent income tax bracket that's your marginal rate but your last dollar of
income you share that ten thousand dollars
you keep seventy five hundred Uncle Sam's keeping twenty five hundred that's
why I'm saying there's a surrender charge gee that's not all your money
okay now if you don't take it out of your 401 K which you'll generally
rollover to an IRA at age 70 and a half the government forces you to take money
out and I've talked about that before in my RMD required minimum distribution
videos and blogs but they make you take your money out and eventually pay tax on
it and it's not you it'll be your spouse because that your spouse it'll be your
kids or whatever and here it's the money now I don't know about you but I'm
scared about our twenty million dollar deficit I'm scared about the entitlement
programs that are already broken gonna be farther and farther than ever at
Social Security medicare/medicaid those types of
programs where is the government gonna get that money to pay goes down the road
I believe a Porsche that's gonna come from income tax may be a significant
portion so down the road I see income taxes potentially being
significantly higher so what am i doing as a certified financial planner to plan
for this well I'm taking advantage of the Roth 401k now with the Roth for
locate it works very similar to your traditional flan cake I can put in the
same amounts of money there's no income there's no income restrictions as far as
who can put money in the plan same percentages go same investment choices
the difference is a I do not get enough front tax write-off when I put the money
in the plan I could do with a traditional 401k so there's no tax
benefit going in the money does grow tax-deferred here's the big difference
when I take the money out after age 59 and a half there's no income tax
so once I've put the money into this plan I don't pay tax on it again so I'm
creating a large pot of money for myself for my family to pull from when I went
to rector a 15 and a half without any income tax so like most people I do have
old IRAs that I can pull from and have to pay ordinary income tax as I
mentioned earlier I may have some taxable accounts that I'll pull from and
probably pay some for the capital gain tax rate which is usually a good rate as
well but then I'll have a large bucket of money that I can pull from income tax
free not only that but the government never forces me to pull money from my
Roth IRA that I'll convert the Roth 401k to so there's no required minimum
distribution on my rock love that then when I pass it to my wife and also much
to my children there's no income tax then either so I love the idea of tax
income tax diversification so I can pull from different pots of money most people
have created the IRA pot of money okay many people have taxable accounts they
can pull from as well the third leg of the stool is missing as his
tax free account by the way for those of you that are not taking so Social
Security never planned for it you do too if you have too much taxable income your
Social Security gets taxed by having an account that I can pull from income tax
free I might be able to offset that or minimize that altogether the same is
true on your better care of payments if you have lower income you can have a
reduced Medicare premium so this is thinking way down the road for people
who are not yet retired to have this bucket of money ready for them yes I'm
giving up the current tax benefit but I'm doing that as a form of
diversification because tax rates may be much higher down the road I've also
blogged about this so go ahead and visit the blog if you want to see this in
writing to get a little bit more information
I've also blogged about and spoken about the RMDs that I mentioned it required
minimum distributions to go and take it that look at that video as well feel
free to subscribe to my youtube videos I have a channel now that is promoting
these videos and other great financial information for you I'm Brad Ramsey
thanks so much for listening have a great day