with income taxes in the u.s. around 30% just investing with the right account
gives your investments a 30% head start so making the most of 401ks and Roth
IRAs it really is the number one way to set yourself up for investing success
from the start what is up everyone I'm rose and welcome back to my channel the
number one place for financial education empowerment and inspiration Roth IRA vs.
401k which is better for you and which account should you use to invest with I
personally have a lot of experience with both of these accounts so I have a lot
of valuable insights to share with you well you'll learn in today's video is
gonna save you tens of thousands if not hundreds of thousands of dollars this is
not an exaggeration because taxes are going to be your single biggest expense
in your lifetime according to Forbes someone who makes $100,000 a year can
expect to pay over seven hundred sixty thousand dollars in taxes over their
lifetime and if adjusted for inflation that's over 1.4 million dollars so it
makes sense to try to reduce your taxes as much as possible because the less you
pay in taxes the more money you get to keep to save and invest in Roth IRAs and
401ks are powerful ways to build a sizeable nest egg fast so in this video
I'm going to first give you some background info on the Roth IRA and the
401k then I'll explain the pros and cons of each account and finally I'll make
some clear recommendations on which one you should prioritize so if that sounds
good to you give this video a like and let's get right into it let's start off
with some basic background info the Roth IRA is named after senator William Roth
who sponsored the part of the US tax code that brought the Roth IRA into
existence the Roth is a type of retirement account that offers huge and
I mean huge tax benefits with a Roth IRA you make contributions that are not tax
deductible so it's with after-tax money however all of your investment profits
and earnings in your Roth IRA are tax-free forever no matter how much your
investments have gone up in value let me put this into perspective
if you had $10,000 in a Roth IRA 30 years ago and you invested all of it
into Apple then you'd have over 13 million dollars today without the Roth
IRA you'd probably owe about 4 million
dollars in taxes when you take the money out
ouch but thanks to the Roth you get to withdraw all 13 million dollars tax-free
zero taxes however there's no such thing as a free lunch especially when it comes
to the IRS so the Roth IRA also comes with restrictions you're not supposed to
make withdrawals of profits from your Roth IRA until you turn 59 and a half
that's because it's designed for retirement and if you do withdraw money
early then you'll incur a lot of taxes and penalties so basically it's not an
option the 401 K is also a type of retirement account and it's named after
section 401 K of the IRS tax code I know so creative right so the 401 k plan is a
type of investment account that's sponsored by your employer
and unlike Roth IRAs your contributions to a 401 K are tax deductible in other
words any money you put into a 401 K is pre-tax money however all your
withdrawals later on from your 401 K are going to be fully taxable at regular
income tax rates so the main difference between the two is in timing of the tax
benefit with Roth IRA contributions you get no tax benefit upfront because it's
with after-tax money but you get unlimited tax benefits in retirement
with 401ks you get the tax deduction today but
later on when you withdraw money in retirement you're gonna pay regular
income taxes on every withdrawal so now that we've covered the basics of the
Roth IRA and the 401 K let's take a look at the pros and cons of each one of the
biggest pros of the Roth is that you're guaranteed a tax-free retirement no
matter what even if you become a bajillion heir in the highest tax
bracket you will never have to pay any taxes on anything in your Roth IRA not
only this but us marginal tax rates have been as high as 94 percent in the past
during World War Two in the 1940s if taxes
been that high in the past then they can maybe get that high again in the future
who knows god forbid we get into a war and they need to pay for it somehow
taxes might go up to 94 percent again can you imagine so I don't know about
you but I would never want to expose my retirements this kind of political
uncertainty other pros of the Roth IRA you can take out contributions
penalty-free so if you put in six thousand dollars into your Roth IRA this
year tomorrow or the following day you can take it right back out because it
was all after-tax so it's basically like it's not really restricted money the
only thing you can't withdraw is investment earnings and profits on those
contributions but any any of your original principal that you contribute
to a Roth IRA you can take back out whenever you want another pro of the
Roth IRA is that you essentially have unlimited investment options
unlike most 401ks which typically only give you a limited menu of mutual funds
to choose from with a Roth IRA you can really just buy
anything you want stocks ETFs mutual funds bonds literally anything is game
for more ideas on how to invest the money in your Roth IRA make sure to
download my Roth IRA investing starter kit it's an awesome PDF resource that
I've created specifically for Roth IRA investors and it's full of actionable
tips and step-by-step instructions on how to put the money in your Roth IRA to
work so I've dropped the link to download it right below in the
description box so click the link it's right below this video and you can
download it and get it right away and now for some of the cons of the Roth IRA
the Roth has a six thousand dollar annual contribution limit which isn't
that much if you have more money to put away for your future if it were allowed
I dash away as much as humanly possible in my Roth IRA but the IRS only allows
up to six thousand dollars per year another con is that the Roth IRA doesn't
give you any tax deduction today as we talked about all your contributions are
gonna be with after-tax money but the Roth IRA does give you a bunch of tax
benefits later in life however it doesn't reduce your tax bill today so
that can be a con for some people finally there are income limits to
qualify for Roth IRA if you make too much money you
can't contribute to the Roth however there is a really cool way to get around
this income limit and it's a hundred percent legal and I show you exactly how
to do it in this video the income limits for the Roth IRA are a hundred twenty
four thousand dollars in 2020 if you're single and if you're married filing
jointly it'll be one hundred ninety six thousand dollars so those are where the
Roth IRA ability to contribute starts getting phased out so if you don't
qualify but you want to learn about a really cool workaround definitely check
out this video moving right along to the 401 K by far
the biggest Pro of 401 KS is that they often offer you an employer match that
means that for every dollar you contribute to your 401 K your employer
will throw in some money for you as well it could be dollar for dollar it could
be 50 cents for dollar it's whatever your employer offers at my first job the
employer match was three dollars for every dollar that I contributed that is
free money that was epic for me so definitely look into whether your 401 K
offers an employer match and if they do you need to get on that ASAP another pro
of the 401 K is that the annual contribution limit for the 401 K is
higher for 2019 it's 19 thousand dollars versus six thousand dollars for the Roth
IRA and that is not counting employer match with employer match included your
total allowed contribution every year to your 401 K it's fifty six thousand
dollars so if you're really good at saving or you just make a ton of money
and you have a shit ton of money to put away for retirement but you want to
shield it from taxes and just be smart with your money you'll be thrilled to
have a 401 K cuz it will allow you to put away up to fifty six thousand
dollars of pre-tax money another pro of the 401 K is that you can set up your
paycheck so that a percentage of it gets routed to your 401 K automatically you
can just talk to your HR department to set this up that way whatever actually
lands in your checking account on pay day is what's left after you've paid
into your 401 K and since you don't even see
the money you'll hardly feel the pain and it's a great way to trick yourself
into saving essentially you're just deducting a piece of your paycheck and
directly routing it to your 401k before you even get to see it
that's because something that I did a few years into my first job and I wish
I'd done it sooner but that was and before that I really never thought I'd
be able to save money but you'll be surprised at what you can do when if you
just kind of automate everything so that you don't even miss the money and
finally there are two cons of the of the 401k we've already talked about the
first one which is that you'll owe full income taxes on all the withdrawals out
of your 401k in retirement and you know most of us have no idea what our tax
rates will be at age 65 so there's a lot of uncertainty there you know you're if
you're counting on having a certain of money certain amount of income in your
retirement but tax rates have gone up to like 90 percent then you're gonna be
kind of screwed so although the 401k gives you a big fat tax deduction today
you're really just kicking the can down the road because you're eventually gonna
have to pay the taxes in the future another clown of the 401k is that most
of them give you really limited investment options most 401k plans only
give you a really small menu of mutual funds to choose from so you can't really
buy your own individual stocks or ETFs or whatever and I don't know about you
but I don't like being limited to just a few mutual funds that somebody else
picked for me I'd rather have full control over what my money gets invested
in so we've covered a lot here let's wrap it up with some final
recommendations if you have a 401k with employer match max it out no ifs ands or
buts and then max out your Roth IRA a very wise person once told me the only
thing better than TAC 3 money is free money
no one ever actually told me that but still you get my point employer match
401k that is free money so if you have that then you need to prioritize that
and then if you have any money left over to save then put it into your Roth IRA
now if you have a 401k but you don't get an employer match then you need to
prioritize your Roth IRA obviously this is just my opinion
your tax situation could be very different but for most people the Roth
IRA is gonna be the best thing that ever happened to them second to employer
match so if you have limited cash flow and you're not sure how to prioritize
then here's a simple way to think about it first get all the free money so all
the employer match and then if you have anything left to save get all of the
tax-free money so your Roth IRA then if you still have even more left to save
then get all the rest of the tax-free money by either maxing out the rest of
your 401k or using other tax advantaged investment accounts I know it's a lot to
think about but it is worth it with income taxes in the u.s. around 30% just
investing with the right account gives your investments a 30% head start so
making the most of 401ks and Roth IRAs it really is the number one way to set
yourself up for investing success from the start if you have any questions
about what I talked about today feel free to ask me in the comments or DM me
on instagram at investing with rose and if you think this video was helpful
please give it a thumbs up and subscribe subscribe subscribe it really helps out
the channel and more importantly it helps get this life-changing financial
information in front of more people and again if you want some more ideas and
step-by-step information on how to invest your Roth IRA then download my
Roth IRA investing starter kit the link to that is right below in the
description I post new videos every Wednesday so I'll see you next week same
time same place