Roth IRA vs 401k (WHICH TO PRIORITIZE?) - YouTube

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