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Roth 401k Or Traditional 401k - Which Is The Better Investment? - YouTube
Channel: Jarrad Morrow
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your employer gives you a way to invest
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for retirement awesome
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yes this is huge so you log in and you
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see Roth 401k and a traditional 401k as
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your options you think about it for a
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minute and you do one of two things
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number one you don't understand what the
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heck you're looking at you get annoyed
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log off and forget about it bad idea
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because the longer that you wait to
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invest the poor you're gonna be when you
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get older I don't even know if poorer is
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a word but we're gonna say this for this
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video or number two you basically just
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kind of closed your eyes and pick one
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because who cares you're not gonna see
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that money for another twenty or thirty
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plus years this could also be a mistake
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that could cost you some money down the
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road in this video I'm gonna help you
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decide which one is gonna be better for
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you a Roth 401k or a traditional 401k am
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jarred with an A and on this channel we
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talk about all things personal finance
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investing and financial independence
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just so we're on the same page I'm going
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to refer to a traditional 401k as just a
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401k and a Roth 401k as a Roth 401k as
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always nothing I say in this video
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should be taken as financial advice this
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is for information and entertainment
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purposes only please talk to your
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professional or do your own research
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instead of listening to a guy like me on
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YouTube who kind of likes to draw stick
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figures in his free time the first thing
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you need to know is that some employers
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offer just a 401k and some offer a 401k
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and a Roth 401k
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if your employer only offers a 401k and
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you want the option of a Roth 401k then
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talk to your HR department about them
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offering this sometimes they'll say yeah
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sure we'll look into it
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or sometimes they'll tell you to kick
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rocks but it's at least worth a try
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let's start with some similarities you
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can only invest in both types of 401ks
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if your employer provides both of them
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this isn't a retirement account you can
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start up on your own just like you would
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with an IRA at this point in time you
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can invest up to 19 thousand five
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hundred dollars per year or one thousand
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six hundred and twenty-five dollars per
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month between the both of them the
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amount you choose to invest will
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automatically be taken out of every
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single one of your paychecks this is one
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of the easiest ways to automate your
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investing so in my book
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gets two thumbs up you were able to
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adjust your contributions throughout the
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year so if you start the year for
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example only contributing $6,000 then at
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any point throughout the year you can
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log into your account to increase or
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decrease that percentage do me a favor
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and try not to ever decrease it though
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just like that rotisserie oven that we
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see on those infomercials set it and
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forget it the biggest difference between
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the two is how they're taxed with the
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401k you don't pay taxes on the money
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when you put it into the account but you
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do pay taxes when it comes out of the
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account the amount you contribute will
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reduce your taxable income by that same
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amount so for example if your taxable
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income is we'll say $100,000 and you
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contribute $10,000 into your traditional
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401k this year then your taxable income
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will only be 10 that there will only be
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$90,000 because one hundred thousand
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minus $10,000 is $90,000 hashtag math
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but the government still wants to get
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paid so you will have to pay taxes on
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that $10,000 plus pay taxes on any gains
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from that money when you go to withdraw
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at the age of fifty nine and a half if
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that $10,000 was invested and will say
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that it grew so much and it tripled by
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the time you withdrew it then you would
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pay taxes on that thirty thousand
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dollars how much you'll pay in taxes is
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all going to depend though now we'll
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cover that in just a few minutes with
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the Roth 401k you're taxed when the
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money goes into the account so if you
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make a hundred thousand dollars then
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you'll pay taxes on that full one
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hundred thousand dollar amount let's
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just assume that you pay taxes of twenty
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thousand dollars so that leaves you with
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eighty thousand dollars of income for
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the year you'll probably end up with a
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little bit less than eighty thousand
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dollars since there's other things to
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pay for but let's just keep it simple
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and assume that you have eight and
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eighty thousand dollar income after
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taxes since you already paid taxes on
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that full one hundred thousand dollars
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the contributions that you make to your
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Roth 401k will have already been taxed
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because you're going to be contributing
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to your Roth 401k with the 80 thousand
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dollars that you have left you will
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never have to pay taxes on this money
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that you contribute or the gains that
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come from investing that money quick
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summary 401 K not
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next going in but it is taxed coming out
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your paychecks will be slightly larger
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now since you'll be taxed less today
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don't just choose a traditional just so
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you can have a little bit bigger of a
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paycheck though because you'll still
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have to pay taxes just not today
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you'll do it later down the line Roth
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401k taxed going in but not taxed going
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out your paychecks will be slightly
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smaller right now since you'll be taxed
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at your full income amount don't let
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this deter you from choosing a Roth if
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it makes sense for you though got it
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okay good on the surface it could seem
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like a Roth 401k is going to be the best
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option because you don't pay taxes on
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the money when you go to withdraw it
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right you might also think that
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contributing to a 401k it would be best
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since you can lower the amount of taxes
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that you pay today maybe it's all going
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to depend on what you think your income
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is going to be in retirement and what
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tax bracket you're gonna fall into at
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that point in time unfortunately there
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are a ton of unknowns between now and
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when you can take the money out at the
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age of 59 and a half so let's cover when
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it would make sense to go with one or
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the other the biggest unknowns are what
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the tax rate is going to be in
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retirement and what your income will be
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at that point in time as well let's
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cover when each would make sense for you
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then I'll give you a solution that you
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might find appealing if you're getting
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some value from this video please Hulk
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smash that thumbs up on the numbers I
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gave are all going to be based on a
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single person just to make things simple
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if you were married then it's the same
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line of thinking with different numbers
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you'd want to choose a Roth 401k if you
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think that your tax rate will be higher
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in retirement for example if you
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currently make 80 thousand dollars per
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year then you'd be in a 22 percent tax
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bracket today but if you think that the
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tax rates will stay the same and your
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yearly retirement income will be ninety
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thousand dollars per year then based on
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today's tax rates you'd be in the twenty
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four percent tax bracket in the future
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you pay less in taxes overall because
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you were paying twenty two percent taxes
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today so you don't have to pay twenty
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four percent later down the line
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choosing a Roth 401k is kind of a way to
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protect yourself from the possibility of
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tax rates increasing in the future if
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you're someone who's pursuing financial
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independence and you plan on needing to
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access
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401k money before the age of 59 and a
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half then a Roth 401k might not be the
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way to go for you to understand why that
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is you'll need to understand the process
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of investing for financial independence
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I'll have a video I'll on that topic at
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some point in the future once once it's
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released I'll have it linked in the
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description of this video or somewhere
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above my head on the other hand you'd
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want to choose a 401k if you think that
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your tax rate will be lower in
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retirement this could be because your
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income in retirement is lower than it is
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today or because the tax tax great tax
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rates will be lower at that point in
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time looking at the 2020 tax for our
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example if you make 80 thousand dollars
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per year then you're currently in the
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twenty four percent tax bracket if you
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think that once you retire you'll be in
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a lower tax bracket like the twenty two
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percent tax bracket then a 401k would be
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ideal for you you're skipping out on
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paying the twenty four percent in taxes
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on your 401k contributions today so that
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you can pay twenty two percent on the
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money you start withdrawing from your
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401k in retirement okay so your head
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might be spinning right now and you were
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even more confused about what to do
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I completely understand because when I
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first looked at this stuff years and
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years ago it started to make my head
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hurt I needed to take some tylenol
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immediately but give me give me a minute
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because I'm going to help you think
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through this problem don't get analysis
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paralysis and choose not to do anything
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at all that's gonna be the worst thing
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that you can do let me give you my
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thoughts on the whole darn thing and
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give you a possible solution that might
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help you work through it in your own
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head we're going to take the big problem
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and break it down into individual pieces
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the two pieces that we needed to talk
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about our taxes and income first let's
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think through the tax rate portion of
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this problem one of the biggest unknowns
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is what the tax rate will be no one has
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a crystal ball so it's nearly impossible
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to guess what the taxes will be in ten
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years let alone thirty plus years I'm
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not even gonna go into the politics
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either because that also plays a role in
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this as well no matter what you're going
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to adjust how much we're taking out
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during your retirement years based on
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the what what the tax rates are at that
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there's just too many unknowns when it
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comes to Texas if you forced me to guess
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then I always say that they'll increase
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but I have zero clue and my guess is
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based on how much faith I don't have in
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our government next let's talk about
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income and retirement the further you
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are from retirement the less confident
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you might be with projecting what your
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yearly income will be you might be
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really good at investing right now but
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there's always a possibility a
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possibility that life could happen and
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you may have to lower the amount that
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you were investing at some point in the
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future or your returns might be lower
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because you didn't invest in things that
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you should be like low cost index funds
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this is exactly why I'm the biggest
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proponent of investing as much as you
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possibly can as early as you possibly
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can and for as long as you possibly can
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if you have the money today then start
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putting it to work as soon as possible
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just in case there comes a point in time
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where you have to back off on investing
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for a little bit in the future pretend
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like you're pursuing financial
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independence retire early even if you
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have no desire to do so before I give
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you my thought on what to do I first
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want to let you know about something
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that might be helpful and save you some
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money in the process of investing in
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your 401 K Payne investment fees aren't
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any fun even a 1% fee could cost you
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more than $500,000 over your investment
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lifetime to make sure that you are not
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paying too much in fees I recommend
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checking out bloom with three o's there
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are free 401k and IRA fee analyzer tool
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that will take a look at your
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investments to let you know if you were
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being charged too much I tried him out
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and was blown away at how easy it was to
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have them take a quick look to make sure
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that my investments were in good shape
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I'll have a link in the description of
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this video for you to check them out the
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best solution that I've been able to
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come up with if you're planning on
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retiring at 59 and a half is to invest
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in both a traditional 401k and a Roth
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401k as I said before there are too many
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unknowns so why not take advantage of
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both just ahead your bets a little bit
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before pursuing financial independence
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I personally was going this route with
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my employer I can easily log in and
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split my contributions up 50/50 my
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reasoning behind this is because I don't
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know
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what the tax rates will be in the future
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and I'm not gonna waste my brainpower
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today thinking about it either when it
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comes to my income in retirement I have
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an idea of what it's going to be in the
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future based on my current rate of
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investing I am so far away from being at
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the age that I need to be to pull the
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money out of that account so between now
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and then so many things could change I
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may end up with slightly less than I'm
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projecting I could also end up with way
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more than I was planning on because I
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just don't know my personal opinion is
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that splitting it right down the middle
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will help someone out either way as I
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move closer to retirement and things
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become a little bit more clear I may
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choose to put all of my money into one
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over the other
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make sure to Hulk smash that thumbs up
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button before you go check out these
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videos to your left that I put put
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together for you on investing also check
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out the description for more resources
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and playlists to help you out with all
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of your personal finance and investing
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needs I'll see in the next one friends a
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Dios
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