DON'T PAY TAXES LATER! ROTH 401K - YouTube

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