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401(k), 403(b), IRA, Roth | Retirement Savings Plans Explained (For 2022) - YouTube
Channel: Tae Kim - Financial Tortoise
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i feel like one of the unfair
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expectations we set for ourselves as
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adults is that we automatically
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understand all the confusing financial
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terms out there at our first job we sat
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down with the hr manager and as he or
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she goes over all the 401k options we
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try to look like we know what they're
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talking about you start talking to
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another dad at your kid's soccer game
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and as he talks about how he's planning
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to start funding his roth ira you nod
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your head along trying to show that you
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understand what he's talking about and
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we kick ourselves for not knowing well
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i'm here to tell you not to be so hard
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on yourself 401ks iras roth these are
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terms that are thrown around in the
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personal finance space so today i want
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to go over the basics of what these
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retirement savings plans are so that
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next time you're at your daughter's
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ballet recital you could be the one
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jabbering about how you're thinking
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about rolling over your 401ks to an ira
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trust me your fellow parents won't be
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annoyed at all they'll actually be
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impressed hi if you're new to the
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channel my name is tay from financial
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tourists a channel dedicated to helping
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the sound generation reach financial
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security in this video i want to
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demystify the retirement savings plan
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tax advantage accounts 401ks 403bs iras
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roth iras i'll go over each one in
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detail but if you want to skip ahead to
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a specific section please feel free to
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do so using the link in the description
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below also go over my quick four-step
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order of investing at the end so feel
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free to jump there if you want the quick
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takeaways alright first let's start out
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with some fundamentals when i talk to
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people about 401ks or iras people often
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confuse them as investments themselves
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rather we should think of 401ks or iras
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as buckets that hold the investments
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that we choose and these investments
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could be single stocks actively managed
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mutual funds or my favorite low-cost
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index funds and these buckets are quite
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important because by putting our
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investments into these designated
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retirement savings plans we're able to
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take advantage of tax benefits provided
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by uncle sam and uncle sam wants you to
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invest money into these buckets so you
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can be financially ready for retirement
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thus all the tax benefits you can still
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have investments outside of these
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buckets but they won't be able to take
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advantage of the tax benefits provided
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by the retirement savings plans they can
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be broadly categorized as ordinary
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buckets versus the tax advantage buckets
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for the purpose of this video i won't be
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talking about ordinary buckets but we'll
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focus specifically on tax advantaged
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buckets one thing to note is that tax
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advantage buckets doesn't mean you avoid
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paying taxes they don't eliminate your
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tax obligations i'll explain more in
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detail later in the video but just know
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that you'll definitely pay less but
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still pay some taxes when you're using
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these buckets the timing of when you'll
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pay taxes will differ based on the type
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of accounts that you use also there are
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penalties for trying to access this
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money early currently as it stands
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you'll pay a penalty if you withdraw
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before the age of 59 and a half alright
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now that we've covered some fundamentals
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let's dive into specific buckets i'll
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cover the most common employer-based
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retirement savings plan the 401k if you
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have a traditional job most often
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they'll have a 401k as part of their
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benefits package with loads of other
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benefits like healthcare disability
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insurance and or wellness support there
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is also the 403 b these are offered to
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employees of public schools and certain
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religious or charitable organizations
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for simplicity's sake since 403 b's are
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similar to 401ks i'll refer only to
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401ks throughout the rest of this video
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tax advantage for me the most obvious
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reason to contribute money to a 401k is
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the tax advantage for a 401k when you
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make a contribution you can deduct that
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amount from your income for tax purposes
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for 2022 the contribution cap is 20 500
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per person per year add another 6 500 to
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that if you're 50 and older if you're
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fortunate enough to be in a higher tax
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bracket this benefit is huge let me show
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you an example let's say that for 2022
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you're fortunate to be making more than
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83 550
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combined as a family the marginal
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federal tax rate is 22
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if you contribute the max amount and
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your contribution can lower your taxable
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income level to below this bracket then
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you're saving four thousand five hundred
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ten dollars in taxes twenty two percent
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of twenty thousand five hundred dollars
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essentially instead of paying four
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thousand five hundred ten dollars in
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taxes you're putting that money into the
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market to work to grow your net worth of
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course you need to pay taxes when you
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withdraw but that initial contribution
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is tax deductible and the growth is
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always tax deferred until you withdraw
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and as i stated earlier any money
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withdrawn before 15 and a half is
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subject to penalty so make sure you do
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your best not to touch it before then
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another thing to note is that after you
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turn 70 and a half your money is subject
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to rmds require minimum distributions i
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won't go into too much detail here but
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just know that you will eventually need
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to withdraw your money from this account
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because uncle sam will eventually want
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your taxes investment options the
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investment options will depend on the
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investment company that your employer is
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working with and the investment company
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will narrow down the investment options
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for you most plans that i've seen have a
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range of actively managed funds target
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date fund and some index funds if your
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investment company happens to be
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vanguard then you're in luck you can
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choose from a selection of low-cost
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index funds my favorite is vt sax if
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your company offers it but you can't go
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wrong with most of its low-cost
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well-diversified index funds however
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even if vanguard isn't your investment
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company your employer has chosen that's
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okay most 401k plans should have at
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least one index fund option make sure to
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check the expense ratios though this was
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the case for me my company was partnered
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with fidelity but thankfully there was a
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s p 500 index fund with a pretty low
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expense ratio that i was able to go with
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for some reason you don't see a low cost
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index fund as an option it may be time
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to talk to your hr office match if your
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employer is nice they'll also offer a
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match to your contribution this can
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range from three to six percent what
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this means is that if you make hundred
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thousand dollars annually and your
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employer matches up to five percent then
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when you contribute your five percent
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five thousand dollars your employer will
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also contribute their five percent
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another five thousand dollars this is
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free money if your company matches make
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sure to invest at least up to the match
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rollover in today's economy it's rare
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for someone to stay with one company
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throughout their career so when you
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leave your current employer know that
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you can roll over your 401k into an ira
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preserving its tax advantage some
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employers will allow you continue
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holding the 401k in their plan but if
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you want more control know that you
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don't need to keep your money in there
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roth 401k some of you guys might have
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heard something called the roth 401k it
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wasn't available a lot of places before
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but i've seen it being made more widely
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available in the last few years this
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will make more sense when i review roth
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ira in the next section but the main
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thing to note here is that everything
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else being similar investment option
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withdrawal penalty etc contributions you
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make are not deductible from your income
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for tax purposes my recommendation is
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that if you're in a higher income
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bracket where you're paying a pretty
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sizable amount in taxes you should offer
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a traditional 401k so you can save money
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in taxes and be able to invest more in
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your accumulation phase of life if
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you're enjoying this video so far and
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you want to learn more about personal
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finance and navigating life as the
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standard generation i would appreciate
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if you could subscribe and hit the like
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button because that would really help
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out the channel let's move on to
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individual based tax advantage buckets
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iras individual retirement accounts
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unlike an employer-based tax advantage
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buckets like 401k these are not tied to
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your employer you have complete control
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over them this could be good for some
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may be bad for others i hope not i'm a
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control freak so i personally love these
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iras i can select the investment company
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i want and the investments that i want
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for my arra there are many types of iras
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but for simplicity's sake in this video
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i'll cover the two most common ones the
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traditional ira and the roth ira let's
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start out with traditional ira or also
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known as the deductible ira contribution
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limit for 2022 the contribution limit is
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six thousand dollars per person add
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another thousand if you are 50 and older
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and this is separate from your
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employer-based plan limit so if you're
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hardcore in 2022 you can essentially max
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out your 401k and another 6 000 with
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your ira you could be putting 26 500
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into the market annually and double that
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if you're married tax deductible like a
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traditional 401k contributions you make
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are deductible from your income for tax
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purposes so again if you max out your 6
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000 and you're in a 22 tax bracket you
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could be saving 1 320 from going to
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uncle sam and rather be going into your
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investment growing your net worth but
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this deductibility is phased out over a
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certain income so make sure to check the
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irs website for the latest updates i'll
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have a link in the description and
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similar to a traditional 401k while all
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the investment growth is tax deferred
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you'll need to pay taxes when you
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withdraw your money money drawn before
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15 and a half is subject to penalty so
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practice caution and after 70 and a half
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your money is subject to rmds as well
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the second type of ira i want to discuss
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is the roth ira the key difference
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between the roth ira and the traditional
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ira is the timing of their tax
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advantages with traditional ira you
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deduct contributions now and pay taxes
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on withdrawals later roth ira works the
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opposite you pay taxes upfront but you
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don't have to pay taxes on your
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withdrawals however note that
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eligibility to contribute is phased out
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over certain income levels so if you
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feel like you'll be hitting the ceiling
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eventually consider investing in the
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roth as soon as possible so you can take
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advantage of the tax free withdrawals
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the great thing i like about roth iras
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is that not only are all earnings on
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your investment growth tax free all your
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withdrawal after 59 and a half are
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tax-free unlike a traditional 401k or
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traditional ira where you know you'll
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need to pay uncle sam his taxes down the
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line you're free and clear with a roth
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another thing to note is that you can
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withdraw your original contribution
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anytime tax and penalty free since
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you've already paid taxes on them but i
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recommend refraining yourself from doing
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this because you want that contribution
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to compound alright if you stay with me
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so far
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congratulations before i go over my
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recommendations and how to approach
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these plans let me quickly summarize
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what we just went over 4-1 case
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immediate tax benefits and tax-free
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growth but taxes are due when the money
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is withdrawn roth 401ks no immediate tax
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benefit tax-free growth and no taxes due
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on withdrawal traditional ira immediate
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tax benefit and tax-free growth but
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taxes are due when the money is
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withdrawn roth iras no immediate tax
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benefit tax-free growth and no taxes on
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withdrawals eligibility to contribute
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phases out over certain income limits to
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simplify your takeaways my four step
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recommendation for filling these buckets
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would be the following order one if your
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company has a traditional 401k match
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fund it until you get the match this
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could be three to six percent based on
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your company's offering fund it up to
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the match percentage two is fully fund
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the roth ira this is six thousand
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dollars per individual for 2022. if you
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don't have one yet you can easily open
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up one with any brokerage company of
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your choice of course my favorite is
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vanguard three after maxing out your
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roth ira go back to your 401k and fully
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fund it to the max and four if you still
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have money available to invest this is
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when i would recommend you open up a
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taxable brokerage account to invest your
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money in but do this only after you've
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maxed out all your retirement savings
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plans there you have it guys if you
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found value from this video please hit
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the like button leave a comment and
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subscribe to the channel so that you
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don't miss out on any of my other
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upcoming videos i firmly believe that
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being part of the standard generation
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doesn't have to mean financial stress
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with careful planning and preparation we
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can thrive in the stage of life help me
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spread knowledge thank you again i'll
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see you in my next video
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