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

hi welcome to the Money Tea, today we'll be talking about the different types of

investment accounts available to you these are your 401k, ria and a brokerage

account and trying to figure out which one is

the right one for you to contribute to. when it comes to investing different

types of accounts can be used for different types of

investing goals for example if you're investing for retirement

or if you're investing for something that's five or ten years down the line

you will use separate types of accounts first up is your tax deferred accounts

where money grows year over year without it being taxed and you're only taxed

after you make a withdrawal on that amount you put in the account

among your tax deferred accounts you have your individual retirement account

as well as other types of employer sponsored plans

such as your 401k or other types of plans

so remember that money put into your retirement account has to be earned

so you can't put for example like money that you got from your inheritance

or maybe if you got like a tax refund this money does not qualify to be put in

your retirement account so perhaps the best benefit about tax

deferred accounts is the tax breaks that they offer you

workplace retirement accounts allow you to make contributions from each paycheck

and each amount is deducted from the paycheck before it is taxed

let's look at an example say you earn fifty thousand dollars a year

and you decide to contribute six percent of your salary towards your retirement

plan how this will work is that on an annual

basis you have fifty thousand and six percent will be subtracted from

the fifty thousand leaving you with forty seven thousand

dollars so overall you will be taxed on forty seven

thousand dollars and not fifty thousand dollars

but you will pay taxes on your withdrawal in retirement

so let's look at different types of tax deferred accounts

so one you have your 401k which is your employer sponsored plan

one of the great things about a 401k is that the money that you contribute to it

actually lowers your taxable income for the year and for 2020 you are

allowed to contribute up to 19 500 towards your 401k

what i will recommend is that if your employer offers a 401k

match then the least you can do is to contribute

up to whatever percentage your employer matches

so let's say your employer matches up to six percent of your contribution

this is how it will work you get paid 50 000 a year and then you decide

to contribute six percent of your salary so uh that is a three thousand dollar

contribution a year now because your employer matches up to

six percent of your salary they will also contribute three thousand

dollars to your account so overall you end up contributing six

thousand dollars a year towards your retirement account

one of the things to keep in mind with the 401k is that you can only start

making withdrawals from your account after you turn 59 and a half and if you

choose to make withdrawals before turning 59 and a half

you will be charged a penalty fee of 10% and

income taxes under withdrawal another type of your tax deferred account

is your traditional individual retirement account so traditional ira

is actually similar to your 401k but the main difference

is that anyone can open a traditional ira at any financial institution

such as a fidelity like vanguard betterment ellevest you can use all of these financial

institutions so similar to a 401k with the traditional ira you also contribute

pre-tax amount but in this case you're only allowed to

contribute 6 000 a year if you're under the age of 50.

so one of the benefits of a traditional ira is that you typically have a lot

more investment options than you would with a

401k this is great because then it will allow

you to properly diversify and to also keep your costs low and then

you have your taxable accounts which are accounts such as your brokerage account

or your certificate of deposits account or any other type of taxable account

so rods are a particular type of individual retirement account and the

main difference is that with your roth ria

you contribute money that's already been taxed

this is great because when you make withdrawals in retirement you don't have

to pay any more taxes so roth rras are great for young

investors because you get to lock in a lower tax rate now like much lower

than you would later on in life when you're earning more money

another great benefit is that you can make withdrawals at any time

tax-free and penalty-free because you've already paid taxes on your contributions

because you can withdraw money at any time a roth ria can also serve as a

secondary emergency fund if you ever needed to however it is strongly advised

against withdrawing money that you will need later on in retirement

many cases if you can investing in both a 401k

or in traditional ira as well as a roth ria

is actually a strong move if you want to diversify your

retirement income well so what are the downsides

roth ria have income limits your modified adjusted gross

income has to be below $139 000 a year in order for you to contribute towards a

roth ira so your brokerage account like a robinhood

or if you have an account with interactive brokers

actually for under your taxable investment accounts

meaning that investors can withdraw and contribute

as they please so brokerage accounts are actually great for your saving goals or

if you have investment goals that are five or ten years down the line so

one of the key benefits of a brokerage account is that on an

average you'll have a much wider option of investments to choose

from than you would with a retirement account

so you will pay taxes if you make money on an asset

in the account say for example if you sell a stock you'll pay taxes on that

so obviously brokerage accounts are very very popular but you should be careful

about having this as your only account or starting with a

brokerage account and this is because your emergency savings as well as your

retirement investments should always be prioritized

before contributing towards your brokerage account

so how do you go about navigating these different accounts

if your employer offers a 401k match you should contribute enough to

earn that full match so check your employee handbook

and verify what percentage of your 401k your employer matches

don't waste this opportunity to basically collect free money

but in case your employer does not offer 401k what you should do is that you

should contribute to a traditional ira or a roth ira first and the reason

i'm saying start with the ira is that they just have so many

investment types and options that are available to you

and that you can choose from step 3 max out your company retirement plan

and finally step 4 open a brokerage account for any more additional

investments so remember that you should contribute

to your brokerage account only after you've contributed to a 401k or similar

plan or your individual retirement account

the reason i'm saying this is because emergency savings and retirement

investments should always be prioritized before

contributing towards your brokerage account

and that my friends is a tea of the day see you next time

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