Have you ever wondered what the differences between a Roth IRA and a Traditional 401k are? Well I am here to help. To answer this questions, there is no one size fits all approach for what is better. This is going to depend on the individual. However, hopefully the video helped you to understand what each of these items are and which one is right for you? ROTH IRA: what is a Roth IRA? A Roth IRA is a retirement account that you can contribute 6,000 to and for people over 50, you can contribute 7,000 dollars all of which is after tax contributions. Meaning that you have already paid taxes on the money. This money will continue to grow and come out both tax free. With compound interest the earlier you start here, the better. Pro's of the Roth - Your saving are growing tax free because you have already paid taxes on them. - There is no mandatory age for withdrawals. With a Roth, you can withdrawal your contributions anytime without a penalty. However, if you withdrawal any of your earnings, before age 59.5 you will face a 10% penalty. Keep in mind this may not be the best option, but it is an alternative Con's of the Roth - The maximum contributions Is low 6,000 and 7,000 if over the age of 50. - Income limits – you need to earn less than 140k as an individual or less than 208k if filing jointly. - Given you have already paid taxes on these funds, you cannot deduct this from your taxes. -The Roth IRA Must be open for 5 years before you can start withdrawing the money. Traditional 401k: What is a Traditional 401k? This is basically the opposite of the Roth IRA. With the 401k you can contribute up to $19,500. If 50 or older, you will be able to utilize the catch up ($6,500), which allows you now to contribute $26,000. With the Traditional 401k, your money goes in tax free however as it grows and comes out, you are going to be taxed on the withdrawals. Pro's of the 401k - The contribution limit here is much higher $19,500 or $26,000 if you are age 50 or above. - There is no limit on who can open one (no income phase-outs) - Contributions to the Traditional 401k are pre-tax and are tax deductible. With the contributions being pre-tax and being tax deductible, this is going to lower your overall earnings and you will pay less taxes. Con's of the 401k - You pay taxes on the back end, which if you are in a higher tax bracket when you retire, you will end up paying even higher taxes on this money. - The minimum distribution age Is 59 ½ , meaning you cannot start to take distributions until you turn 59 ½. Additionally, the Traditional 401k will require you to start taking “required minimum distributions at the age of 72 or you will face a penalty. Backdoor Roth: If you are watching this video and think that you have made the wrong choice by choosing the 401k, there is also another option that is called the backdoor Roth. This is going to be where you convert your money from a traditional 401k to a Roth IRA. In simple terms, this is done by paying the taxes on your earnings from your 401k and converting it to a Roth. Pro's - After conversion, money will grow and come out tax free. - You can avoid the income restrictions set by the Roth IRA. Con's - You are going to have to face the tax burden to convert. Which is the best choice? There are just too many nuances to say which is the best option for you. This boils down to your income level. If you are in a lower tax bracket and don’t expect your income to grow in the future, the ROTH is going to be the best starting point for you. The way I like to think about it is – Is my tax rate going to be higher today or in the future. If my taxes will be higher in the future, then I would rather do the Roth and go ahead and pay my taxes now while they are lower. Whereas if I am making more now than I will in the future, it may be more advantageous, from a tax perspective, to do the traditional 401k. Keep in mind though, you don’t have to do just one or the other, you can do both of these at the same time. Although doing both of these is going to take some more planning, it will have the most potential to benefit you. Additionally, with tax rates being low at the moment, I am always under the belief that they are going to increase in the future, so It may wise to go ahead and contribute to a Roth. And don’t forget to make sure to utilize which ever option that your employer does a match on. This is free money that you can take advantage of and it could be enough money to help you in your decision-making process. Thanks for Watching!...(read more)
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How to Use a Roth IRA & 401k to Become a Millionaire Saving for retirement is a vital goal for everyone. With the average life expectancy increasing, it's more important than ever to ensure one has enough funds to sustain a comfortable lifestyle in their golden years. One strategy that can help to achieve this goal is by utilizing a combination of a Roth IRA and a 401k. A Roth IRA is an individual retirement account that offers significant tax advantages. Unlike traditional IRAs, the contributions made to a Roth IRA are made with after-tax income. This means that withdrawals during retirement are tax-free. On the other hand, a 401k is an employer-sponsored retirement savings plan. This plan allows employees to contribute a portion of their pre-tax salary into an investment account. Similar to a Roth IRA, the funds in a 401k account grow tax-free until withdrawals are made during retirement. To become a millionaire using a Roth IRA and a 401k, it's essential to follow a few key steps. 1. Start Saving Early: Time is an investor's best friend when it comes to growing wealth. The power of compound interest allows one's savings to grow exponentially over time. By starting to save early, even with small contributions, one can take full advantage of compounding and watch their investments grow significantly. 2. Maximize Contributions: The more money one can contribute to a Roth IRA and a 401k, the faster their savings can grow. Take advantage of employer matching programs for 401k contributions, as it is essentially free money. Ensure that you contribute the maximum allowed by these accounts each year. Both Roth IRAs and 401k plans have annual contribution limits set by the IRS, so it's important to stay informed and maximize those contributions each year. 3. Diversify Investments: A key element of building wealth is diversifying investments. Spread your contributions across various asset classes such as stocks, bonds, and mutual funds. Diversification helps to minimize risks and maximize returns. Consult with a financial advisor to create a diversified portfolio that suits your risk tolerance and financial goals. 4. Continuously Monitor and Adjust: As with any investment strategy, regularly review and adjust your Roth IRA and 401k investments. Keep track of market trends and performance, and make necessary changes to your portfolio. Periodically reassess your financial goals to ensure your retirement savings are on track. 5. Stay Disciplined: Becoming a millionaire through a Roth IRA and 401k requires discipline and commitment. Avoid tapping into your retirement savings unless absolutely necessary. Stay focused on your long-term financial goals and resist the temptation to make impulse decisions with your retirement funds. By combining the benefits of a Roth IRA and a 401k, individuals have a powerful tool to accumulate wealth and eventually become a millionaire. Start early, contribute consistently and take advantage of tax breaks and employer matching programs. Ensure a diversified portfolio and regularly assess your investments. Maintaining discipline and staying committed to your retirement savings goals will help you achieve financial security in the future. https://inflationprotection.org/mastering-the-art-of-utilizing-a-roth-ira-401k-for-financial-prosperity/?feed_id=109621&_unique_id=649215c728714 #Inflation #Retirement #GoldIRA #Wealth #Investing #401kexplained #401kfordummies #401kinvesting #401kloan #401kmatch #401kmatchexplained #401kvsroth401k #401kvsrothira #EarlyRetirement #FinancialIndependence #grahamstephan #howtoinvestinstocks #howtomakepassiveincome #passiveincomeideas #retireearly #retirementaccount #RothIRA #rothiradaveramsey #rothiraexplained #rothirainvesting #rothiravstraditionalira #traditional401k #traditional401kvsrothira #BackdoorRothIRA #401kexplained #401kfordummies #401kinvesting #401kloan #401kmatch #401kmatchexplained #401kvsroth401k #401kvsrothira #EarlyRetirement #FinancialIndependence #grahamstephan #howtoinvestinstocks #howtomakepassiveincome #passiveincomeideas #retireearly #retirementaccount #RothIRA #rothiradaveramsey #rothiraexplained #rothirainvesting #rothiravstraditionalira #traditional401k #traditional401kvsrothira
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