Let's talk about retirement accounts! Is it better to max out your Roth 401k or your 401k? What about the Roth IRA? I break it down for you simply in this video.

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First we need to answer: What is a 401k and how does it differ from the Roth version?

A traditional or regular 401k is an employee sponsored retirement account, which means that it is offered by your employer. In a 401k, simply put – you can decide to set aside a portion of your paycheck, known as a contribution – to put into your 401k. All the money that you contribute to it is known as tax-deductible, which means that by contributing to your regular 401k, you are contributing to it with pre-tax dollars, and this contribution also will lower your tax bill. With a regular 401k, you’ll eventually pay taxes later on your withdrawals when you reach retirement age.

Contrast that to a Roth 401k. The Roth 401k is a different type of 401k that has different tax rules. In a Roth 401k, your contributions to this account are made with AFTER TAX dollars. So you pay taxes going in. But, the biggest advantage in my opinion is that all the earnings in a Roth account grow TAX free, and when you withdraw it later, you don’t pay ANY taxes. This could especially be important, for example, if you have a regular 401k, when you withdraw your money you’re taxed on your earnings by whatever your income tax rate is at the time.

One note I want to cover is that: to qualify for tax-free earnings, the funds need to be inyour Roth 401k for 5 years+ before it starts to qualify for that. But since these are long-term retirement accounts, this is generally not an issue.

One of the biggest benefits of having a 401k is what’s called EMPLOYER MATCH. If you work for a company, chances are they have some sort of benefit program that includes this.

You always want to max your employer match if you can, this is the most optimal way of contributing to retirement.

As of 2020, the contribution limits on 401ks is $19,500, but note that this is the TOTAL. So if you had both a 401k and a Roth 401k you can split that total up however you like.

So let’s talk about the 2nd priority: opening up a Roth IRA. After contributing as much as you would need to get the match with your employer, you’ll want to contribute the max to a Roth IRA every year if possible. There is an income limit to the Roth IRA however – if you make more than 139k a year, you cannot contribute to a Roth IRA. If you are making more than 139k a year, you may just want to skip to the investments portion of this video which I’ll put in a timestamp below.

Most 401ks will have a variety of investment options – including mutual funds, target date funds, etc – juts make sure you examine what you are investing in, make sure it’s well diversified, and the fees are low.

If you are trying to choose an investment in your 401k portfolio, always look at how much the fees are. Anything above 0.2-0.3% is what I would consider high. Vanguard index funds for example, have expense ratios of 0.04%, and those are the lowest in the industry.

Timestamps:
0:00 Start Here
0:59 What is a Trad. 401k
1:46 What is a Roth 401k
3:13 Employer Match
5:05 Roth IRA
7:30 What to Invest In
7:54 Expense Ratios
9:46 Priorities

📧 Contact me: If you have a question feel free to leave me a comment on my videos or follow me on IG and send me a DM! If you have a business related inquiry, please then send me an email at humphreytalks@gmail.com

Disclaimer: I am not a financial advisor, any investment commentary are my opinions only. Some of the products and services that appear on this channel are from companies that I have an affiliate relationship with, such as Robinhood, for which I recieve a small percentage made via those links, but it doesn’t cost you anything extra!

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