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Traditional 401k or Roth 401k Which is better #retirement
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Feb 25, 2024
When selecting a 401(k) plan, it's crucial to consider various factors to ensure it aligns with your financial goals and preferences. Look for a plan with low fees, a diverse selection of investment options, and ideally, an employer match. Consider your risk tolerance, investment timeline, and retirement goals to choose the best 401(k) plan for your needs. //Creative Commons Attribution Licence video (Reuse allowed)
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56% of Americans say they're not on track to retire and need around $1.3 million to
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retire comfortably. One popular rule of thumb is to have enough to put away that you'll
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be able to withdraw 4% from your investment each year in retirement. It can be stressful
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to think that you won't be financially ready to retire when you're physically and emotionally
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ready. So today we're diving into the world of retirement savings, especially comparing
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traditional 401k, Roth 401k and Roth IRA. If you're new here, don't forget to click
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the subscribe button and turn on notifications so you never miss out on helpful financial
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tips. So, you're planning for your future and you know you need to start saving for
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your retirement. But which type of account or 401k account is right for you? Let's break
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down the differences between traditional 401k and the Roth 401k. Firstly, let's talk about
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contributions. With a traditional 401k, your contributions are made with pre-tax dollars
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This means the money you contribute reduces your taxable income for the year, potentially
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lowering your tax bill. However, you'll pay taxes on your withdrawals during retirement
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If you earn $90,000 and make a $20,000 contribution to your traditional 401k, you're taxed on
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$70,000 worth of income. In exchange for this upfront benefit, you'll owe taxes on
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the entire amount of your portfolio when you withdraw the money in retirement. On the other
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hand, with the Roth 401k, your contributions are made with after-tax dollars that is funded
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with money you've already paid taxes on. This means you won't get an immediate tax break
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when you contribute, but your investment will grow tax-free and so your withdrawals in retirement
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are tax-free. Next up, let's talk about eligibility and withdrawal rules. With traditional 401k
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anyone with earned income can contribute and withdrawals are subject to income tax and
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potentially early withdrawal penalties if taken before age 59.5. Meanwhile, Roth 401ks
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have more flexible withdrawal rules. While contributions can be withdrawn penalty-free at any time, earnings may subject to taxes and penalties if withdrawn before age 59.5
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unless certain conditions are met. Another key difference lies in required to minimum
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distributions or RMDs. With traditional 401k, you must start taking RMDs once you reach
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age 72, regardless of whether you need the money or not. These withdrawals are taxed
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as ordinary income. However, with Roth 401k, there are no RMDs during account owner's
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lifetime, making it an attractive option for those who don't need the money immediately
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and want to continue growing their retirement savings tax-free. If you think the rules for
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Roth 401k sounds familiar, you're right. They're the same ones that apply to Roth IRA. But
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Roth 401k bears a few distinct differences. Unlike Roth IRA, the accounts offered through
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your workplace don't come with an income limit, so you can contribute regardless of your salary
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and you can contribute quite a bit more. For 2023, anyone with an employer-sponsored 401k
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plan can contribute up to $22,500 Roth or traditional, with an additional $7,500 catch-up
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contribution if you're age 50 or older. Individual tax filers with a modified adjusted gross
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income under $138,000 can contribute up to $6,500 in total across their traditional and
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Roth IRA accounts, and those 50 and older can contribute an additional $1,000 catch-up
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If you earn more than $138,000 a year but less than $153,000, you can contribute a reduced
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amount. Roth 401k plans are less flexible than Roth IRA plans. While you can withdraw
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your contribution at any time from your Roth IRA without tax and penalty, early withdrawal
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from Roth 401k come with a 10% penalty. Some investors favor the traditional 401k because
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of the tax break. Forgoing tax break today can potentially net huge gains down the road
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depending on your financial situation. The whole decision is a bet on today's tax rates
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versus future tax rates. With Roth money tax up front, you're theoretically coming out
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ahead if you expect to pay lower taxes now than you will at the time of your retirement
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Once you know how much you need to retire, you'll figure out what it will take to get
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there. You can increase your contribution or plan to work a few years longer, it depends
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on your financial situation. And that wraps up today's video. I hope you
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found this breakdown helpful in understanding the differences among traditional 401k, Roth
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401ks, and Roth IRAs. If you found this video helpful, give it a thumbs up, and please don't
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forget to subscribe. Thanks for watching, see you in the next one
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