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Becoming a Millionaire: Roth IRA vs 401K (What makes the MOST PROFIT)

what's of the guys it's Graham here so

here's a question that's been coming up

a lot recently and this is a very

confusing question for most people and

that is this what is better to invest in

a Roth IRA or traditional 401k now this

is actually a someone complicated answer

and it's definitely not a

one-size-fits-all approach so I figured

I would just take the time to make this

video to break down exactly which one

would be best for you and which one is

going to give you the most amount of

money in the long run and seriously

though if you're at all confused about

which one you should be investing in or

which one would be better for you just

watching this video until the very end

and understanding these concepts could

save you tens of thousands or

potentially even hundreds of thousands

of dollars and pretty much guarantee

that and I know I know it's a bold claim

to pretty much guarantee something like

this but trust me if you watch this

video until the very end and you smash

that like button if you haven't already

because this video took me forever to do

you'll understand why so let's first

start with some background on the

almighty Roth IRA so this is a

retirement account where you can

contribute and invest up to six thousand

dollars per year with post tax money and

after the age of fifty nine and a half

you can withdraw all of that money in

that account and whatever profit you

made completely tax-free this means that

you could potentially get decades upon

decades of compound interest and growth

or hundreds of thousands of dollars in

profit without paying any taxes on those

gains now here are some of the benefits

of doing this the first one like I just

mentioned is that all the profit you

make in this account is completely

tax-free after the age of fifty nine and

a half that could save you a lot of

money by the time you retire especially

if you begin investing in this early on

now secondly with a Roth IRA you can

withdraw whatever money you contribute

to that account at any time completely

tax-free without paying any penalty this

means that if you contribute six

thousand dollars to an account this year

and let's say next year it grows to

seven thousand dollars well you could

still withdraw your initial six thousand

dollars without paying any additional

tax you must however leave the profit

you made in the account this gives you a

lot of flexibility in the event that you

need your money unexpectedly however

unfortunately there's no such thing as a

free lunch so these are some of the

downsides a first thing with the Roth

IRA is that you contribute what's called

post tax money which is the money that

you've made

after you've already paid taxes on it

and of course as we all know the money

that you have left over after you pay

taxes is a lot smaller than before you

had the taxes taken out of that so that

just leaves you with less money upfront

to invest all things considered now

secondly if you want to take out your

profit from this account prior to the

age of fifty nine and a half you're

gonna be subject to a 10% penalty and

you're going to have to pay taxes on

that money which it pretty much defeats

the entire purpose of contributing to a

Roth IRA in the first place now third

the contribution limit to a Roth IRA is

capped right now it's six thousand

dollars per year so if you want to

contribute more than that to this

account well you can't but I with that

said how does this all compared to a

traditional 401k well the traditional

401k is an employer sponsored retirement

plan where you contribute pre-tax money

into this account which means you won't

pay any taxes on the money that you

contribute now because you don't have to

pay any tax on the money you contribute

to this account this means that you have

more money left over to invest instead

of paying it to the IRS and with that

extra money you can then go and invest

it to make you even more money then

after the age of fifty nine and a half

you could begin withdrawing the money

that you have in a 401k and you just end

up paying the taxes you would have owned

later at that time so basically you're

avoiding paying taxes on that money

right now just to end up paying it off

later at the time you actually take it

out of the account but the advantage to

doing this is that you have more money

left over upfront to invest with so you

have a larger amount working for you to

make you even more money I just like the

Roth IRA here are the positives of doing

this the first and main benefit of doing

this is that you contribute what's

called pre-tax money which means that

this is money that has not been taxed

and this is actually a pretty

substantial tax write-off so this means

for example if you're in a thirty two

percent tax bracket and you contribute

19 thousand dollars to a traditional

401k this will save you six thousand

eighty dollars in taxes and this means

an additional six thousand eighty

dollars that you can then go and invest

to work for you instead of paying that

to the IRS so secondly you can

contribute up to 19 thousand dollars per

year in a 401k and that is more than

three times higher than what you can do

with a Roth IRA

a third some employers are gonna offer

you what's called an employer match in a

401k and this is where they match you

dollar for dollar for whatever you

contribute into this account now in

terms of investment ROI

this is the best guaranteed risk-free

100 percent return on investment you

will ever get in your entire lives

always do this no matter what at least

always take the employer match and at

least always smash that like button if

you haven't already

but now for real though at least has

promised me this is something you will

do this is one of the biggest benefits

of contributing to a 401k is having the

employer match if you have this always

take advantage of it no matter what but

now of course with that said

unfortunately there are some downsides

with the 401k that I do want to mention

the first one is that even though you

don't pay taxes on that money now and

you save all of it you're gonna end up

paying taxes on that money after the age

of 59 and a half whenever you take the

money out of that account so with a 401k

hopefully you're saving on taxes now

when you're in a really high tax bracket

to then withdraw it later on when maybe

you're not making as much money in a

lower tax bracket and then you end up

profiting that difference now secondly

if you want to take out any of the money

in a 401k prior to the age of 59 and a

half for anything other than financial

hardship you're gonna be hit with a 10%

penalty and you're going to have to pay

ordinary income taxes on that money

which is a lot higher than you paying

long-term capital gains because you've

held that investment for a long period

of time

the third downside to see with this is

that you're going to be forced to

withdraw some of this money beginning at

the age of 70 and a half which if you

want to keep it in there and just let it

continue growing you know well you can't

so now with all of that said which one

is actually the better option and which

one should you contribute to so let's

first start with the Roth IRA now since

this is done with post tax money meaning

you don't get any immediate tax

deduction on the money you contribute to

this account this is best done when

you're young in a low tax bracket and

not already making a lot of money or

basically it's better when you know

you're gonna be making more money in a

future and because of that you're going

to be in an even higher tax bracket on

the other hand a Roth is not a good

investment if you're making a ton of

money right now in your prime earning

years and you expect to make less money

by the time you

like let's say right now you're running

a business and that's making you

$300,000 per year but you know this is

not going to last forever and you don't

expect to really be making more than

like $80,000 a year by the time you're

60 well in this case you're in a high

tax bracket now but again by the time

you retire you're gonna be in a much

lower tax bracket so in this case it's

smarter to take the 401k deduction at

the higher tax bracket and then pay

taxes on it by the time you're making

less money in the lower tax bracket and

then you save that difference and of

course in my opinion that's really how

these accounts should be prioritized and

the reality is that most people in

retirement will not need as much income

as they need right now potentially by

the time you retire you're gonna have it

paid off home and you're probably not

going to be working full time and

because of that you're not gonna need as

much money to survive and then because

of that you're gonna be in a lower tax

bracket which is ideal for withdrawing

your money from a 401k when you pay tax

at that time so for people in this

position who are making a ton of money

now but don't necessarily expect this to

continue in the future

a traditional 401k could make a lot of

sense especially if you're in a 32 or

34% higher tax bracket and you expect to

retire in a lower tax bracket however

there's also a very large percentage of

people out there who expect to be like

ballin in retirement and just making a

ton of money and I expect to probably be

one of those people even though I'm

currently in a ridiculously high tax

bracket I expect myself to make even

more money in the future and I can't

expect myself ever not to work and make

money so it kind of makes sense that I

should contribute to a Roth first

knowing that in the future if I make

more money I'm not gonna have to pay any

additional taxes now another concern I

have with prioritizing a traditional

401k is that we have no idea what the

tax situation will look like 30 or 40

years from now for example the tax rates

could be significantly higher than what

they are right now and if this is the

case you could end up paying way more

taxes in the future than if you made the

same amount of money today and that of

course is very very bad I just see it as

being too many variables that could

affect the potential tax rate positively

or negatively in the future that none of

us can predict so given all of that

information here's my own personal

recommendation

of what I would do and of course this is

not financial advice for entertainment

purposes only

that's my disclosure right there so no

one get upset this is just my opinion do

your own research on this obviously and

don't listen to some person on YouTube

so anyway with that said if it were me

if you're young and in a low tax bracket

the first thing you should do is

prioritize the Roth IRA you're not going

to regret that when you're older and I

pretty much consider this a sure thing

your tax-free money is going to be worth

a lot more in the future or on the other

hand if you're making a ton of money

right now in a super high tax bracket

and you don't expect that to last and

you expect to retire in a much lower tax

bracket then potentially you may want to

prioritize the traditional 401k take the

write-off now with the high tax bracket

withdraw the money in a lower tax

bracket and you'll be left over with

more in the future and the right mix

between this in my opinion is probably

just a balance between the two

I still contribute money to a

traditional 401k just to hedge my

options I have no idea if it's going to

be the smarter choice or the worst

choice in the future but I do it just in

case as an option I also go pretty heavy

with the Roth option as well because I

know a hundred percent this is going to

be tax-free in retirement and it won't

really have to question what the future

tax rates might be if they're higher or

lower and for anyone else also watching

this you can also look into what's

called a Roth 401k this is very similar

to the Roth IRA except with a higher

contribution limit of $19,000 per year

and of course this works really well if

you want more money to contribute with

the Roth option beyond just a Roth IRA

this one works phenomenally well and if

you're still confused on this because

honestly this topic is extremely complex

to explain I'm including a calculator

down in the description which will tell

you how much money you would have left

over with each option for your own tax

bracket in an income so for sure

definitely check that out

and as always you guys thank you so much

for watching I really appreciate it if

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for watching and until next time