What is best ira or 401k
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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