Name: 401(k) vs. Roth IRA, understanding which retirement plan is for you
Uploaded: 2022-10-18
Duration: 4 min 58 s
Description: Fortune’s Senior Reporter Megan Leonhardt breaks down what you need to know about common retirement plans.

Fortune’s Senior Reporter Megan Leonhardt breaks down what you need to know about common retirement plans. 

401(k) vs. Roth IRA, understanding which retirement plan is for you

Finance

401(k) vs. Roth IRA, which retirement plan is for you

there are so many different types of retirement accounts out there. It can get super confusing. We're gonna be talking about some common types of retirement accounts including 401 Ks and individual retirement accounts also known as iras both the traditional and the rock kinds so that you'll understand how they work and how best to maximize the different advantages of each of these types of accounts. Many times it's not an either or situation. It's the one plus one plus one plus one plus one. I'm just using that. You can be enrolled in multiple types of retirement accounts. For example a lot of americans are in a four oh one K. And they're in a Roth ira totally acceptable. Both 401 Ks and iras allow you to invest in a number of funds including bonds and E. T. S. And of course over time hopefully that money will grow and you'll have a nice nest egg for retirement when it comes to a four oh one K. This is provided by an employer. The rules and restrictions are either set up by an employer or the retirement plan providers when it comes to an individual retirement account. An ira. In other words much of that is actually put on you the saber. You have more control over it also it may actually be your main retirement account depending on your situation. Common types usually for most americans are sort of your traditional and your Roth Iras traditional really encompasses a couple of different categories but it basically means that pretax account with a Roth ira. On the other hand though, this is a post tax account. The saying is true. The only thing you can rely on is death and taxes. We're talking about a pretax account of four oh one K. For example, what that means is you're going to have the money come in before you pay any payroll taxes, any Social Security, any Medicaid taxes on that when you retire, it automatically assumes that you are going to be in a lower tax bracket. Maybe you'll be not working, maybe only working part time in retirement hopefully will not be paying as much payroll taxes on your retirement than you would have been during your peak earning years. There are actually a number of ways that you can take money out of the account without paying penalties. If you're having a baby, you're going back to school maybe buying a home for the first time, You may be able to take a withdrawal early in order to pay for those life events. You still may have to pay taxes of course because this went in as tax free money. But on a whole, most experts recommend really trying not to touch this money until you retire. Now on the flip side, we have post tax accounts and these are generally Roth iras Roth 401 case where you're paying the taxes that the front end you end up having life emergencies. This account provides a little bit more flexibility because you've already paid the taxes on it when it comes to investing and saving in your 401k. A lot of employers will offer a matching program. Now if you're not familiar with this, it's really simple. Think of it as free money that your employer is giving you a lot of times an employer match in a four oh one K. Prime will look something like anywhere between three to maybe 6% of your annual contributions. And so that means instead of getting just 3% of your salary and you get a total of 6% of your salary and and half of that money is coming from your boss. Many americans have probably seen a new benefit available to them in the form of a Roth 401k. Only about one in five employers are offering this right now but more jumping on board and it is actually a little bit of a hybrid account between a Roth ira and four oh one K. So it actually has benefits from both sides of the equation. Like a Roth ira, you can put money in post tax for a Roth 401k. Very helpful and certainly like a four oh one K. You have a little bit higher contribution limits than your traditional Roth ira a lot of times it's a little bit of like building a puzzle. You need to make sure that you're using usually multiple types of accounts at different points in your life. For example, many experts will say when you're younger, you want to do a post tax account because you're in a lower tax bracket. When you start earning your max or your peak earning, you certainly were wanting to put as much away in a pretax account, like a four oh one K. And lower your total tax bill annually and then when you start heading into retirement, perhaps even doing a part time job in retirement and if you are still saving using that rock again because you're in a lower tax bracket, of course, all of this is just best advice. You need to figure out what works best for you at the end of the day, you just want to make sure that you're saving for retirement in a way that is both feasible, practical and hopefully is getting you the maximum returns at the lowest tax rate possible.