View the spreadsheet on the side if you are having difficulty following the Pretax Vs Roth comparison: docs.google.com/spreadsheets/d/1ALjEoWfWPlNiNTNuRudEU2uozVWVMQpQjcNT_USc8HI/edit?usp=sharing
As a soon-to-be retiree, keeping my 401k on track after a bumpy 2022 is a high goal. I've read about investors generating up to $250k ROI in this present sinking market; any suggestions for increasing my ROI before retirement would be greatly appreciated.
Yes, you are right. it's been a brisk tailwind for investors in US stocks over the decades but it is still a delicate season now, so I advise you to consider the guidance of a financial advisor.
A lot of folks downplay the role of advisors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve notwithstanding inflation, from $275k to $850k.
*Gertrude Margaret Quinto* is the licensed advisor I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.
The Roth 401k can be beneficial if you expect your tax rate to be higher in retirement than it is now. Given the uncertainty of future tax rates, it’s a good hedge against rising taxes.
I’ve read that the US economy’s fluctuations could impact future tax policies significantly. If taxes increase, having a Roth 401k might save you money in the long run since withdrawals are tax-free.
My portfolio took a hit last year, and I’m trying to stabilize it. I’m leaning towards a Roth 401k because I think tax rates are likely to go up. Do you guys have any experience with this transition?
Yes, I transitioned to a Roth 401k two years ago, and it has provided me peace of mind. I don’t have to worry about future tax hikes affecting my retirement funds. Plus, the tax-free growth is a great advantage.
From what I understand, the current economic trends suggest that taxes might increase to address the national debt and other fiscal policies. A Roth 401k could be a safer bet in such a scenario.
However, don’t forget the immediate tax benefits of a traditional 401k. If you’re in a high tax bracket now, those savings can be substantial. It really depends on your current income and expected future income.
Exactly 🎉🎉🎉. I have supported this theory for a long time. I love your detailed explanation, As usual. 👏🏽👏🏽 Fingers crossed for your next episode on the Roth 401k exception 😂 You could provide some details about 401k withdrawal Conditions/ Compulsion / Frequency, if any.
Great job on the detailed work, thank you so much for putting the effort! One question: isn’t 8% return an assumption as well? There should be a point (somewhere higher that 8% of average return) where the conclusion will change. Please correct/confirm - will be really appreciated!
8% return is hypothetical and reflects reasonable return for long time frame. Different tax rates a greater impact on whether traditional or Roth is better choice. No conclusion can be made about if traditional or Roth is always or generally better, just that this specific YT scenario traditional is better.
Roth will be beneficial if one wants to withdraw whole 401k at the same time irrespective of tax slabs. So a blend of both will be a good choice, so that we can withdraw any amount of money from Roth in a given year along with the benefits of pretax 401k
Thank you for the comparison. You missed on scenario with RMD and also the fact that in Roth the employer contributions are pre tax and they will be taxed on withdrawal (although that might not be much of a bearing but maybe it is). Also missed on inheritance tax benefits.
@@NiranjanBendre not binding on the employer but they can choose to provide that option. Only employees fully vested in matching or nonelective contributions (as applicable) when they are allocated can make a Roth designation for those contributions. Partially vested employees can’t elect Roth treatment for the vested portion of their contributions. Designated Roth matching and nonelective contributions are excluded from wages for federal income tax withholding purposes. However, IRS indicates that employees electing Roth treatment may need to adjust their tax withholding elections or make estimated tax payments to account for the tax due on these amounts. Sponsors may want to communicate this point to eligible employees. Designated Roth matching and nonelective contributions are reportable on Form 1099-R. IRS instructs filers to report the aggregate amount of such contributions made to a participant during the year in boxes 1 and 2a and use code G in box 7.
4:25 "pay additional 27% tax on contribution... $6,210...$490k " That $6,210 is incorrect as computation is not additional 27% on $23k but $23k is result after 27% tax has been removed: $23,000 / 0.73 = $31,506.85 pretax income needed to contribute $23k to Roth 401(k) so ($31,506.85 - $23,000 =) $8,506.85 tax $31,506.85 * 0.27 tax rate = $8,056.85 tax : $31,506.85 - $8,506.85 = $23,000 Roth 401(k) contribution $8,506.85 at 8% for 25 years = $671,653 not $490k
Can you please make a video on how to convert or transfer the traditional 401K money to non taxable accounts couple of year’s before retirement and the withdrawal limits on non taxable accounts
Thanks sir for the detailed video. What will happen during early withdrawals. Comparing both Roth vs Pre tax. Can we do 50 50 contribution in both of them
@@RRD111 (1) doesn't make sense. Why would I want to pay tax at when I have a good pay.. Also it is possible you are a single in which case.. tax savings are going to be higher with tax deferral
As I said in the episode, the social security and standard deduction will cancel off each the for the most part. You will not see much of a difference from social security income. A combination of pretax and Roth can definitely be advantageous depending on your needs. I will cover that in the next episode.
Since LT Cap Gains are not taxed until >$94k, now I’m thinking if it is even worth doing after tax 401k (mega back door Roth conversion), because even in brokerage account the cap gains won’t be taxed until 94k, plus I’ll have the freedom to withdraw gains before 59.5yrs in brokerage acct unlike Roth account. You have really made me think. I would appreciate any inputs on this.
If you realize capital gains in the working years when your taxable income is potentially > 94k you will have to pay capital gains. 94k limit includes all incomes not just capital gain. If you are a buy and hold type of a person then you will not incurr any captial gains but for dividend.
@@cybrainx72 true, I was assuming that I’ll stop working in another ~10 years and then slowly start cashing the brokerage and Roth funds. And since my total expenditure would be less than 94k, there won’t be a reason to realise more cap gains than that. But megaback door would give me the ability to cash out my contributions/gains for a big expense like college tuition in one shot without worrying about taxes.
A mega back door Roth is definitely better than a brokerage after retirement (No tax for any amount of withdrawal Vs No tax only for the first 94K of income). But depending on our needs, we can combine them to work in our favor. For early retirement, yes, you can use brokerage account withdrawal tax free for $94K + Standard deduction $29K. You can also line up the backdoor Roth for that purpose. When you change job, move your Roth 401K balance into Roth IRA. This moved money will be available for you to withdraw tax free and penalty free in 5 years. You can also line up your pretax 401K for this purpose as well (Roth conversion ladder strategy). www.madfientist.com/how-to-access-retirement-funds-early/ When we understand how different accounts work with its own advantages and disadvantages, we should be able to set them up to fit our situation to take the maximum benefit from them.
@@InvestmentInsightsEnglish thank you for the detailed explanation Vijay sir. That blog is very helpful. Just one more follow up, when you say move Roth 401k money to Roth IRA and then withdraw in 5 years, I still have to be 59.5 years old to withdraw the earnings right? And I assume I can withdraw only the contributions at any point without 5 year or 59.5 yr age restrictions. The blog does not clearly state that either.
Actually it is the rolled over money (contribution + earnings from Roth 401K) that can be withdrawn in 5 years. Any earnings from the rolled over money have to wait till retirement.
Hello Vijay Mohan! Is this true that the withdrawals are taxed as capital gains? As far as I know (and some articles confirms it) withdrawals from the traditional IRAs and 401(k)s are taxed at ordinary income rates not treated as capital gains. Can you confirm?
Yes. The capital gains that he referred to is for the brokerage accounts, which is your after tax money contributed, and it will not be taxed again. Pre-tax 401k or IRAs are taxed during withdrawal
@@jawethakther I know. My question is around taxed as capital gain vs ordinary income. That makes a huge difference. I don’t think it is taxed as capital gain. It is taxed as ordinary income.
Withdrawals from pretax 401K will be taxed like regular ordinary income as I shown in the episode. Withdrawals from brokerage will be taxed for the capital gains.
Tax rate is currently at the lowest historically and I think it’s naive to assume that it ll stay the same in 20 yrs time. That will potentially change the math. But fantastic explanation!
But what if I’m in California and paying 10% state tax and retire in Florida with 0% state tax? That is more certain to happen than the federal tax slabs going up by 10%.
@@SunalMittal I wrote a python script to adjust for inflation and calculate effective tax rates in history. For around 75-150k salary now, very few years had an effective rate more than the current marginal rate and when it was higher for a few years out of the 80 calculated, it was only a few % higher. So worst case scenario you were out 2-3% but if you now include like you said, moving to a low/no income tax state, you easily beat out that few %. Roth does have other benefits, like avoiding RMD's (which may not actually be a problem for most people because you planned on taking that $ or more out anyway). It does not count towards provisional income so it will save taxes on SS income and reduce what you would pay in medicare premiums. Also when you pass away, your beneficiaries need to withdraw that $ within 10 years so chances are they will be working when they pull it out so Roth obviously has the benefit in that scenario. I like to do a mix of both, Roth IRA and Trad 401k. I recently swapped to doing full Roth 401k but that is because I started really late with the Roth IRA so I am just trying to get to essentially catch up on my Roth %, eventually I will switch back to Trad 401k.
![OsamaSon - ik what you did last summer [Official Music Video]](http://i.ytimg.com/vi/4DIQDnu3mr4/mqdefault.jpg)
View the spreadsheet on the side if you are having difficulty following the Pretax Vs Roth comparison:
docs.google.com/spreadsheets/d/1ALjEoWfWPlNiNTNuRudEU2uozVWVMQpQjcNT_USc8HI/edit?usp=sharing
As a soon-to-be retiree, keeping my 401k on track after a bumpy 2022 is a high goal. I've read about investors generating up to $250k ROI in this present sinking market; any suggestions for increasing my ROI before retirement would be greatly appreciated.
Yes, you are right. it's been a brisk tailwind for investors in US stocks over the decades but it is still a delicate season now, so I advise you to consider the guidance of a financial advisor.
A lot of folks downplay the role of advisors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve notwithstanding inflation, from $275k to $850k.
@@maryHenokNftImpressive can you share more info?
*Gertrude Margaret Quinto* is the licensed advisor I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment.
She appears to be well-educated and well-read. I ran a Google search on her name and came across her website; thank you for sharing.
The Roth 401k can be beneficial if you expect your tax rate to be higher in retirement than it is now. Given the uncertainty of future tax rates, it’s a good hedge against rising taxes.
I’ve read that the US economy’s fluctuations could impact future tax policies significantly. If taxes increase, having a Roth 401k might save you money in the long run since withdrawals are tax-free.
My portfolio took a hit last year, and I’m trying to stabilize it. I’m leaning towards a Roth 401k because I think tax rates are likely to go up. Do you guys have any experience with this transition?
Yes, I transitioned to a Roth 401k two years ago, and it has provided me peace of mind. I don’t have to worry about future tax hikes affecting my retirement funds. Plus, the tax-free growth is a great advantage.
From what I understand, the current economic trends suggest that taxes might increase to address the national debt and other fiscal policies. A Roth 401k could be a safer bet in such a scenario.
However, don’t forget the immediate tax benefits of a traditional 401k. If you’re in a high tax bracket now, those savings can be substantial. It really depends on your current income and expected future income.
The best comparison till date on the internet. Great job. Good work
Thanks for putting the effort to give detailed explanation
Exactly 🎉🎉🎉.
I have supported this theory for a long time. I love your detailed explanation, As usual. 👏🏽👏🏽
Fingers crossed for your next episode on the Roth 401k exception 😂
You could provide some details about 401k withdrawal Conditions/ Compulsion / Frequency, if any.
Thank you. Nice explanation.
Hello, please post 403b vs 457 comparison. Which is better if we don’t plan to retire by 59? Withdrawal differences etc
Great job on the detailed work, thank you so much for putting the effort!
One question: isn’t 8% return an assumption as well? There should be a point (somewhere higher that 8% of average return) where the conclusion will change. Please correct/confirm - will be really appreciated!
8% return is hypothetical and reflects reasonable return for long time frame. Different tax rates a greater impact on whether traditional or Roth is better choice. No conclusion can be made about if traditional or Roth is always or generally better, just that this specific YT scenario traditional is better.
Is it good to invest in Low volatility International equity fund ?
Thank you very much Sir. Great video
Roth will be beneficial if one wants to withdraw whole 401k at the same time irrespective of tax slabs. So a blend of both will be a good choice, so that we can withdraw any amount of money from Roth in a given year along with the benefits of pretax 401k
That too when passed on to kids.. they have to withdraw in 10 years. Having 401k or ira will be burden.
Thank you for the comparison. You missed on scenario with RMD and also the fact that in Roth the employer contributions are pre tax and they will be taxed on withdrawal (although that might not be much of a bearing but maybe it is). Also missed on inheritance tax benefits.
@@RRD111 so employee contribution can be Roth too?
RMD and Inheritance benefits will be covered in the next episode.
@@InvestmentInsightsEnglishthank you sir! Inspired by you I would like to change careers to financial advisor 😊
@@NiranjanBendre not binding on the employer but they can choose to provide that option. Only employees fully vested in matching or nonelective contributions (as applicable) when they are allocated can make a Roth designation for those contributions. Partially vested employees can’t elect Roth treatment for the vested portion of their contributions. Designated Roth matching and nonelective contributions are excluded from wages for federal income tax withholding purposes. However, IRS indicates that employees electing Roth treatment may need to adjust their tax withholding elections or make estimated tax payments to account for the tax due on these amounts. Sponsors may want to communicate this point to eligible employees. Designated Roth matching and nonelective contributions are reportable on Form 1099-R. IRS instructs filers to report the aggregate amount of such contributions made to a participant during the year in boxes 1 and 2a and use code G in box 7.
Today , IRS released new max out amount for HSA plan 2025. Could you pls share more insights about it
4:25 "pay additional 27% tax on contribution... $6,210...$490k " That $6,210 is incorrect as computation is not additional 27% on $23k but $23k is result after 27% tax has been removed:
$23,000 / 0.73 = $31,506.85 pretax income needed to contribute $23k to Roth 401(k) so ($31,506.85 - $23,000 =) $8,506.85 tax
$31,506.85 * 0.27 tax rate = $8,056.85 tax : $31,506.85 - $8,506.85 = $23,000 Roth 401(k) contribution
$8,506.85 at 8% for 25 years = $671,653 not $490k
Can you explain 401 k Catch up and after tax
Can you please make a video on how to convert or transfer the traditional 401K money to non taxable accounts couple of year’s before retirement and the withdrawal limits on non taxable accounts
They all will be covered as part of this US retirement series.
Sir there is another assumption about the returns in the investment is consistent right? Is it not an assumption? Or is it possible to do that way?
8% rate of return in this video is hypothetical and constant for sake of simplicity.
Thanks sir for the detailed video. What will happen during early withdrawals. Comparing both Roth vs Pre tax. Can we do 50 50 contribution in both of them
@@RRD111 (1) doesn't make sense. Why would I want to pay tax at when I have a good pay.. Also it is possible you are a single in which case.. tax savings are going to be higher with tax deferral
Can you make it practical and give fair comparison with social security? Also is combination of pretax and Roth be advantageous?
As I said in the episode, the social security and standard deduction will cancel off each the for the most part. You will not see much of a difference from social security income.
A combination of pretax and Roth can definitely be advantageous depending on your needs. I will cover that in the next episode.
Great video!! Waiting for the second part!!
Since LT Cap Gains are not taxed until >$94k, now I’m thinking if it is even worth doing after tax 401k (mega back door Roth conversion), because even in brokerage account the cap gains won’t be taxed until 94k, plus I’ll have the freedom to withdraw gains before 59.5yrs in brokerage acct unlike Roth account.
You have really made me think. I would appreciate any inputs on this.
If you realize capital gains in the working years when your taxable income is potentially > 94k you will have to pay capital gains. 94k limit includes all incomes not just capital gain. If you are a buy and hold type of a person then you will not incurr any captial gains but for dividend.
@@cybrainx72 true, I was assuming that I’ll stop working in another ~10 years and then slowly start cashing the brokerage and Roth funds. And since my total expenditure would be less than 94k, there won’t be a reason to realise more cap gains than that.
But megaback door would give me the ability to cash out my contributions/gains for a big expense like college tuition in one shot without worrying about taxes.
A mega back door Roth is definitely better than a brokerage after retirement (No tax for any amount of withdrawal Vs No tax only for the first 94K of income). But depending on our needs, we can combine them to work in our favor. For early retirement, yes, you can use brokerage account withdrawal tax free for $94K + Standard deduction $29K. You can also line up the backdoor Roth for that purpose. When you change job, move your Roth 401K balance into Roth IRA. This moved money will be available for you to withdraw tax free and penalty free in 5 years. You can also line up your pretax 401K for this purpose as well (Roth conversion ladder strategy).
www.madfientist.com/how-to-access-retirement-funds-early/
When we understand how different accounts work with its own advantages and disadvantages, we should be able to set them up to fit our situation to take the maximum benefit from them.
@@InvestmentInsightsEnglish thank you for the detailed explanation Vijay sir. That blog is very helpful. Just one more follow up, when you say move Roth 401k money to Roth IRA and then withdraw in 5 years, I still have to be 59.5 years old to withdraw the earnings right? And I assume I can withdraw only the contributions at any point without 5 year or 59.5 yr age restrictions. The blog does not clearly state that either.
Actually it is the rolled over money (contribution + earnings from Roth 401K) that can be withdrawn in 5 years. Any earnings from the rolled over money have to wait till retirement.
Hello Vijay Mohan!
Is this true that the withdrawals are taxed as capital gains?
As far as I know (and some articles confirms it) withdrawals from the traditional IRAs and 401(k)s are taxed at ordinary income rates not treated as capital gains. Can you confirm?
Yes. The capital gains that he referred to is for the brokerage accounts, which is your after tax money contributed, and it will not be taxed again. Pre-tax 401k or IRAs are taxed during withdrawal
@@jawethakther I know. My question is around taxed as capital gain vs ordinary income. That makes a huge difference. I don’t think it is taxed as capital gain. It is taxed as ordinary income.
@@Layachu yes.
Withdrawals from pretax 401K will be taxed like regular ordinary income as I shown in the episode.
Withdrawals from brokerage will be taxed for the capital gains.
@@InvestmentInsightsEnglish Thank you! I have more ROTH 401k allocation than Trad 401k. Hence asked.
is the employer contribution is taxed at time of withdrawal?
Yes
Tax rate is currently at the lowest historically and I think it’s naive to assume that it ll stay the same in 20 yrs time. That will potentially change the math. But fantastic explanation!
But what if I’m in California and paying 10% state tax and retire in Florida with 0% state tax? That is more certain to happen than the federal tax slabs going up by 10%.
Exactly my point too, with debt growing every year the question is will the tax rate stay the same?
@@SunalMittal I wrote a python script to adjust for inflation and calculate effective tax rates in history. For around 75-150k salary now, very few years had an effective rate more than the current marginal rate and when it was higher for a few years out of the 80 calculated, it was only a few % higher. So worst case scenario you were out 2-3% but if you now include like you said, moving to a low/no income tax state, you easily beat out that few %.
Roth does have other benefits, like avoiding RMD's (which may not actually be a problem for most people because you planned on taking that $ or more out anyway). It does not count towards provisional income so it will save taxes on SS income and reduce what you would pay in medicare premiums. Also when you pass away, your beneficiaries need to withdraw that $ within 10 years so chances are they will be working when they pull it out so Roth obviously has the benefit in that scenario.
I like to do a mix of both, Roth IRA and Trad 401k. I recently swapped to doing full Roth 401k but that is because I started really late with the Roth IRA so I am just trying to get to essentially catch up on my Roth %, eventually I will switch back to Trad 401k.
1st comment 1st like...✌️
With the federal debt trend will the tax increase from 22% to 40%