I worked for a company a few years ago that had the option to do a Roth 401k. I was so happy but then I realized that only my contributions were after-tax and the company’s contribution was pre-tax. It caused so much headache.
Yes, it does add a bit of complication to the account, but at least you are not responsible for tracking the different mix of investments, and what the company contributes is still free money. However, some companies have poor contribution plans, and some don't match at all. But most have reasonable contribution matching plans that are very helpful. I free money is available, it's a good idea to take it.
Having so many options on RUclips when it comes to Financial education, I really appreciate when the person making the videos ACTUALLY cares about their viewers by responding AND answering their questions and that to me speaks volumes !!! I truly believe that's the BEST way to find out who really cares and is really worth watching. I really appreciate you. Great información 👌👌👌
Thank you so much for the comment. I certainly appreciate you taking the time to share those thoughts! As you mentioned, I don't just have "canned" replies, and when there is a question, I truly try to take the time to answer it. I appreciate those who take the time to check out the videos, and I hope to provide good information without trying to sell them products or my own courses. Glad you found the channel.🙂
Thank you again for sharing those thoughts of support. I am happy to hear you value the channel. Hopefully, it will continue to grow and the information can reach more people. It is a lot of work to make the videos, so it is very nice to hear when they are valued and appreciated.
This was really helpful! My daughter and I enjoyed seeing your presentation a few months ago. She mentioned that she wanted to invest but we were both uncertain how young someone could setup an investment account. How old does she need to be?
And thank you for attending! I’m happy to hear you found it helpful and that your daughter is interested in getting started with investing. I'm not sure of her age, but to open her own brokerage account, most states require an age of 18, though a few states are higher. For example, Alabama and Nebraska require someone to be 19. However, there are other options available. Custodial accounts (UGMA/UTMA) allow a minor to own assets in a brokerage account while at least one parent or guardian manages and controls the account until the child reaches the legal age of majority. Although the child does not manage the account, the assets in the account do belong to the minor. These types of accounts are available at discount brokerage places like Fidelity and Schwab, and they can certainly help answer any questions. I hope this was helpful. Let me know if you have any other questions. Thank you for checking out the video and leaving a comment.
Mike - it sounded like you were indicating that it's "bad" if the government makes me take out funds from the traditional 401K so that they get their taxes by the time I am 75. I am trying to figure out what might be "wrong" with this for a few reasons. First if I am in a partnership with the government then eventually they have to get their taxes, so at age 75 seems reasonable. If I don't need it for everyday living, I could use it for something fun. If I don't use it all while living then does that mean that my benefactor will pay the taxes? Thanks for a very detailed video.
Sorry - I certainly didn't want to imply that it was bad to use our retirement savings to enjoy life in retirement. That's exactly what we should be doing unless someone is just focused on leaving it for someone else. Let me clarify a few of the things I was referring to. Mandatory minimum withdrawals (RMDs) can become a problem for some people if they only have traditional types of retirement accounts and they have a sizable balance. By problem, I mean it can throw them into much higher tax brackets and cause other income streams, like Social Security and possibly any long-term capital gains from a personal brokerage account, to become taxable at higher rates as well. It can even cause us to be in a higher tax bracket in retirement than we encountered during our working career. This is especially true for super-savers. For example, if someone has $2 million in a traditional retirement account, their RMDs at the age of 75 would be over $81,000 in one year. Now, add Social Security to that and any other income they may have, like capital gains or pensions, and they are losing more of their retirement account to taxes because of higher tax brackets. If someone is 80 and has $2 million in traditional accounts, the RMD would be close to $100,000. This causes more of their Social Security to be taxable and, of course, any capital gains. If our income is low enough, capital gains rates are zero and so can be Social Security. If someone has a mix of Roth-type accounts and traditional accounts, it allows them to manage their tax brackets much better in retirement. The lower the tax bracket we can stay in during retirement, the more of our retirement funds we get to keep for ourselves to enjoy life the way we want because the government is taking less of it. Thus, if someone only has traditional accounts, a series of Roth conversions done correctly ahead of that point can be an excellent solution. That is, in the early years of retirement, we may benefit from converting portions of our traditional retirement accounts to a Roth IRA so when we hit RMDs, the mandatory withdrawals can be managed better. I know that's a lot of information, and it's difficult to cover it thoroughly in a quick reply, but hopefully, that helped a little. Please let me know if you have further questions. Thank you for the comment and your question!
1) 401k Invest up to max match by employer (because of the match, ROI is very high) 2) Max out IRA (ideally Roth because taxes will be higher in future) 3) Max out HSA (triple tax advantage) 4) Try to max out 401k Does that summarize the recommendation Mike?
If we were only discussing retirement accounts, that's a pretty good order with possibly a slight adjustment. If someone is eligible for an HSA and uses it properly as a retirement account, it can be prioritized ahead of the Roth IRA. However, an HSA has a lower contribution limit, so not a lot of money can be diverted to it. Naturally, other factors play into a complete list of funding priorities when it comes to our money. We need to establish a reasonable emergency fund and tackle any high-interest debt, like credit cards, too. Maybe the order of investing or funding priorities would make a good video topic sometime.
I sure appreciate this summary bc for someone like me, who never thinks about this stuff, this was lots to take in. I need to watch again! Thanks for all the info Mike. I will be watching again and again.
Thank you for the video, very informative. I have just asked my son to switch his contributions from transitional 401K to Roth 401K, he is at the 22% tax brackets. For the $23000 limit, is this number based on pretax or post tax basis? Thanks!
Both the traditional 401(k) and the Roth 401(k) have a $23,000 limit. You can contribute to both a traditional 401(k) and a Roth 401(k) in the same year, as long as the total contributions don't exceed the IRS limit. That means between the two accounts, you can contribute a combined maximum of $23,000, or $30,500 if you are over 50. The $23,000 is the total contribution limit into the accounts. Thus, it is pretax for a traditional 401(k) and post-tax for a Roth 401(k). Thank you for the comment, and I am glad you found the video informative! I hope I answered your question.
With me being in the 12% US federal tax bracket having my retirement contributions being 100% Roth IRA 100% Roth 401k makes 1000% sense!!! We already know unless more legislative action takes place the 12% tax bracket is going up to 15% in 2026. Let's say hypothetically my tax bracket stays at 15% at least when I take out distributions from a Roth account it does not tax my social security benefits
Yes, it sounds like you are going to be in great shape come retirement time. Having both a Roth IRA and a Roth 401(k) will help keep you in lower tax brackets. If you only have Roth accounts, your Social Security should likely have zero taxes, and even if you have some capital gains, they could also be taxed at the zero rate. Plus, being in a lower tax bracket makes Medicare premiums less expensive. Plus, no concerns with RMDs. Thanks for sharing, checking out the video, and leaving a comment.
I assume you mean finding a way to tax withdrawals from existing Roth accounts. I'm sure there are politicians who would like to do that, and I have actually seen statements to that effect. There is also some talk about doing away with certain aspects of Roth accounts, particularly regarding what types of investments can be placed inside them. However, to your question, I do not believe that could legally happen with any existing Roth account. It would undermine public trust in the stability and reliability of retirement savings plans. Any change to the tax treatment of Roth accounts would require legislation to pass through Congress. Given the potential backlash from constituents who have been contributing to Roth accounts with the expectation of tax-free withdrawals, such legislation would face significant opposition in the courts. Politicians are generally cautious about making changes that negatively affect a large portion of the electorate, and the political fallout from such a decision could be considerable. It is possible that laws could be changed for new Roth accounts going forward, but even in that case, I do not believe it could be made retroactive on any existing accounts and their earnings. Thus, I have no concerns about this happening, and I hope that alleviates any concerns you may have had. By the way, thanks for the question and checking out the video.
The tax rates are certainly always a consideration. The current brackets are set to sunset after 2025 and, of course, with all the government spending and increased debt, it's hard to predict where the tax brackets might be in the future, but that's a concern. Roth types of accounts provide some insurance against that. Thank you for the comment and checking out the video!
If you are under the income limits, you can certainly do a Roth IRA. Typically, 401(k)s are offered by employers, but there is a Solo 401(k) for business owners with no employees. To understand Solo 401(k) contribution rules, you need to think of yourself as two people: an employer (of yourself) and an employee (yes, also of yourself). Within the overall $69,000 limit in 2024, your contributions are subject to additional limits in each role. As the employee, you can make salary deferral contributions up to $23,000 in 2024, or 100% of compensation, whichever is less. Those 50 or older can contribute an additional $7,500. But you are both the employee and the employer. As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself. You can set one up at places like Fidelity or Schwab.
Had to watch this video again. So much info to learn. I especially like the part about how Roth 401k accounts end up being a mix or blended account with pre-tax and post-tax money in it. I don't think many people understand how this works. Anyway, great video!
Yes, that is an often overlooked aspect of Roth 401(k) accounts. Most people probably don't realize that until they start withdrawing funds and then discover they owe some taxes on part of it. Glad you liked the video!
Yes, having a mix of types of retirement accounts allows us to take full advantage of pre-tax savings during our working career and avoid some taxes later on. By mixing in Roth accounts, we can stay in lower tax brackets, providing more flexibility to manage our tax situation in retirement.
@@MikesFinancialEdge I checked with my HR department and my Roth 401k is indeed all mixed up or as you say blended. Thanks to your video, I better understand how this will work in the future or if I want to roll it over into IRAs now.
My current strategy for the past 6 years have been maxing out traditional 401k and HSA to reduce my MAGI and then max out Roth IRA every year. If i do Roth 401k , i will not be able to max out contribution to Roth IRA , perhaps no contribution at all due to income limits. So in my case , total contribution for Roth 401k is just $23,000 but if i do traditional 401k , my total contribution will be $30,000 ($23,000 for 401k + $7,000 for Roth IRA) Do you think the latter look better for investment?
Looks like you are well on your way to having a comfortable retirement and the option to retire at a younger age. The mix of assets will give you flexibility to manage your tax brackets in retirement quite well. Thus, you will be able to minimize any tax consequences on your traditional 401(k) and Social Security because you will have the Roth IRA and HSA to do so. Are you using your HSA as a retirement account or for ongoing health expenses each year? Here's a video on the best ways to use an HSA for a retirement account: ruclips.net/video/bwxhtmGhkss/видео.html Anyway, sounds like you have a sound plan. Thanks for the comment and for checking out the video.
I have a Roth 401k 🎉🎉🎉i love that part but my employer doesn't match anything. There should be a LAW that all employers have to do a 5% match at the minimum 😭😢😥
Yes, I agree that employers should match something. The whole point of a 401K is to encourage and help employees save and invest for retirement. If employers are going to offer that as a benefit, they need to match something to make it a true benefit they are offering. Otherwise, people could just do a Roth IRA on their own, although the contribution limits are lower for an IRA. Anyway, I appreciate the comment!
I think he was mentioning that his employer doesn't provide any matching dollars. But, yes, for some people doing Roth converstions can be a good strategy.
I wanted to make the video accurate for its time of posting and over the next couple of years. But you are correct, the current tax brackets are set to sunset in 2026, and if they are not extended, brackets will revert to previous levels. It will be interesting to see what happens. Parts of the current tax bill are very popular, such as the large increase to the standard deduction. Others are upset about the changes to the SALT deductions. Anyway, I am not sure anyone knows for sure whether the current brackets will be extended or revert to previous levels. Thanks for the comment. It's something some people may need to be aware of, and I'm sure they appreciate the reminder.
In my company’s plan, you can withdraw pre-tax and employer contributions without touching the Roth account or vice versa. Your cup of coffee analogy was not accurate.
Notice that I was talking about when the employer keeps a "blended" account, which many employers do. These are rather typical and I mentioned it was "likely" you may have a blended account. That's why I mentioned that you may want to check with your HR department to see how they are handling it. If the employer contributions are in a separate traditional 401(k) account, withdrawals can be separate, as you stated. Since blended accounts are typical, the IRS provides specific rules for rolling over a blended account into IRAs. This is from the IRS website: "No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over: 1. pretax amounts to a traditional IRA or another eligible retirement plan, and 2. after-tax amounts to a Roth IRA." Additionally, this is from Fidelity when talking about the typical blended type of Roth 401(k) accounts: "What you should know is that you won't be able to withdraw your after-tax contributions without also withdrawing any earnings associated with them. Taking out just the after-tax balance would not be allowed." As mentioned above, I did say it was likely that you have a blended account and that you may want to check with your HR department to see your specific plan. All employers do not always handle Roth 401ks the same. Thank you for your comment and the opportunity to allow me to explain a bit more, in case there was any misunderstanding.
For young ppl, all “retirement acc “ is such a stigma fixed mindset. How about just put all ur money in taxable acc and do whatever you like WITHOUT any of the restrictions, and USE it ANYTIME with a long term cap gain and annual write off! 401 , Roth and other just fill of BS rules . Please contemplate
Doing a 401K at least enough to get the full match, thereby doubling your money on the first day, is a very good idea and something people should absolutely do, provided their company matches contributions up to a certain point. Additionally, remember that with a Roth IRA, you can always withdraw your own contributions at any time for any reason without penalties or taxes and you still get the added benefit of all the growth is always tax free in retirement. I do agree that a personal brokerage account is an often-overlooked investing strategy for retirement and should be part of an overall plan. However, the benefits of investing within a personal brokerage account can be greatly increased if someone has a good mix of Roth-type accounts because their withdrawals do not add to income in retirement. Therefore, Roth accounts can help people stay in lower tax brackets in retirement and, in some cases, keep long-term capital gains rates at zero. We also want to remember that most people tend not to be very disciplined, and a personal brokerage account can make it too easy to access funds throughout life. Investments for our future security in retirement should be viewed as off-limits, so for many people, some of the rules associated with retirement accounts helps prevent self-sabotage. Additionally, there is the risk of higher taxes in the future due to government spending. Roth accounts provide protection against that risk. Anyway, thanks for the comment. I certainly have a relatively high percentage of my overall investments in a personal brokerage account, and it has allowed great flexibility when needed. Long-term capital gains can be managed well in retirement and, as mentioned, sometimes kept at zero. I plan on doing a video in the near future on how someone can manage their tax rate in retirement and many times keep it at zero, even with an above-average income.
I worked for a company a few years ago that had the option to do a Roth 401k. I was so happy but then I realized that only my contributions were after-tax and the company’s contribution was pre-tax. It caused so much headache.
Yes, it does add a bit of complication to the account, but at least you are not responsible for tracking the different mix of investments, and what the company contributes is still free money. However, some companies have poor contribution plans, and some don't match at all. But most have reasonable contribution matching plans that are very helpful. I free money is available, it's a good idea to take it.
Incredible video, I’m going to save it and listen again in the future. Thanks so much for posting!
Thank you for checking out the video and the comment! I'm happy to hear it was helpful and you'll be rewatching it again sometime.
I agree - This really is the best video on this topic.
Happy to hear you think so.
Great - Happy to hear you think so.
Having so many options on RUclips when it comes to Financial education, I really appreciate when the person making the videos ACTUALLY cares about their viewers by responding AND answering their questions and that to me speaks volumes !!!
I truly believe that's the BEST way to find out who really cares and is really worth watching.
I really appreciate you.
Great información 👌👌👌
Thank you so much for the comment. I certainly appreciate you taking the time to share those thoughts! As you mentioned, I don't just have "canned" replies, and when there is a question, I truly try to take the time to answer it. I appreciate those who take the time to check out the videos, and I hope to provide good information without trying to sell them products or my own courses. Glad you found the channel.🙂
You have one of the best channels on RUclips and truly believe you deserve a lot more viewers.
I wish the best of luck for you and your channel 👍
Thank you again for sharing those thoughts of support. I am happy to hear you value the channel. Hopefully, it will continue to grow and the information can reach more people. It is a lot of work to make the videos, so it is very nice to hear when they are valued and appreciated.
Yes - this channel is great! Great information and he actually cares about helping people and not just trying to sell courses and other crap.
Fantastic video! So much detailed information throughout the whole thing. Thanks!
Thank you for the comment. Glad to hear you liked the video.
Thank you for another great video.
Thank you so much for the comment and I appreciate you checking the video out.
This was really helpful! My daughter and I enjoyed seeing your presentation a few months ago.
She mentioned that she wanted to invest but we were both uncertain how young someone could setup an investment account. How old does she need to be?
And thank you for attending! I’m happy to hear you found it helpful and that your daughter is interested in getting started with investing. I'm not sure of her age, but to open her own brokerage account, most states require an age of 18, though a few states are higher. For example, Alabama and Nebraska require someone to be 19. However, there are other options available. Custodial accounts (UGMA/UTMA) allow a minor to own assets in a brokerage account while at least one parent or guardian manages and controls the account until the child reaches the legal age of majority. Although the child does not manage the account, the assets in the account do belong to the minor. These types of accounts are available at discount brokerage places like Fidelity and Schwab, and they can certainly help answer any questions. I hope this was helpful. Let me know if you have any other questions. Thank you for checking out the video and leaving a comment.
Wish I could have seen that presentation.
It's available to watch on the channel.
It's available to watch on the channel.
Mike - it sounded like you were indicating that it's "bad" if the government makes me take out funds from the traditional 401K so that they get their taxes by the time I am 75. I am trying to figure out what might be "wrong" with this for a few reasons. First if I am in a partnership with the government then eventually they have to get their taxes, so at age 75 seems reasonable. If I don't need it for everyday living, I could use it for something fun. If I don't use it all while living then does that mean that my benefactor will pay the taxes? Thanks for a very detailed video.
Sorry - I certainly didn't want to imply that it was bad to use our retirement savings to enjoy life in retirement. That's exactly what we should be doing unless someone is just focused on leaving it for someone else. Let me clarify a few of the things I was referring to.
Mandatory minimum withdrawals (RMDs) can become a problem for some people if they only have traditional types of retirement accounts and they have a sizable balance. By problem, I mean it can throw them into much higher tax brackets and cause other income streams, like Social Security and possibly any long-term capital gains from a personal brokerage account, to become taxable at higher rates as well. It can even cause us to be in a higher tax bracket in retirement than we encountered during our working career. This is especially true for super-savers.
For example, if someone has $2 million in a traditional retirement account, their RMDs at the age of 75 would be over $81,000 in one year. Now, add Social Security to that and any other income they may have, like capital gains or pensions, and they are losing more of their retirement account to taxes because of higher tax brackets. If someone is 80 and has $2 million in traditional accounts, the RMD would be close to $100,000. This causes more of their Social Security to be taxable and, of course, any capital gains. If our income is low enough, capital gains rates are zero and so can be Social Security.
If someone has a mix of Roth-type accounts and traditional accounts, it allows them to manage their tax brackets much better in retirement. The lower the tax bracket we can stay in during retirement, the more of our retirement funds we get to keep for ourselves to enjoy life the way we want because the government is taking less of it.
Thus, if someone only has traditional accounts, a series of Roth conversions done correctly ahead of that point can be an excellent solution. That is, in the early years of retirement, we may benefit from converting portions of our traditional retirement accounts to a Roth IRA so when we hit RMDs, the mandatory withdrawals can be managed better.
I know that's a lot of information, and it's difficult to cover it thoroughly in a quick reply, but hopefully, that helped a little. Please let me know if you have further questions. Thank you for the comment and your question!
@@MikesFinancialEdgeI know this may be too niche but I would appreciate more information on this process of converting traditional accounts to Roth
That's a topic I have considered for a video. I'll add it to the list of topics and maybe release a video on that later this year.
@@MikesFinancialEdge Thanks that was helpful.
@@virajfaria3832 ditto
1) 401k Invest up to max match by employer (because of the match, ROI is very high)
2) Max out IRA (ideally Roth because taxes will be higher in future)
3) Max out HSA (triple tax advantage)
4) Try to max out 401k
Does that summarize the recommendation Mike?
If we were only discussing retirement accounts, that's a pretty good order with possibly a slight adjustment. If someone is eligible for an HSA and uses it properly as a retirement account, it can be prioritized ahead of the Roth IRA. However, an HSA has a lower contribution limit, so not a lot of money can be diverted to it. Naturally, other factors play into a complete list of funding priorities when it comes to our money. We need to establish a reasonable emergency fund and tackle any high-interest debt, like credit cards, too. Maybe the order of investing or funding priorities would make a good video topic sometime.
I sure appreciate this summary bc for someone like me, who never thinks about this stuff, this was lots to take in. I need to watch again! Thanks for all the info Mike. I will be watching again and again.
There was quite a bit of information in this one. Thank you for leaving a comment and checking out the video a couple times.🙂
Thank you for the video, very informative. I have just asked my son to switch his contributions from transitional 401K to Roth 401K, he is at the 22% tax brackets. For the $23000 limit, is this number based on pretax or post tax basis? Thanks!
Both the traditional 401(k) and the Roth 401(k) have a $23,000 limit. You can contribute to both a traditional 401(k) and a Roth 401(k) in the same year, as long as the total contributions don't exceed the IRS limit. That means between the two accounts, you can contribute a combined maximum of $23,000, or $30,500 if you are over 50. The $23,000 is the total contribution limit into the accounts. Thus, it is pretax for a traditional 401(k) and post-tax for a Roth 401(k). Thank you for the comment, and I am glad you found the video informative! I hope I answered your question.
thank you for the reply, very clear.
Great, glad that helped answer your question. I appreciate you checking out some videos and supporting the channel.
With me being in the 12% US federal tax bracket having my retirement contributions being 100% Roth IRA 100% Roth 401k makes 1000% sense!!! We already know unless more legislative action takes place the 12% tax bracket is going up to 15% in 2026. Let's say hypothetically my tax bracket stays at 15% at least when I take out distributions from a Roth account it does not tax my social security benefits
Yes, it sounds like you are going to be in great shape come retirement time. Having both a Roth IRA and a Roth 401(k) will help keep you in lower tax brackets. If you only have Roth accounts, your Social Security should likely have zero taxes, and even if you have some capital gains, they could also be taxed at the zero rate. Plus, being in a lower tax bracket makes Medicare premiums less expensive. Plus, no concerns with RMDs. Thanks for sharing, checking out the video, and leaving a comment.
Do you think that the federal government will ever find a way to legalize "re-tax" Roth accounts when money is removed ?
I assume you mean finding a way to tax withdrawals from existing Roth accounts. I'm sure there are politicians who would like to do that, and I have actually seen statements to that effect. There is also some talk about doing away with certain aspects of Roth accounts, particularly regarding what types of investments can be placed inside them.
However, to your question, I do not believe that could legally happen with any existing Roth account. It would undermine public trust in the stability and reliability of retirement savings plans. Any change to the tax treatment of Roth accounts would require legislation to pass through Congress. Given the potential backlash from constituents who have been contributing to Roth accounts with the expectation of tax-free withdrawals, such legislation would face significant opposition in the courts. Politicians are generally cautious about making changes that negatively affect a large portion of the electorate, and the political fallout from such a decision could be considerable.
It is possible that laws could be changed for new Roth accounts going forward, but even in that case, I do not believe it could be made retroactive on any existing accounts and their earnings. Thus, I have no concerns about this happening, and I hope that alleviates any concerns you may have had. By the way, thanks for the question and checking out the video.
Do you have a Roth or Traditional 401K? Please let me know your thoughts below! Look forward to hearing from you.
I have both.. My balance is close to 50% Roth and %50 tradtional
That sould give you some nice flexibility to manage your income tax brackets in retirement!
When you work with percentages all that matters is tax rate.
The tax rates are certainly always a consideration. The current brackets are set to sunset after 2025 and, of course, with all the government spending and increased debt, it's hard to predict where the tax brackets might be in the future, but that's a concern. Roth types of accounts provide some insurance against that. Thank you for the comment and checking out the video!
where can i open roth 401k? i am self employment. do i need something to qualify for this thank you:)
If you are under the income limits, you can certainly do a Roth IRA. Typically, 401(k)s are offered by employers, but there is a Solo 401(k) for business owners with no employees.
To understand Solo 401(k) contribution rules, you need to think of yourself as two people: an employer (of yourself) and an employee (yes, also of yourself). Within the overall $69,000 limit in 2024, your contributions are subject to additional limits in each role. As the employee, you can make salary deferral contributions up to $23,000 in 2024, or 100% of compensation, whichever is less. Those 50 or older can contribute an additional $7,500. But you are both the employee and the employer. As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself.
You can set one up at places like Fidelity or Schwab.
Had to watch this video again. So much info to learn. I especially like the part about how Roth 401k accounts end up being a mix or blended account with pre-tax and post-tax money in it. I don't think many people understand how this works. Anyway, great video!
Yes, that is an often overlooked aspect of Roth 401(k) accounts. Most people probably don't realize that until they start withdrawing funds and then discover they owe some taxes on part of it. Glad you liked the video!
Oh, and I liked the part about the advantage of having both!
Yes, having a mix of types of retirement accounts allows us to take full advantage of pre-tax savings during our working career and avoid some taxes later on. By mixing in Roth accounts, we can stay in lower tax brackets, providing more flexibility to manage our tax situation in retirement.
@@MikesFinancialEdge I checked with my HR department and my Roth 401k is indeed all mixed up or as you say blended. Thanks to your video, I better understand how this will work in the future or if I want to roll it over into IRAs now.
Glad to hear the video helped make you better informed. Thanks for sharing your update.
My current strategy for the past 6 years have been maxing out traditional 401k and HSA to reduce my MAGI and then max out Roth IRA every year.
If i do Roth 401k , i will not be able to max out contribution to Roth IRA , perhaps no contribution at all due to income limits.
So in my case , total contribution for Roth 401k is just $23,000 but if i do traditional 401k , my total contribution will be $30,000 ($23,000 for 401k + $7,000 for Roth IRA)
Do you think the latter look better for investment?
Looks like you are well on your way to having a comfortable retirement and the option to retire at a younger age. The mix of assets will give you flexibility to manage your tax brackets in retirement quite well. Thus, you will be able to minimize any tax consequences on your traditional 401(k) and Social Security because you will have the Roth IRA and HSA to do so. Are you using your HSA as a retirement account or for ongoing health expenses each year? Here's a video on the best ways to use an HSA for a retirement account: ruclips.net/video/bwxhtmGhkss/видео.html
Anyway, sounds like you have a sound plan. Thanks for the comment and for checking out the video.
I have a Roth 401k 🎉🎉🎉i love that part but my employer doesn't match anything. There should be a LAW that all employers have to do a 5% match at the minimum 😭😢😥
Yes, I agree that employers should match something. The whole point of a 401K is to encourage and help employees save and invest for retirement. If employers are going to offer that as a benefit, they need to match something to make it a true benefit they are offering. Otherwise, people could just do a Roth IRA on their own, although the contribution limits are lower for an IRA. Anyway, I appreciate the comment!
I think he was mentioning that his employer doesn't provide any matching dollars. But, yes, for some people doing Roth converstions can be a good strategy.
Good example except the 22% and 24% brackets go away in 2026 and become the 25% bracket
I wanted to make the video accurate for its time of posting and over the next couple of years. But you are correct, the current tax brackets are set to sunset in 2026, and if they are not extended, brackets will revert to previous levels. It will be interesting to see what happens. Parts of the current tax bill are very popular, such as the large increase to the standard deduction. Others are upset about the changes to the SALT deductions. Anyway, I am not sure anyone knows for sure whether the current brackets will be extended or revert to previous levels. Thanks for the comment. It's something some people may need to be aware of, and I'm sure they appreciate the reminder.
In my company’s plan, you can withdraw pre-tax and employer contributions without touching the Roth account or vice versa. Your cup of coffee analogy was not accurate.
Notice that I was talking about when the employer keeps a "blended" account, which many employers do. These are rather typical and I mentioned it was "likely" you may have a blended account. That's why I mentioned that you may want to check with your HR department to see how they are handling it. If the employer contributions are in a separate traditional 401(k) account, withdrawals can be separate, as you stated.
Since blended accounts are typical, the IRS provides specific rules for rolling over a blended account into IRAs. This is from the IRS website:
"No, you can’t take a distribution of only the after-tax amounts and leave the rest in the plan. Any partial distribution from the plan must include some of the pretax amounts. Notice 2014-54 doesn’t change the requirement that each plan distribution must include a proportional share of the pretax and after-tax amounts in the account. To roll over all of your after-tax contributions to a Roth IRA, you could take a full distribution (all pretax and after-tax amounts), and directly roll over:
1. pretax amounts to a traditional IRA or another eligible retirement plan, and
2. after-tax amounts to a Roth IRA."
Additionally, this is from Fidelity when talking about the typical blended type of Roth 401(k) accounts:
"What you should know is that you won't be able to withdraw your after-tax contributions without also withdrawing any earnings associated with them. Taking out just the after-tax balance would not be allowed."
As mentioned above, I did say it was likely that you have a blended account and that you may want to check with your HR department to see your specific plan. All employers do not always handle Roth 401ks the same. Thank you for your comment and the opportunity to allow me to explain a bit more, in case there was any misunderstanding.
For young ppl, all “retirement acc “ is such a stigma fixed mindset. How about just put all ur money in taxable acc and do whatever you like WITHOUT any of the restrictions, and USE it ANYTIME with a long term cap gain and annual write off! 401 , Roth and other just fill of BS rules . Please contemplate
Doing a 401K at least enough to get the full match, thereby doubling your money on the first day, is a very good idea and something people should absolutely do, provided their company matches contributions up to a certain point. Additionally, remember that with a Roth IRA, you can always withdraw your own contributions at any time for any reason without penalties or taxes and you still get the added benefit of all the growth is always tax free in retirement.
I do agree that a personal brokerage account is an often-overlooked investing strategy for retirement and should be part of an overall plan. However, the benefits of investing within a personal brokerage account can be greatly increased if someone has a good mix of Roth-type accounts because their withdrawals do not add to income in retirement. Therefore, Roth accounts can help people stay in lower tax brackets in retirement and, in some cases, keep long-term capital gains rates at zero.
We also want to remember that most people tend not to be very disciplined, and a personal brokerage account can make it too easy to access funds throughout life. Investments for our future security in retirement should be viewed as off-limits, so for many people, some of the rules associated with retirement accounts helps prevent self-sabotage. Additionally, there is the risk of higher taxes in the future due to government spending. Roth accounts provide protection against that risk.
Anyway, thanks for the comment. I certainly have a relatively high percentage of my overall investments in a personal brokerage account, and it has allowed great flexibility when needed. Long-term capital gains can be managed well in retirement and, as mentioned, sometimes kept at zero. I plan on doing a video in the near future on how someone can manage their tax rate in retirement and many times keep it at zero, even with an above-average income.