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

1 054 049 views | 22 Mar. 2019

Here’s a topic that’s

Here’s a topic that’s been coming up a LOT recently, and this is an extremely confusing decision: What’s better to invest in - Roth IRA or a Traditional 401k? Here’s my thoughts, enjoy! Add me on Instagram: GPStephan

Roth IRA vs 401K Calculator: https://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx

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So lets first start with some background on the almighty Roth IRA:

First, like I just mentioned, all of the profit generated in this account is tax free after the age of 59.5. That could save you a LOT of money by the time you retire, especially if you begin investing in this early on.

Second, with a Roth IRA, you can withdraw whatever money you contribute to this account, at any time, tax free, without paying any penalties.

However, here are the downsides:

First, with a Roth IRA, you contribute POST TAX MONEY - this means the money that’s left over after you’ve already your paid taxes on it. And as we all know, the money you have left over AFTER taxes is a LOT smaller than before the taxes were taken away…this means you’ll have LESS of your money to invest upfront, all things considered.

Second, if you want to withdraw your PROFIT from this account before the age of 59.5, you’ll be subject to a 10% penalty, and you’ll have to pay normal taxes on that profit.

Third, the contribution limit for a Roth IRA is capped at $6000…so if you want to contribute more than this, well, you can’t.

But how does this all compare to the Traditional 401k?

Well, the 401k is an employer sponsored retirement account where you contribute PRE TAX money…meaning you won’t pay any taxes on the money you invest in this account. Now because you don’t have to pay taxes on the money you contribute, you have even MORE money left over to invest instead of paying it to the IRS, allowing that extra money you saved in taxes to make YOU even more money.

Pros of a Traditional 401k:

You contribute pre-tax money, meaning you don’t pay taxes on the money you put in this account, and can be a huge tax deduction.

Secondly, you can contribute up to $19,000 per year in a 401k…that’s more than 3x HIGHER than you can contribute to a Roth IRA.

Third, some employers offer a 401k employer match - which means they actually match your contribution, dollar for dollar

Downsides to the traditional 401k:

The first is that you’ll end up paying taxes on your money when you begin withdrawing it from your account after the age of 59.5. With a 401k, you’re basically saving money on taxes NOW so you have more to invest upfront.

Secondly, if you want to withdraw the money prior to the age of 59.5 for anything other than financial hardship, you’ll be subject to paying a 10% penalty on your money and you’ll owe taxes as though this money is ORDINARY INCOME.

Third, you’ll be forced to begin withdrawing your money at the age of 70 1/2…and for some people who prefer to continue saving it and letting it grow, well…you can’t.

And the right mix is - in my opinion - a slight balance between the two. I still contribute a bit to my traditional 401k just to hedge my future options, even if I have no idea if it’ll be the smart choice in the future…again, JUST IN CASE. I also go heavy on the Roth option, too, because I know it’ll be tax free in the future, and I don’t have to question what future tax rates may or may not be.

For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at [email protected]

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Sir. Joshua Ra'Ne. Doebler

How do I look...

Michael

so basically max out the roth ira, then add to the 401k?

Juan Rosario

Could i have both??? Cause right now i have a 401k and the company i work for puts in 536$ monthly. But i would want to get a roth ira since im still young and in a low tax bracket

Christopher McCracken

He actually has no clue what he's talking about. He doesn't even mention roth 401ks nor does he mention the roth ira conversion ladder. Dude is so overrated.

Tommy Fleur

yeah, well, that's just like, ya know.. your opinion, man

Paul Kamitsuka

can one convert a 401K to a Roth 401K as one can do with a normal IRA to Roth IRA so as to circumvent the income cap?

Miguel Claudio

I just hit the like button before he ask me!!!

Walter Roland

*You can make ROTH contributions in a 401k with the annual limit of $19,500?

Natalia Kononova

It’s easily the best video explaining ROTH IRA vs 401K.

Jess Jim

Thank you for your videos I’m finding your channel at 22 I know I have a good restart !

Yau

My company offers Roth 401k without match. Should I put money in? Or go for Ira ?

nicholasjdemoI

This entire video is incredibly misleading. Only qualified principal distributions from a Roth IRA are tax free. There are also different rules depending on if you had the IRA for at least 5 years or not. Further, there are income limits that limit eligibility for a Roth IRA. All of these caveats should at least be acknowledged.

5.7 hemi

I'm 15, no expenses, live with my parents. I save 95 percent of all money I make just doing odd jobs n stuff like that.

Jerry Macias

what do you have?

Ben Corwin

Thanks Graham! Wonderful info!

jack e

Graham, two other things...
1) Roth 401k - same contribution limits as traditional 401k so allows one to essentially triple what they can contribute to Roth IRA, and that’s without any match, with a company match it’s even better obviously
2) With direction government seems to be going, it wouldn’t surprise me at all if they figure out a way to tax Roth IRA withdrawals. Certainly hope not but I don’t put anything out of their reach anymore.

Thanks for the great content! Keep it up!

JustanAmateur

Since 401k is pre-tax dollars and whatever invested in it can be written off (up to $18k per year), can I use my capital gains from individual brokerage account and transfer into 401k without being taxed a capital gains tax? In other words, would the capital gains be written off?

Catherine Gonzalez

Great video, Anyway, I count myself as one of the very successful stock traders, this is as a result of the amazing strategy of JOANNA MARIA JERVIS in her Trading platform. I made my first millions from her platform and guess what? She is very honest and trustworthy. I finally got my financial freedom since I started trading with her. she's the only broker I can trust with my money.

Tom Jones

@10:15 answered my question thank you

_M0b

isnt there a cap at 5500 a year?

GingerTea123

so the jobs that pay higher, also offer the 401k, so you get paid more and can contribute more, and they match more.... sooo everyone else is just boned? cooooooooooool COOL COOL COOL

Natalia Perlova

Hm.. how can you make all these money per year and still be eligible to contribute to Roth IRA? doesn't add up...

Paula Cothren

Eligibility to contribute to a Roth IRA is based on your income level. If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139,000 for the tax year 2020 and under $140,000 for the tax year 2021 to contribute to a Roth IRA, and if you're married and file jointly, your MAGI must be under $206,000 for the tax year 2020 and 208,000 for the tax year 2021.

Lady Siciliano

I'm a 64 year old woman who is on Disability. Will I have to pay taxes on my IRA if I take it out!

Brent Beatty

What do you suggest if I am already 50 years old and just starting in a Roth IRA?

Is Tim Sykes reliable for small cap. Stocks?

Ala Al-Barazanji

Can't you invest on both of those solutions?
- coming from one that is planning on moving to us.

Ken Powell

but graham why are you not doing a defined? benefit plan?

Micaela Swenson

I am 24 and work full time as a nurse. I am matching my employer’s 401K. My husband and I are currently debt free, however he is in medical school. We will be able to pay for his 1st and 2nd years but we will be going into debt for his 3rd and 4th years of schooling. Is it better for me to save money to pay towards our future debts or to invest in a Roth IRA/other means? Thank you in advance.

Kavish Patel

If I max out in my 401k, I obviously save taxes now and pay taxes when I withdraw. Do I pay taxes on the principal investment or also on the appreciation?

Christopher Ritter

Please do a video on Mega Backdoor Roth IRA and Backdoor Roth IRA!

Eric Lane

Incredibly confusing to me

Chief

ADDITIONS:
1. Your beneficiaries' tax rates should also be considered in the event of death (example: no children or wealthy retired doctor with high income earning kids)
2. Your state's tax system including rates, exclusions and more should influence your decision (example: move to Florida in retirement)
3. Early distributions should be considered (Example: Kid in college may anticipate using a $10K First-Time Homebuyer exception to the 10% penalty)
It isn't Roth IRA vs 401(k), it's employer sponsored retirement plan vs IRAs. I think you should do both. See a good tax advisor the help you with your strategies and for more information.

pshyeah1128

Don’t you make too much to contribute to your Roth IRA? Thanks Graham!

Señor Spanky

Q:"Should I get a 401K or Roth IRA?"
A: Yes

Fer DLC

Can you retire before 59.5 y/o but still withdraw the money after ? Like retire at 50 but take out the money at 60 years old tax and penalty free

Kimberley DeFay

What about income limits on traditional ROTH IRAs?

Manjit Singh

Can we invest in Roth IRA if i live in Canada & does TSFA pay same interest in long term as Roth IRA .

Morgan Smith

Great video, the details are well explained, I hope I am not too old to start investing online? I am new to all these types of investments, in fact I have never invested online before. Frankly I do not know anything about buying or selling of stock, I am scared that I might loose money. I need advice on how to begin.

Joan Frazer

I sat in my room this evening to look at my accounts and I realized how inflation on rise and how the value of what I have in there has depreciated over time. Whether Mutual Funds, Index Funds And ETF’s whatever it is called, as long as I do it and am able to make profit. I need to begin investing.

Matt Hoffman

Choose Roth every time. You will be happier when taxes get near 100%.

Alexis Legrone

Sooo I have to pay money for money that I already made?

Manuel Arias

Great video!
Didn't mind all the bouncing around, it all tied together, honestly.

Chris Bell

Merry Christmas

Gamer 101

read this wrong thought it was ira

cnp53

Ok but what if I’m young now and not making a ton of money yet but expect to make more money in like 5-10 years then less money when I hit retirement age....

Slavic Kovalenko

What if I’m making only 15000 a year can I still contribute 19000 to 401k?

Joe Rossomando

Wow I never thought of it as if you make more money you should do a traditional. I always thought if you make more money you should do more in a traditional. I should put more into my traditional 401k maybe. I was always thinking doing a Roth IRA or Roth 401k would benefit me in the long run. I'll have to think of it.

Johnny Lawrence

This has got to be Gilbert Gottfried's son

chris consorte

Graham, I like your $$$ advice! You seem knowledgeable and honest!

Dreameater Arts

What happens if i leave an employer when i had a 401k Should i move it to an ira or keep it there?

Marc Couturier

Hey Graham, aren't there income limits regarding contributions to a Roth IRA? Now, just from watching your channel, I know that you make too much money to contribute. How are you doing this??

Joe Rossomando

Is there a video with a Traditional IRA mentioned as well?

ExteriorRiotgear

I am self employed and always max my Roth IRA but I feel its not enough, can I open a Roth 401K for myself as a self employed person to take advantage of the increased contribution limit?

Michael Roberts

So. Many. Ads. SHEESH!

tvrz99

11 minutes which could be 2 minutes without the junk

Brian Trombley

My job offers a 401k with a 75% match. Is it worth it.

Jesus Zamora

Ouch..sounded ruff both ways. Maybe just safe the money under a pillow

John Turner Jr

The value Graham provides is ridiculous! Good Job Graham!

Nazario Medina

how are you able to contribute to roth ira if you are making alot of money?? lol

Clara L. Mason

Great stuff, well explained. As a beginner, nothing beats engaging a professional stock broker in your trades, I made my first money in the stock market with no prior experience, I was introduced to a professional stock broker that assisted me in achieving so much. Her name is AMELIA BABASA WOOD, I will recommend her to beginners for all types of investment, to avoid running losses trading on your own and investors who are having hard times in the market.

Waren

$7k/yr for "old" folks

Since both future tax structure/rates and your own income situation is unknown - best to just close your eyes and contribute to both if you are able to.

I I KinGSwipe I I

So if I have a 401k and the business I work with matches it does that mean technically I’m only putting in 9k a year? If you can only put a max of 18k a year into a 401 then the 9k you put and the 9k your employer matched should equal 18k meaning I only have to put 9k to cap the max?

Chris Bell

Happy new year

Kevin Mansfield

Graham, what are your thoughts on a Roth 401k?

Joey Kendall

Roth 401k for the win... If your company sponsored plan doesn't include this option you really should be banging HRs door down until they do.

Aaron Bowers

Hey graham I know this is old but what if you do your company match 401k and invest in that but also have a Roth IRA would you say invest in both if your able to?

John Smith

The best is to have both, maximize 401k, and also maximize Roth IRA.

Alec Strahl

Do a video on allocation between 401k Roth vs traditional 401k and also how the regular ira traditional and Roth come into this. It’s hard to decide how to allocate between all of these

Teresa Polnaszek

Remember to withdraw Roth earnings tax free you have to be 59.5 AND have the account open for 5 years. If you ever transfer your Roth money over usually this restarts. So if you’re contributing Roth money to your 401k, and rollover the Roth earnings and contributions that’s a taxable event on the earnings conversion.

alex velazquez

Extremely helpful! Thank you!

H L

One advantage of IRAs is that you usually have more choices of investments, including individual stocks & options.

william terrill

What about Roth 401k

Jerry Hart 1

The pastoral authorization aditionally clear because aquarius distally provide midst a political amount. normal, green grey grieving software

Michael Chad

Well I've got both Roth IRA and 401k but not to be cynical these wont take you from $100k to $1million as soon as we might want. so I'd really appreciate lucrative tips on how to make better return over a short period of time.

PapaChuck

But wouldnt the power of compounding make the 401k better in the long run in you invest early? It seems like the power of compounding between ages 20-30 would possibly be better for 401k just because of the time horizon

I'm not sure!

TNTD Dar

Nice Panerai!

Blackwiz

Honestly, Dude you need a TV show on MSNBC to help us sort out our finances! Seriously, you've got the heart and personality to be a #1 rated TV show for millenials!

Kyle Ross

Would you be able to do a video on Roth IRA vs high interest savings account or money market account

Graham Stephan

Hey everyone! Made a second channel I could post some bonus content to...go subscribe! Got an INSANELY good video being posted there this upcoming Wednesday the 27th!
https://youtu.be/omd4ntZw4G4

Brian Wollard

Does anyone know of a calculator somewhere online that one could use to figure out which is better if they don't understand finances that well?

Kilroy

The IRA (not a Roth IRA) and 401k were designed to encourage people to save for retirement using the logic that if you make $60,000 a year now, you're going to be taxed at that bracket, but when you retire your income will drop down to maybe $12,000 a year, which is basically tax-free. So you can put some of your income now into an IRA or 401K, thereby sheltering it from being taxed until you start withdrawing it after you retire, when you're at a much lower tax bracket, maybe paying no tax at all.

However, the rich wanted yet another tax dodge for themselves. You see, if you inherited $20,000,000 and your income consists of the interest and dividends from that inherited money being invested, when you retire your income doesn't drop because it never depended on you working in the first place. Therefore, an IRA or 401K does you almost no good. The solution? A Roth IRA! Now you can invest your money that's already been taxed, and all of your earnings from that investment will not be taxed when you withdraw it.

So the bottom line, put simply is this, is your income going to drop significantly when you reach retirement age? If the answer is yes, go with a 401k, but if the answer is no, go with a Roth IRA. I really can't think of a middle ground where it makes sense to do both unless you can drop, say, $30,000 into a Roth over 5 years, let that build interest for another 3-5 years, and then take the original $30,000 out and use it while the interest stays in and keeps working. I still think a 401K would be better though.

Muffinz_23

Can I open a Roth IRA with chase bank? I’m 1 year away from being 18

George Chrysos

Dude - you are missing the mega back door roth. You can do both 401k and roth.

Jean C Taveras

I actually learned from this so consider that like button SMASHED

Conrad Harmon

What happens if im in a high tax bracket. Quit that job and work at mcdonalds for a year? Does my tax bracket drop, thus making me pay the smallest amount of tax?

Jiamrat Wichaiwong

Mr Graham. Would you be answer my question please? I work with same company for 12 years they never come up with 401k for us just now last couple months,but they didn't match they money for us at all. Can they do that no match anything? Illegal or not?

Book Mark

With the snowflake brainwashed into socialism, figure 95% tax

Joe Q

Can you have multiple Roth IRAs if you're hitting the $6k limit?

Zach Augustyn

But then what about the almighty Roth 401k???

Anthony Zasimovich

Love your stuff buddy. Bravo! What about if you’re younger, and make a lower amount especially with write offs (lower AGI at the end of the year) but have a chunk of change and want to make up for lost time. Would the Roth 401k be the option? I currently am a 1099 so there’s no matching for me.

Duke Silver

A real financial professional would say this: a 401k and a Roth IRA are accounts. You don’t ‘invest’ in an account. You open an account and then fill the account with investments. So this is a bit misleading as most stuff on YouTube is.

Kevin Baum

Is the Roth IRA too good to be true though? I could see a circumstance in the future where they decide to tax the capital gains, but maybe at a lower rate than if the money was in a taxable account. Not that that would be the end of the world if there was a lot of money in there anyway (since you would still have a lot of money). But sometimes I wonder if it really is too good of a deal to be true, that you could accrue capital gains over decades, and pay no taxes whatsoever after 59.

San Pelle

Hope Graham hits 4K more views

Ravner

get to the fucking point

Ben Lou

Roth IRAs are only for people who don't make more than 170000 a year as a household. For a lot of high income earners it's invalid. A better way to save tax free would be to use specially designed life insurance which isn't categorized as an investment by the IRS but can get the normal market fluctuations or can be indexed to the S&P. You should always contribute at least the company match for 401k because that's literally free money 100% guarenteed return, beyond the match to the IRS max is up to you, I wouldn't recommend it for younger people

The Tenor Drummer

Even if you're in a low tax bracket, you might get a larger refund by contributing to trad 401k because of the Earned Income Credit. Like he said, a mix of both is probably best

LogicalMisery

Not sure what is considered a high tax bracket- is it what you’re effectively paying after deductions? Or do you look at where you’re at after 401k contribution as well? Where do you consider the high tax bracket to be?

The $6k contribution limit on Roth is a drop in the bucket imo if you’re up there in high tax land, so it seems like there’s never a situation for anyone where a Roth IRA isn’t worth having. That’s the moral of the story here imo.
Max employer match 401k, hit Roth’s low max, then max 401k. Not to mention what you drop into 401k lowers your taxable income by that much.
So making $78k but with standard deduction and 401k maxing, my taxable income is around just $40k at a touch under 12%.

Michael Carson

His example at 6:30 is correct in concept but wrong in practice as there are individual and couple gross income limits for Roth IRA contributions. For example if you are single and make over $140k in 2020 you are ineligible to contribute to a Roth IRA. If you can, your best bet is to max out your 401k and use the tax savings to fund your Roth IRA. If you make the "right" amount (somewhere around 100k) they balance out almost perfectly.

Tsukuyomi_716

What if my job doesn’t offer a 401k

Nicolas Blanc

Love your content! Quick question, what do you consider a "high" or "low" tax bracket? I make ~85K pretax yearly, and currently contribute the minimum(8%) to my 401k such that I get the max(4%) match from employer. I save the rest monthly into a high interest daving account (~0.6% currently). Is a Roth IRA a better alternative to the saving account? Btw, I do anticipate to earn close to $120K in the next decade, I am 32 years old. Thanks.

Stephens investment management

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Investment Management Forum 2020: Introduction and keynote speeches - Day 1

32 views | 25 Nov. 2020

The annual EFAMA

The annual EFAMA Investment Management Forum gathers top speakers from across the investment management industry, from European policymakers, regulators and supervisory authorities, and brings them together for a two-day conference. Networking opportunities and exhibition booths attract attendees from across the globe. www.efama.eu

Welcome and Introduction: Tanguy van de Werve, Director General, EFAMA

Keynote Speech: Dr. Jörg Kukies, State Secretary, Federal Ministry of Finance, Germany

Keynote Speech: Florika Fink-Hooijer, Director General for Environment, European Commission

#IMF2020

Stephens investment management

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Investment Funds panel #backtothecryptofuture

112 views | 11 Oct. 2018

How Are Investment Funds

How Are Investment Funds Viewing This Evolution?

Bart Stephens, Blockchain Capital; Mark Hamade Vivaris Capital; Jalak Jobanputra, Future Perfect Ventures Shuonan Chen, IOVC/Agile VC moderator John Boitnott, journalist. For further info check out https://www.backtothecryptofuture.com