Episode #13: Traditional Versus Roth 401(k) Accounts


The Principle:

As you approach retirement, understand the different investment options that are available. Know the difference between a Roth and traditional 401(k).

(Click the featured times below to jump forward in the episode)

Honest Takes:

[1:23] – What Is A Roth 401(k)?

  • A Roth 401(k) is a qualified retirement account that allows you to pay taxes on your initial investment rather than any gains you incur. Think of it this way. A farmer plants a seed in order to later reap a harvest. In the same way, you invest your “seed” now, and your initial investment multiplies through the years into a financial harvest of sorts. You’re going to have to pay Uncle Sam one way or another, and it’s cheaper to pay the taxes on your seed than it is your harvest. If you’re able to pay your taxes up front, you stand to make more long-term.

[1:32] – What Is A Traditional 401(k)? 

  • A traditional 401(k) allows you to invest tax-deferred. This can be as plus as it enables you to save more up front. However, when you invest in a traditional 401(k), you’re committing to pay the taxes on your previously mentioned harvest. While you can maximize tax savings now, you’ll most likely pay more in taxes later. Just think, it’s a lot easier to pay the taxes on a $20,000 investment than it is a $200,000 account when it’s time to withdraw your money.

[2:55]- What’s The Same Between The Two?  

  • There’s still a limit to how much you can contribute into a Roth 401(k). If you’re under 50, you can only contribute $18,500 a year. Additionally, if you have both a Roth 401(k) and traditional 401(k), you can still only contribute a combined $18,500. You don’t get to do that in each account. There’s also a catch-up contribution limit if you’re over 50. This allows you to make up for lost time while you’re still in your peak earning years.

More To Learn:

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The host: Brian Bowen – Contact

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