Roth 401k vs 401k vs Roth IRA - What's the BEST?

Let's talk about retirement accounts! Is it better to max out your Roth 401k or your 401k? What about the Roth IRA? I break it down for you simply in this video.

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First we need to answer: What is a 401k and how does it differ from the Roth version?

A traditional or regular 401k is an employee sponsored retirement account, which means that it is offered by your employer. In a 401k, simply put – you can decide to set aside a portion of your paycheck, known as a contribution – to put into your 401k. All the money that you contribute to it is known as tax-deductible, which means that by contributing to your regular 401k, you are contributing to it with pre-tax dollars, and this contribution also will lower your tax bill. With a regular 401k, you’ll eventually pay taxes later on your withdrawals when you reach retirement age.

Contrast that to a Roth 401k. The Roth 401k is a different type of 401k that has different tax rules. In a Roth 401k, your contributions to this account are made with AFTER TAX dollars. So you pay taxes going in. But, the biggest advantage in my opinion is that all the earnings in a Roth account grow TAX free, and when you withdraw it later, you don’t pay ANY taxes. This could especially be important, for example, if you have a regular 401k, when you withdraw your money you’re taxed on your earnings by whatever your income tax rate is at the time.

One note I want to cover is that: to qualify for tax-free earnings, the funds need to be inyour Roth 401k for 5 years+ before it starts to qualify for that. But since these are long-term retirement accounts, this is generally not an issue.

One of the biggest benefits of having a 401k is what’s called EMPLOYER MATCH. If you work for a company, chances are they have some sort of benefit program that includes this.

You always want to max your employer match if you can, this is the most optimal way of contributing to retirement.

As of 2020, the contribution limits on 401ks is $19,500, but note that this is the TOTAL. So if you had both a 401k and a Roth 401k you can split that total up however you like.

So let’s talk about the 2nd priority: opening up a Roth IRA. After contributing as much as you would need to get the match with your employer, you’ll want to contribute the max to a Roth IRA every year if possible. There is an income limit to the Roth IRA however – if you make more than 139k a year, you cannot contribute to a Roth IRA. If you are making more than 139k a year, you may just want to skip to the investments portion of this video which I’ll put in a timestamp below.

Most 401ks will have a variety of investment options – including mutual funds, target date funds, etc – juts make sure you examine what you are investing in, make sure it’s well diversified, and the fees are low.

If you are trying to choose an investment in your 401k portfolio, always look at how much the fees are. Anything above 0.2-0.3% is what I would consider high. Vanguard index funds for example, have expense ratios of 0.04%, and those are the lowest in the industry.

Timestamps:
0:00 Start Here
0:59 What is a Trad. 401k
1:46 What is a Roth 401k
3:13 Employer Match
5:05 Roth IRA
7:30 What to Invest In
7:54 Expense Ratios
9:46 Priorities

Disclaimer: I am not a financial advisor, any investment commentary are my opinions only. Some of the products and services that appear on this channel are from companies that I have an affiliate relationship with, such as Robinhood, for which I recieve a small percentage made via those links, but it doesn’t cost you anything extra!

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[humphrey]

Do you have a Roth IRA, 401k or Roth 401k? Let me know your thoughts below! Look forward to hearing from you. You guys rock 👊

[Sahil-dogs]

I just wanted to say that you’re really doing an amazing thing by promoting investing and teaching young people about finance. You’re making peoples lives better!

[QuickPLFMA]

Humphrey, thank you so much for this video! The difference between Regular 401, Roth 401, and Roth IRA has been so confusing

[alisonwalker]

Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.

[markpescatrice]

I have a Roth IRA, 403(b), and Roth 403(b), among other types of accounts (529 and Coverdell). Thanks for the video, as this helps my wife understand the priorities for her retirement saving strategy.

[heatherleslie]

Hi! Saw you on ifunny! I have 2 Roth IRAs. One with Northwestern Mutual and one with Vanguard... both maxed. I plan to max out my Roths every year, and I’m really liking the Vanguard app. I’ve also got a few shares of the Vanguard Total Stock Market and I’m pleased. I’m blessed to be young with a good paying job, so I’m trying to set myself up for the future!
I’m subscribed!!

[aliakca]

first comment man feels good your so big, like congrats, thanks for the awsome info your the best!

[be.soreal]

This video is pretty sick ngl, thanks Humphrey !!! :D

[steves]

I work in payroll consulting and never have seen a company match 2 dollars for 1 contributed

[shepherds_grandma]

I wish my employer matched. They do offer some cash for my HSA. I have only had it for a year but was able to invest it. It has done pretty well for such a little bit of money.

[krakken]

I have a regular 401k. I figure when I when I retire, I will be in a lower tax bracket since I won’t be working and just take the RMD.

[tp]

I have a 401k from an old employer. Should i roll over to new employer or open a new account if the new employer has a better deal, i.e. company match

[charliev]

This is solid content! I was wondering if there are websites or books that goes more on depth with overall general finance? I read the Tony Robbins book Money Money Master the Game already but I doubt that's all you need.

[ultrazeldagamer]

can you do a video on each one going into more depth? 😅

[phillipellingson]

Hi Humphrey. I will be leaving my company soon. I have contributed to both 401k and a Roth 401k. I'm going to roll them over to Fidelity. So I would need to create a RO IRA and RO Roth IRA?

[lomawatts]

When you do pretax 401k with your employer do you still pay the federal tax for social security/fica on that money or that figures after

[Mariomario-gtoy]

I'm curious what do you think of the current stock market? Too overvalued? Too bullish? Thanks!

[codyallen]

when you roll over a 401k into a roth ira, do you only pay taxs on the money you moved or now do you pay on taxs on everything in your roth ira when you pull it?

[NekoMableFan]

so just wondering-- if I were to join my company's 2 year rotational program as a full time position, and the company doesn't contribute to 401k until 1 year into employment, and I'm not sure whether I want to stay with the company after 2 years, is it worth starting my 401k with the company?

[joannalee]

I currently have a traditional 401K from my old employer. Would it be better to roll this over to my new employers 401K, roth 401K, or start a Roth IRA? I assume I would have to pay taxes if I roll this over to either a ROTH IRA or ROTH 401K. Also if my company is providing a 6% match, since all matches are pre-tax is it still better to make these contributions to a Roth 401k or should I stick with a traditional 401K until 6%? Thank you!