401k or Roth 401k? Which is Better? One you are not taxed on the money going on, the other is not taxed when you take it out. Does having more principal to allow for compounding matter? How much does being able to take money out tax free offset the reduction in principal because you have to pay taxes going in? The secret is in the anticipated tax bracket you will be when you retire. If you are not working, your tax bracket will only be higher IF you have SIGNIFICANT assets or basically pretty rich. On other other hand, more people vying for financial independence will spend less than they earn. If that is the case, you will withdraw less and thus be in a lower tax bracket making 401k the better choice.
How’s it going on for davis’s beat the bush 401ks and rock for one case are sort of confusing because one of them you put pre-tax money in and the other one you put after-tax money in when you’re 59 and a half you can start taking money out of your 401k and it’ll be taxed like regular income however when you’re the same age as you take money out of a roth 401 k
It’s not taxed at all so the saying goes if you happen to be in a higher tax bracket when you retire it’s better to contribute to a roth 401k because you can take the money out tax-free if you’re in a higher tax bracket then the advantages are a lot more now i’m trying to see which one is better because in 401 k you have more money to start with so you have more
Money to compound over many many years however enough raw for 1k you have less money to compound however when you take it out you don’t have to pay taxes on it so these are two competing points and i want to see exactly where the trade-off occurs i’ve created an excel spreadsheet and that has all these numbers i’ll link it down in a video description below if you
Want to download it change things around and take a look at it yourself but here’s a chart created from those numbers what i did here is i put $10,000 in you either put it in a 401k or put it in a roth ira now when you put in a 401k it’s not hacked so you begin with $10,000 in a roth 401k i capped it at a 28% rick just assuming you’re at that tax rate you can go
In my spreadsheet and change it yourself and see how things change the main takeaway from this chart is that 401k you begin with a higher number rob you begin with a lower number however if you compound it at the same rate for over 30 years they’re not going to intersect each other at some point because they’re compounding at the same rate the way to look at it is
This you have a certain salary and the top $10,000 you skim off you can either put that into a 401k or a roth 401k the $10,000 if it’s not taxed all of that goes into a 401k however you can take the $10,000 i’ll pay the taxes now and they’ll go into raw 401 k now both cases you get $10,000 less from your income and you receive the same amount at the end of the
Year let’s say suddenly you retire next year and you’re still in the 28 percent bracket somehow because you’re making all this money if you’re withdrawing from a thorough okay you still have to pay that 20% so at the end you’re still going to take seven thousand and two hundred dollars up in the roth 401k you don’t have to pay taxes so you’re still going to take
Seven thousand and two hundred dollars off the thing to take away here is if you retire in the same tax bracket as when you contributed to the broad 401k then there’s no difference between putting in a 4-1 tail or a roth 401k it comes out exactly the same value however it if you somehow managed to get in a higher tax bracket then it’s better to put it in a row now
When you retire it’s kind of hard for me to imagine most people actually making more when you stop working the only reason someone will be able to do this is unless they’re really rich somehow maybe they made millions maybe they have a business that keeps on giving them income somehow and you know they just can’t stop to income from coming in then if you’re in the
Really high tax pack it’s good to raid the rock because you don’t have to pay any taxes on it before most people they’re not going to be in a higher tax bracket because when you don’t work unless you have a lot of passive income which is really hard for me to imagine someone having so much passive income that it exceeds whatever they make right before they retire
Because generally right before you retire you have the most experience and you make the most so here’s a more realistic scenario i see a person working throughout their careers they make more and more money so then they increase in their tax bracket so it’s better to put it in a 401k to defer their taxes and later on when you retire you’re going to be using a lot
Less income than your income right before retirement if you’re in the financial independence case this is generally the case because as you’re working toward your financial independence you are actually spending a lot less than your income and right after retirement of course you’re still going to spend a lot less in your retirement so the scenario is in most your
Career you’re going to be working and maybe you’re going to be twenty five twenty eight percent tax bracket well you’re not going to pay that right now and later on when you retire you’re going to pay something in the 10 percent 15 percent tax bracket if you know you’re going to be in a lower tax bracket which is pretty likely because you’re not going to be working
In then it’s kind of like taking the top part of your income and not paying the high taxes there and then moving this all the way to your retirement and then pay like a small tax bracket over there so i hope this was enlightening as much as it is for me because when i worked out the numbers of like wow roth ira is not all that great like i said before roth iras
Are still kind of good because you can still use it as a backdoor to withdraw the principal amount that you put in your 401k before retirement without a penalty i hope you enjoyed this video and made you think a little bit about roth iras and 401ks and which one to put more money into these days don’t forget to give me a like on this video comment down below let
Me know if you’re going to change your decision between going from a roth ira and then kind of way 401k a little bit more if you’re interested in supporting this channel don’t forget to check out my audible link down in the video description below we can get a free auto book and if you cancel before the trial period ends you can get keep the book and you don’t
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401k or Roth 401k? Which is Better? | BeatTheBush By BeatTheBush