Skip Ahead Here! 0:00 - Roth 401k vs Traditional 401k 0:41 - Can you contribute to both a Roth 401k and a Traditional 401k? 1:11 - How does a Roth 401k work? 2:56 - If you do a Roth 401k, do you still get employer matching? 3:13 - Who is eligible for Roth 401k? 3:37 - How should you choose between a Roth 401k and a Traditional 401k? 6:34 - Bonus Tip!
Hey, Alvin! I just stumbled across your blog and videos. Outstanding content! Great job man! Keep up the good work! Really appreciate the information. Subscribed!
New to your channel and find your content interesting. I currently do a traditional 401k and Roth IRA. My thought process is that I’m in a 22% marginal tax bracket now, so I’m saving 22% on my 20.5K I contribute to the 401k. With this extra tax savings up front, I’m basically able to fund my Roth IRA with these tax savings. Does this sound like a good approach? When I’m retired, I should be able to be smart with my traditional withdrawals to keep income in lower tax brackets than my current 22%.
You are mistaken. The tax savings for contributing to *_traditional_* 401(k) is not a spendable amount that you can use to fund your Roth IRA. That amount resides within the traditional 401(k).
@@w7855 It's true that contributing to *_traditional_* reduces your taxable income but it's *false* that translates to *"extra"* income that you can (spend or) invest in Roth IRA. $20,000 pretax income in 22% Federal Tax Bracket is subject to ($20k * 0.22 =) $4,440 federal tax. Here are 3 scenarios: $20,000 pretax income = $20,000 traditional 401(k) contribution + $0 tax + $0 spendable income $20,000 pretax income = $15,600 Roth 401(k) contribution + $4,400 tax + $0 spendable income $20,000 pretax income = $4,400 tax + $15,600 spendable income Investing in traditional 401(k) *DOES NOT* provide you with "tax savings income" that can be used to fund Roth IRA. The tax savings resides within that traditional 401(k).
@@alrocky I get where you’re coming from, but let me explain my rationale further. I nearly max out my traditional 401k, let’s say $20,000. This results in $4,400 less paid in taxes up front compared to if that $20,000 was not put into a 401k or put into a Roth IRA. This means I have $4400 more to save or invest anywhere I please
@@w7855 No that is *NOT* correct. That $4,400 is inside the traditional 401(k)! As shown in prior post, you either pay the $4,400 federal tax or that $4,400 tax you did not pay goes inside the traditional 401(k). $42k to $90k is 22% Federal Tax Bracket: A1) $60k = $Y spendable income + $X federal tax B1) $80k = $Y spendable income + $15,600 spendable income + $X federal tax + $4,440 federal tax B2) $80k = $Y spendable income +$X federal tax + $20,000 traditional 401(k) [which means the $4.4k is inside the t-401(k)]! Person A1) and person B2) end up with identical spendable income and pay identical federal tax. B2 does not have additional $4,400 to invest in Roth IRA. If you contribute $20,000 to traditional 401(k) you "save or don't pay" $4,400 in federal tax. If you covert that $20k t-401(k) to Roth 401(k) you will pay $4,400 in federal tax and end up with $15,600 Roth 401(k).
