Thanks for watching everyone! If you found this video interesting then give it a LIKE to support my channel. Also check out my video that goes into more details on the difference between Roth and Traditional retirement accounts: kzitem.info/news/bejne/uYSny2uLraGmrZw
@trave7644
3 жыл бұрын
One question: Does 401k plan that has S&P 500 Index fund with Fidelity charge special fees; I thought Fidelity fees were lower than even Vanguard? So it it does not matter it is 401k in an index fund or regular index funds; they are the same?
@ssc1083
3 жыл бұрын
New viewer here, liked and commented with my portfolio info. This is SO HELPFUL!!!
@Michael-uf1hz
3 жыл бұрын
My only issue is risk assessment, when you retire you probably dont want to keep all your money in an snp500 fund. Mist people consolidate there nest egg into more conservative accounts.
@WassaAlan
3 жыл бұрын
Since I already have a Roth 401k and I purposely add money monthly into a Roth IRA, instead of putting it into a Roth IRA, should I put it into a ordinary brokerage account?
@Michael-uf1hz
3 жыл бұрын
@@WassaAlan no use the roth IRA because its tax free when you retire, unless you max out the roth IRA, then definitely use something like an index fund for your extra cash you want to invest.
@user-3456rtu
Жыл бұрын
Investing in Roth IRA can be a good choice since they are funded with after tax dollars, your contributions can grow tax-free over time. When you withdraw money from your Roth IRA in retirement, you won’t have to pay tax on it, which will help you keep more of your hard-earned money. Compounding is the process of earning interest on your initial investment, as well as on the interest that investment earns. This means that over time, your investment can grow exponentially. So the earlier you start investing, the more time your investment has to grow through compounding
@devereauxjnr
Жыл бұрын
Nobody knows anything you need to create your own process, manage risk and stick to the plan, through thick or thin while also continuously learning from mistakes and improving.
@322dawgg
Жыл бұрын
@@devereauxjnr I completely agree; I am 60 years old, recently retired, and have approximately $1,250,000 in external retirement funds. I am debt free and have very little money in retirement funds compared to the total value of my portfolio over the past three years. To be honest, the Fin-advisor can only be neglected, not rejected. Just do your due diligence to identify a fiduciary one.
@loud9090
Жыл бұрын
@@322dawgg my 401k has particularly lost everything gained since 2019, who is your coach if this is not too much i'm asking?Been doin sum research lately.
@322dawgg
Жыл бұрын
@@loud9090 My advisor is NICOLE DESIREE SIMON , a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market
@loud9090
Жыл бұрын
@@322dawgg she actually appears to be well-read and educated. I just did a Google search for her name and found her webpage, I appreciate you sharing
@vinnv226
3 жыл бұрын
14:07 "Why would you plan for your marginal tax rate to be lower in the future?" A lot of couples don't plan to need over $300,000 per year in the later years of their life, when their kids have moved out, their home is paid for, and they have no debt. A lot of us might consider this excessive, for others it just isn't attainable with the other costs of living and the other goals that they have during their life (travelling before they're too old to do it, raising children, owning their own home, etc.) You get a $24,000 standard deduction right off the top, so the first $24,000 you make each year doesn't count towards the taxable income. After that, many retirees will be in low tax brackets, and a traditional can make sense. I think it's a bit bonkers to say that if you're making $300,000 per year right now, you should plan to spend that much in retirement. I would bet that for a lot of the people who make $300,000 per year right now, they're making that money working their butts off so that they can retire early and live a modest life. A regular brokerage is great too, but you're suffering tax drag every single year. Even if you don't sell anything during your whole working life, you're still paying taxes on the dividends and bond interest. This is not to mention the fact that you can take the tax savings you get today from the traditional 401(k) and reinvest it (perhaps into a Roth IRA, or a regular brokerage) which allows for more compounding. Over 30-40 years, that adds up. I know another commentator brought this up to you already, but I feel like you brushed it off.
@JakeBroe
3 жыл бұрын
Hey vinnv! Thanks for the thoughtful reply! For sure, it all depends on the individual and of course there are still people where traditional makes sense. I just personally steer people towards Roth if they are not sure what to do. I just love the idea of paying taxes now and having more later. Additionally, this video mostly was the help raise awareness of the 0% bracket and people's ability to take advantage of it.
@edhcb9359
3 жыл бұрын
You nailed it on the head. My wife and I make low to mid $300k put together. We are in our prime earning years and have not always made this kind of money and our retirement accounts reflect that. . Plus the majority of our money right now is going towards our three kids being in college, paying our house off, and bolstering our retirement so that we can retire young. We will absolutely be living in a lower federal tax bracket when we retire because we don’t need $300k per year and won’t have it anyways. Plus we are leaving CA for a tax free state so the 9.3% marginal tax rate we would pay right is being deferred and will be zero in retirement. We are planning on living entirely on my wife’s pension and social security so my 401k money will just be taxed as I pull it out for small RMD’s.
@vinnv226
3 жыл бұрын
@@JakeBroe I'm a big fan of the Roth IRA as well, and I plan on maxing it out every year for the rest of my life. I also participate in a Roth 401(k) through my employer, but I'm not planning on staying with this employer for much longer. Here's one of the issues I have with your argument. If you're maxing out your Roth IRA every year, you're going to have a lot of tax free money in retirement, which means you'll be in a low tax bracket in retirement. This is exactly the kind of thing that benefits a Traditional 401(k)! I feel like you spent half the video trying to tell us how we're going to be in a super low tax bracket in retirement thanks to our Roth IRA and our long term capital gains in our taxable accounts, and the other half of the video arguing that we should plan to be in a very high tax bracket in retirement so traditional 401(k)s don't make sense. This is why I find your argument so strange. You can only put $6/7k in your Roth IRA each year, after that I think putting into the Traditional 401(k) provides a great supplement, since the standard deduction + Roth withdrawals will put you in a very low tax bracket, which means the 401(k) has a lot of money saving power.
@ariefraiser140
3 жыл бұрын
This response is gold. The 401k is one of the few tax shelters left for the average working stiff. Without a doubt the only reason you should avoid putting money there over a brockerage account is if the options and fees are abysmal and/or your company doesn't match. As you already alluded to if you're making a healthy salary the tax savings you get from sheltering your money in a 401k can be used to invest in a roth IRA. The brockerage account due to the yearly tax drag on dividends is actually one of the last accounts you should be funding. You could make a case that if you plan to retire super early you need a brockerage account as a bridge to get you to 59.5 but even then I would only have it funded so it provides 5-10 years of living expenses and do yearly roth conversions on the money sheltered in the 401k. Worse case you can opt for setting up a 72t to withdraw money early from your retirement accounts without penalty.
@andrewdiamond2697
3 жыл бұрын
EXACTLY. I have A LOT of my income taxed at 24% federal + 6% state = 30%. In retirement, with a paid off house and vehicles, and Medicare, I will be able to manage my distributions to be in the 12% bracket...maybe a bit into the 22% bracket on the margins - so my tax rate will be less than half at age 65 - and even below the capital gains rate - than it is today. If I can deduct contributions at 30% - earn money on that money that was untaxed at 7-9% annually for upwards of 20-30-40 years - then pay 12% tax on it at the end, I will do that all day long.
@jasonfbaker
3 жыл бұрын
Also consider legal protection. 401k and IRA have protections from law suits.
@JakeBroe
3 жыл бұрын
This is true! Money in a Traditional and Roth 401K is protected against personal bankruptcy.
@conureron3792
3 жыл бұрын
It saved me!
@hueymiller4842
3 жыл бұрын
What about establishing a trust or umbrella insurance?
@jajajaja2624
3 жыл бұрын
The same with a regular brokerage account if you set it up right . You welcome.
@Iseeyou67
3 жыл бұрын
@@jajajaja2624 can you elaborate?
@alexanderlavoie5461
3 жыл бұрын
I have been doing this anyways. I have a 401K through my job, but I only put in up to the match (6% dollar for dollar match), I max out my Roth IRA, and I put everything else into my regular brokerage account.
@JakeBroe
3 жыл бұрын
You are definitely crushing the retirement game by the numbers then! This is the winning formula for most people here. Cheers Alexander!
@staphacharleme4154
3 жыл бұрын
Same, Alexander!
@enterdoki
3 жыл бұрын
same
@cherrygarciafan
3 жыл бұрын
All three have their pros and cons. An individual should use all three and allocate capital based on their specific set of circumstances.
@James-yi1vk
2 жыл бұрын
Actually, it doesn't appear that way. It looks like that you should max roth and either go the rest 401k or the rest brokerage.
@cherrygarciafan
2 жыл бұрын
@@James-yi1vk I miss the days of being poor, life was far simpler. Like I said, 8 months ago, allocate capital based on your specific circumstances. A Roth is only 6k a year, some of us deploy more capital than that a week. Learn the tax code or it will eat you alive. Best of luck out there sir.
@James-yi1vk
2 жыл бұрын
@@cherrygarciafan thank you. My wife and I are approaching a salary range where it is no longer clear of which one is better than the other. But it still appears that everyone should get employee match, then max roth, then max EITHER 401k (of income is lower) or put all avaliable funds into IRA. I have to do the math on multiple scenarios to see which one works for us. It looks like if you are in around the 30% tax bracket, then the game gets pretty grey.
@cherrygarciafan
2 жыл бұрын
@@James-yi1vk It’s definitely a game. You don’t want to be the one putting up all the capital, taking all the risk and the government reaping all the benefits. It’s not about how much you make but how much you keep. Where you allocate what investment depends on your time frame for holding, do you want or need to borrow against your portfolio? Roth’s are great but you can’t borrow against them or write off losses. 401k and taxable brokerage can be borrowed against. You also have to be careful not to do wash sales when using taxable accounts. 401k are taxed as income when you retire not capital gains. Every investment has a 50/50 chance of making money but without the right strategy it all goes to the government.
@legalfictionnaturalfact3969
2 жыл бұрын
Cherrygarciafan, you miss being poor? Give away your assets and cash then. Prob solved.. Lol. Brighten up, kid :)
@brandoncomer6492
9 ай бұрын
kinda, but a 401k is going to let you take $23000 (or whatever the 401k limit is) and invest and earn interest off the total amount, while if you take that as taxable income and then reinvest it in a taxable account you're only going to have something like 15-16k after taxes to earn interest off of. The compounding interest on the 401k is going to far outstrip the taxable account long term.
@rayzerot
6 ай бұрын
Yup. The tax drag is real
@NIO3954
Ай бұрын
Yeah, the only reason I would convert it to Roth is because of that dang RMD..
@fzigunov
3 жыл бұрын
This video shows you've got no idea of what you're talking about. The traditional 401k allows you to invest more (not considering the company match) because you invest pre-tax money. Thus, you will have more money at the retirement age. The taxes are greater, but you can also withdraw more because you will have more principal. The optimal solution depends on the individual parameters (time horizon, income and target withdrawal amounts). There's a crossing point for Brokerage vs 401k. But you didn't run any actual analysis to make your argument, and still somehow managed to make this video 15 minutes long.
@BradFinn
3 жыл бұрын
Thank you! He brushed over the fact that if you add your income tax when you get paid and then cap gains tax on the way out it’s more than getting taxed ONCE on the way out. Look at the full timeline everyone. The whole punchline of “paying no tax” is a bait and switch and effects a very small percentage of people
@rybowens
3 жыл бұрын
Yeah also he said he doesn’t consider the tax going into the account.. I’m like what?! I think the title should be which account to invest in if you plan on taking out huge sums of money at one time, then at least 70% if his content would be correct. The point of wanting and having a lower tax bracket in retirement the thought is you will have no debt, own your home, thus the amount of salary you need is significantly reduced for a similar lifestyle + 30%.
@DanielRall
3 жыл бұрын
+1 on a tax-balanced approach, incorporating multiple account types as a hedge. We have no idea how the tax code will change. A traditional 401k is a key component of a long-term strategy.
@IwasRetired
3 жыл бұрын
Good summary of the various account types. Two wrinkles I learned after I was Retired at age 58. Traditional 401k funds (maybe those funds that you contributed to get the employer match) are available to you after age 55 (or age 50 for cops and some public employees) if you leave employment from that employer. So you could retire at 55 and take some money out without the 10% penalty. Wrinkle number two: Roth 401Ks have RMDs! I'm planning to roll over my Roth 401k money to a Roth IRA before age 72 to avoid the RMDs. I set up a Roth IRA with a conversion from an tIRA to make sure the Roth IRA is at least five years old. So I'll have all that Roth money completely on my own terms.
@TanManFixes
3 жыл бұрын
you need ALL THREE. that is the answer. max out ROTH. Max out 401. and whatever is left is brokerage account and real estate.
@milty456
3 жыл бұрын
Finally, someone with decent sense....this is the exact message/advice that should be used; this title is nothing but click bait. I have avoided clicking on it; but needed to comment; glad to see someone already relayed the best messaged here.
@XxAlex530xX
3 жыл бұрын
What is a brokerage account? Sorry I just started maxing out my ROTH and looking to Max out a 401 when I have the opportunity
@TanManFixes
3 жыл бұрын
@@XxAlex530xX brokerage would be a regular stock account like E-trade, TD, Webull, etc. So those accounts are not "retirement accnts" you just use them for stocks and ETS. But they are great bc you just buy stocks and hold them. Do NOT sell your stocks, keep them for AT LEAST one year. This is due to taxes. You can even choose some sp500 ETFs and just let them sit for 10 years to grow. Remember: you are not looking for short term, you want the BEST companies IE large caps and mega caps. please note this information is not professional financial advise =)
@ZoneE3
3 жыл бұрын
Well let's be real everybody can't max out be real man
@XxAlex530xX
3 жыл бұрын
@@TanManFixes sorry for the late reply but thank you so much! I’m still finishing up my career and once I make more money I’m looking to move up in maxing out my 401k. At the moment I’m doing ROTH IRA for sure.
@billphister
3 жыл бұрын
This assumes that capital gains taxes will remain at current rates, which is by no means certain.
@belmont3451
3 жыл бұрын
Yea, and he's also forgetting that a person gets a current year tax deduction for contributions to a regular 401k. If that extra money saved is invested, it compounds
@FreakyLynx
2 жыл бұрын
I simply don’t trust the government to not tax my Roth accounts twenty years in the future when I retire. I’ve been contributing to all three buckets: traditional 401k, Roth IRA, and a brokerage account but by far my money is in the 401k. I will also say there’s a good reason you can live in a lower income bracket after you retire - you’ve hopefully got your mortgage and other loans paid and if you have kids then what costs associated with them are off the table.
@ricky627899
3 жыл бұрын
100% agree on the age of using funds, it’s an important consideration. I do think you are vastly underrating the value of growing tax free money over time. You fixate on the tax rates when pulling out, but not on the growth of tax free money. $100 at 7% over 30 years = $812, vs. $75 (after tax example) over the same period = $601.
@Nickkkk838
3 жыл бұрын
But the primary benefit of a Roth is that you pay taxes now, when you are presumably at a lower tax bracket.
@JW-cx8tg
3 жыл бұрын
You don’t pay taxes on capital gains until you sell (Democrats want to change this rule), so unless you buy dividend/income stocks or funds in brokerage accounts then you are still getting tax free growth until you sell the fund during investment. Keep putting money into SPY and/or QQQ till retirement and forget the in between stuff.
@ricky627899
3 жыл бұрын
@@JW-cx8tg the principal you start with will be less, because you pay initial payroll taxes on the funds by not putting it in a 401k.
@andrewdiamond2697
3 жыл бұрын
@@Nickkkk838 Yes. But I'm in the 24% tax bracket (and 6% state) NOW while I am working. When I'm 65 and not working, and move to a income tax free state, I will be 12% bracket...maybe 22% if I hit minimum allowable distributions on my IRA at age 72, but still less than the 24%+6% rate I have now.
@bishamuesmus301
3 жыл бұрын
@@andrewdiamond2697 that is assuming tax rates don’t go up by the time of your retirement. Someone has to pay for all these stimulus cheques and it is going to be through tax changes in the future.
@Ace2021
3 жыл бұрын
Great content Jake, you have the most underrated channel in the YT financial world!
@JakeBroe
3 жыл бұрын
I agree Ace! Hopefully more awesome people like you find me evenutally!
@DicksonMaimouth
3 жыл бұрын
You, sir, are a treasure trove of practical information. I can’t thank you enough.
@JakeBroe
3 жыл бұрын
Haha, hitting that like button and leaving a comment is all I ask. Thanks R R!
@DicksonMaimouth
3 жыл бұрын
@@JakeBroe Done and done!
@DavidSmith-wi3ic
3 жыл бұрын
Jake, this was definately an eye opening video on the benefits of a roth vs traditional vs brokerage account. I especially appreciated the information on tax benefits of investing through a brokerage account vs traditional ira.
@cybrainx72
5 ай бұрын
I suspect you were misled by this as the right math was not applied for comparison.
@cjmhall
3 жыл бұрын
One thing that wasn't mentioned was that the upfront tax savings from a traditional 401K allow you to invest ~1/3rd more into the market which will compound and appreciate in the years leading up to retirement. Even though you are being taxed on the distribution, the portfolio size at retirement will be significantly larger than a Roth account.
@thomasreedy4751
3 жыл бұрын
Ultimately the 401k and Roth give the same returns. Size doesn’t matter because the 401k is taxed. You could realize A very small difference, if you are taxed a smaller amount in retirement. However, that “extra 1/3” you talk about does not grow tax free … bad unless you need the dividends now. Roth’s are best, not because you get a bigger return but because you can invest more in a tax advantage account. Millionaires love Roth’s. It is a myth that Only those with Lower incomes should use them. And in an emergency, you can always withdraw your contributions penalty free.
@gthree0239
3 жыл бұрын
I do all three. Company money into the 401k is traditional, my money goes into this account and the ira as Roth, and my brokerage account…well it does what it does.
@fluentinfinance3744
3 жыл бұрын
That all depends on what you do with that extra 1/3 of your money. You might choose to invest it, but realistically most people will probably end up spending it on bigger and fancier toys. I've never met someone that factors their current years tax savings into account when determining how much money to invest. Most people invest in whole number amounts, such as 10% of their income, or $500/month, or whatever. I've never met someone that said "I have 500/mo left over after expenses, so i'm going to invest $666/month in a traditional because after I get my yearly tax rebate it will balance out to the 500 in after tax". No, they're just going to invest the 500/month and be done with it.
@Frank020
2 жыл бұрын
@@fluentinfinance3744 exactly. Most get, more and spend more. If your goal is to save for retirement, the focus should be on the cash flows at retirement, and getting those taxed like ordibaryjob, sounds like it sucks to me, because when you pull the money you are pulling out massive amounts of principal or numbers of shares to to the same thing. So it's also screwing with your future compounding. Of course in younger stages of life it could give the 401k a chance to multiply a lot.
@muffemod
2 жыл бұрын
If you have no earned income in retirement you can withdraw from the 401k $12,550 a year tax free (standard deduction).
@taytay2046
3 жыл бұрын
When compare traditional IRA and standard brokerage account, we need also consider that one is pre tax money and one is after tax money for the contribution, which means you will potential pay higher tax rate on the after tax money to deposit into standard brokerage account since when get taxed when you are young and working. On the other hand, when you pay tax on the contribution amount for you traditional IRA withdrawal, you potentially paying lower tax rate since you’ve retired and has no income
@NIO3954
Ай бұрын
Agree…and you only pull what you need…
@davidboeger6766
3 жыл бұрын
This is a horribly misleading and incorrect video. Comparing the nominal total amounts paid in taxes now vs. later is meaningless and ignores all kinds of variables like tax drag and portfolio size. Would you rather make $10 and pay $1 in tax, or make $20 and pay $2 in tax? Clearly the latter leaves you with more money, even though technically you paid more lifetime taxes. What matters is the marginal tax rates during accumulation and withdrawal. Let's assume an equal tax rate of r, with input x and retirement total y. With a traditional 401k/IRA, x grows to y, but then you pay taxes on withdrawals, so you only get to withdraw (1-r)y. With a Roth account, you get taxed up front, so that same income only allows you to put in (1-r)x, which will ultimately grow to the same (1-r)y. In other words, the multiplication is associative. You're still multiplying by the marginal tax rate before or after. So the goal is to pick the lower tax rate. And guess what? The vast majority of American workers have lower tax rates in retirement because they don't save all that much. You're completely ignoring the part where the amount going into the Roth and taxable accounts is reduced by the marginal tax rate, so the account balance will start out smaller. You brought up an excellent point about someone saving many millions in retirement accounts, in which case their retirement tax bracket may very well be higher than their tax rate during the accumulation phase. In that case, yes, obviously a Roth is better because they would be paying the lower tax rate during their working years. But how many Americans actually fall under this category? Very, very few, and those that do most likely diversify across account types anyway just to take advantage of all the tax-advantaged space they can get, or they retire early and use strategies like Roth conversions to minimize taxes. It may not be that someone intends to retire poor, just that they intend to retire early. One last little nuance to consider is that it's often the case that nominal contribution limits are the same regardless of Roth or traditional. Both 401k types have the same $19,500 limit, for example. This means that technically, you can contribute more income to the Roth account in pre-tax terms, so in a sense, the Roth account does have a higher effective limit. Whether this is an important consideration is debatable and depends on one's personal circumstances. If someone was better off deferring taxes till retirement (which I mentioned earlier is most Americans by far), then the benefit of contributing "more" to a Roth account would have to outweigh that, which seems unlikely, especially since most don't max out these accounts anyway.
@emikami1
3 жыл бұрын
I agree with you that this video is an oversimplification. However, There's a few other issues other than the tax bracket changes before and after retirement that needs to be considered. 0%, 50%, or 85% of your Social Security Income is included in your taxable income depending on this formula and your filing status: 1/2 Social Security Income + Other Income Roth IRA distribution doesn't count in this formula at all. Traditional Retirement account does count against this formula. The oddity of the calculation is that effectively, you can be at a relatively low income range and be taxed at absurdly high effective tax bracket because of this formula. Sometime the effective tax bracket is as high as 40.7% even when income range is rather low because of the taxation of Social Security Income. www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits So to you answer your question as to how many people actually are in a higher tax bracket than when the were working, the answer is actually a lot more than you would think. The typical FIRE community response to this is to leave work early and live off of savings/investing and delay Social Security Income until age 70. That may work to some extent but for many they have to figure out how to pay for health insurance. Most end up buying health insurance from the Obamacare Healthcare exchange because other options such as post-retirement employer health insurance is not common. With Obamacare insurance, the premium you pay depends on your household size and income. Effectively, it acts like an extra layer of taxation that is rather steep. So a person in a 12% tax bracket after adding the increase in health insurance premium typically pays around 27% total based on their income which is higher than 22% tax bracket that the same person may have been in during their working career. This is despite major decline in income after the person stopped working. The formula of Roth vs Traditional that paying tax upfront or later is correct by itself when effective tax bracket remains constant. However, something changes when you are in a position to contribute to the maximum amount in a traditional retirement account and still have money left over to invest. Presumably, you will invest the excess in the taxable account which goes outside the formula and create a drag. If you contributed to a Roth, it requires more dollars upfront which ironically allows the account to act as a bigger IRA sheltering more after tax equivalent money to it. So if the tax bracket is positive and returns are positive, and you have enough resource to fund the traditional retirement account and still have more to invest, the Roth has an advantage even if the tax bracket remains the same. For those paying for Medicare Part B and Drug Coverage, the premiums are income based. The provision is called IRMAA (Income Related Monthly Adjustment Amount). It hits at rather high income range, but those IRMAA brackets are halved for single individuals. It is important if you are married to consider the high probability that one of you will die sooner than the other leaving the survivor as a single person. Hence IRMAA is sometimes called Widow tax. en.wikipedia.org/wiki/Medicare_(United_States) One other item that might apply to certain seniors is that many states offer a property tax exemption that varies depending on their household income. Once again, that acts much like another layer of income based taxation. So after considering the various "stealth tax" from Obamacare, IRMAA, taxation of Social Security, and senior property tax exemption, Roth usually has a bigger advantage than traditional in most cases as noted in this video. There's not too many people investing whom will not face at least one of these "stealth tax" in retirement--the most common is taxation of Social Security. With Secure Act 1.0 limiting the stretch IRA to 10 years for most non-spouse beneficiary makes things even more likely to benefit those with more Roth than Traditional. Proposed Secure Act 2.0 limits age 50+ catch-up contribution to after-tax cotribution which makes the Roth even more favorable. The argument of Traditional vs taxable brokerage is a bit trickier. Video assumes 0% qualified dividends and capital gains will continue into the future but I probably would not count on that especially if you're a younger investor and are likely to face many tax changes between now and until death. I also will not count on stepped-up cost basis to continue either. So this one will depend on many different factors. One potential big negative for a Roth IRA and Roth 401(k) is if you intend to retire in a foreign country as a U.S. Citizen is that the earnings in those accounts are usually taxable in the country of residence. There's only about 8 countries that the Roth IRA and Roth 401(k) retains their tax-free status based on tax treaty with the U.S. For Roth accounts that fall under government pension such as the Roth TSP, Roth 403(b), Roth 457(b), usually remain tax free in both countries if you retained U.S. Citizenship and retired in a foreign country. Be sure to check the tax treaty and technical explanation for it. The host country may require the income to be declared and specific article in the tax treaty to claim the tax exemption in that country. If this situation applies to you, do not roll-over or direct transfer government sponsored Roth accounts to a Roth IRA.
@DrJ3RK8
3 жыл бұрын
I agree for the most part. However, in cases where the employer contributes more in the form of bonuses (that wouldn't be contributed outside of a company sponsored 401K) it's kind of handy.
@Hyperlooper
Жыл бұрын
Yeah you should at least fund up to the employer match. It's an instant 100% return on your investment at nearly no risk. You can't get better than that.
@ImChiLynn
3 жыл бұрын
I have all three 😁 and plan to deposit/withdraw in each based on my individual tax strategy
@matt33876
3 жыл бұрын
401K helped me buy my first home. Definitely not a waste with the 100% employer match up to whatever percentage.
@jperejpere
3 жыл бұрын
May I ask, how?
@matt33876
3 жыл бұрын
@@jperejpere Well, you can borrow up to 50% of 401k with little or no penalty (depending on your plan and company) to purchase a home. Or, if you took advantage of the 401k withdraw rules during covid. I have a Roth 401K. So I was able to withdraw most of the money and earning tax free to use as a down payment for my first home. Which, I believe was a better move than renting and leaving a 401K to mature for another 30+ years. The home will be paid by then, which would have earned me $300K+ on top of my continued Roth 401K contributions. I hope to come out farther than just a 401K throwing away money renting.
@Rocio36800
2 жыл бұрын
👍👍
@Scott-by9ks
2 жыл бұрын
Many people don't know but many employers have a vesting time requirement for the funds they put in. It's usually 3-5 years. If the employee leaves before fully vested the employer takes back their contributions.
@flamaest
3 жыл бұрын
There is another investment vehicle, the 457. My company gives me a 403 and a 457 which I can max out every year at 19.5k each. Also, once you turn 50, you can double your contributions into the 457, meaning that you can do three times the federal limit on both of these accounts combined, totalling about 60k per year, as a excellent tax shelter.
@Pierceb2
6 ай бұрын
Great video, I knew about this but your concise explanation and great graphics make it understandable. I have fortunately set my young adult children to fully fund Roths and Taxable Investment account at the same time so they can comfortably retire when they choose before 59.5 You should do video on fully funding HSA first as it is the most tax advantaged and one on choosing 401k vs Roth in high tax states and moving out at retirement as well as Roth Conversions from taxable accounts, windfalls etc with help from financial planner / accountant etc. Enjoy your Russia / Ukraine videos too!
@joonakiiski8185
3 жыл бұрын
Dangerous advice. It seems like that you really haven't run the numbers. Traditional makes a lot of financial sense in many situations.
@JakeBroe
3 жыл бұрын
Thanks for the comment Joona! Cheers!
@saiyjin98
3 жыл бұрын
The deciding factor is if you think you're in a lower tax bracket now vs at retirement. Most people would be lower at retirement. But he does have a point about having access to the money if you want to retire early. Then a ROTH or brokerage is the way to go.
@yvettesdavis
3 жыл бұрын
What's the best way to invest for a middle aged person just starting to invest?
@mucusofwanderhome6945
3 жыл бұрын
People forget they don’t need to withdraw any specific amount of $ from their traditional 401ks up until RMDs are required. Therefore, one can control what is taxed at the marginal tax rates. Only a fool would say a traditional 401k is a waste of time given its investing pre-tax dollars (which compound more rapidly) along with the AGI tax reduction plus a company match plus it is one of the best barriers to not be tempted to spend the $ on cases of twinkies.
@heinekenswordfish
3 жыл бұрын
This is an interesting thought experiment but there's an awful lot of "if this is true/remains true" conditions for it to work (as others have already mentioned, the initial analysis doesn't even take into account the #1 benefit of the 401k -- many years of compounding interest on the deferred taxes). One thing I haven't seen mentioned yet is, even if the long term capital gains tax remains 0% for the lowest bracket (a big "if"), in retirement you may never even get to take advantage of this because your social security income alone can easily push you out of that bracket (currently the max social security benefit is about $48k a year, whereas 0% bracket ends at $40k).
@wackzingo
3 жыл бұрын
The big advantage of a 401k is the ability to do a rollover to a Roth IRA when you leave. A person making $100k/yr., maxing out contributions, then does a rollover when they leave the company at 10 years is essentially contributing $15k a year to a Roth (195k - 45k taxes). I think there are only two good reasons to go with taxable over 401k and these don't fit most people: 1) You will be with the same company until retirement so no rollover. 2) You want to retire early. 3) You lack the discipline to not spend money in taxable.
@herratuohinen3805
3 жыл бұрын
As an early retiree this is what I do. Best of both worlds. Eventually I'll have all 401K money flipped into Roth IRA almost tax free.
@JakeBroe
3 жыл бұрын
Plenty to consider for sure! But rolling money from a traditional 401k to a Roth IRA is a taxable event. Be careful!
@headshotdave
3 жыл бұрын
You can't rollover a 401k to a Roth IRA. You can do a Roth Conversion where the amount you convert is taxed (as ordinary income). Hopefully you have available cash laying around to pay those taxes, otherwise you'll have to convert even more of your 401k to pay the taxes with.
@wackzingo
3 жыл бұрын
@Dave Hoffmann what's your point? You essentially repeated what I already stated except you didn't like my informal use of the word rollover. Yes, technically it's a conversion so nice job, you got me.
@pauldunecat
2 жыл бұрын
The other issue is if you're in a higher bracket today paying income tax on a Roth today is a hit on your assets now which need to grow more over time vs maximum amount invested now with a potentially lower tax rate at retirement. Pay 33% tax today and grow slower vs pay 0% today then grow faster with more assets, then extract at 15% tax or less later.
@qn5947
3 жыл бұрын
Politicians will find a way to raise taxes on LTCG in this new world trillion dollar deficit every year.
@neutralsportsfan17
3 жыл бұрын
Maybe, but they'll also likely raise ordinary income tax because that would raise more money which impacts traditional 401Ks. I think they will keep favorable long-term capital gains even if the rate goes up because it incentivizes investments.
@JakeBroe
3 жыл бұрын
I think politicians are more likely to raise taxes on workers (the marginal rate) rather than their owners--the investor class. That strengthens my argument to avoid a traditional 401k.
@velveder2
3 жыл бұрын
I think long term capital gains will be taxed at the marginal rate within the next 15 years. That doesn’t mean you can take advantage now.
@JustinVConroy
3 жыл бұрын
Have to admit I've never considered that aspect of traditional vs brokerage. Really great comparison and video, sir. Thank you.
@JakeBroe
3 жыл бұрын
You are very welcome Justin! Cheers!
@educatedwanderer9293
9 ай бұрын
I have about 500k in traditional and 200k Roth within my 401k, 150k in a Roth IRA, 950k in a traditional IRA, and 550k in a taxable brokerage. All my contributions go into Roth or Taxable at this point. Thank you for illustrating the benefit of having a taxable brokerage as I've grown to appreciate the advantages of having one.
@trevor6607
3 жыл бұрын
Great value. I'm convinced to stop maxing the 401k now. Thank you!
@JakeBroe
3 жыл бұрын
If that works for you! Cheers Aaron!
@22Platypus
2 жыл бұрын
Laughable to assume taxes would remain 0% until I retire (in 40 years!)
@NIO3954
Ай бұрын
Yeah…they’ll figure out how to tax the money you make on it…or cap it somehow..
@arene1710
3 жыл бұрын
Ton of useful information here. I thought the max contribution to all roth accounts total was $6k so I was not contributing to the full. Didn’t realize my roth 401k I set up through my job had its own max cap separate from my personal Roth IRA. And learned much more too! You earned a sub!
@JakeBroe
3 жыл бұрын
Awesome! Welcome to the channel Aren E! Great to have you with us!
@LisaCulton
2 жыл бұрын
Great video. I had one of those years where I paid 0% captial gains tax on about 50K in LT captial gains from my TAXABLE brokerage account. My eyes were opened! On the other hand, so-called "early" withdrawals from my 401k will result in at leat 30% Taxes!!!! people need to be aware of this. And note, I had a pretty high income in the year where I paid 0% BUT it was foreign earned income and therefore not taxable.
@nickdoyle-achievefinancial2464
3 жыл бұрын
One major benefit is 401ks are protected by ERISA and cannot be lost in a lawsuit or bankruptcy. I would hate to have all my eggs in the taxable basket at risk of one lawsuit. IRA protections vary by state (may / may not be protected).
@JakeBroe
3 жыл бұрын
True! Worth considering!
@gbb82
3 жыл бұрын
Which is why my money is staying in the TSP.
@ajtoy7723
3 жыл бұрын
@@gbb82 good idea. But if you have a business an umbrella policy for a 1+ mil may be a better option
@hueymiller4842
3 жыл бұрын
Jake, wouldn't establishing a trust be a good way to get around the lawsuit worries of a taxable account?
@howardwylie1620
3 жыл бұрын
Thanks for the information Nick !
@edgarfletes8196
3 жыл бұрын
I had never thought about this idea. Like you, I don’t plan on retiring until 60+ so investing in the ordinary brokerage account is looking real interesting now.
@JakeBroe
3 жыл бұрын
Solid choice Edgar! Cheers!
@betruetoyourself7162
3 жыл бұрын
Thank you Jake. I never thought of a taxable brokerage account would be better than a 401k
@Chris.Brisson
3 жыл бұрын
Well, that's if you plan to live a modest retirement, eh? Should you aim so low?
@JakeBroe
3 жыл бұрын
Yeah! That 0% long term capital gains tax bracket is a game changer. My retirement is pretty much going to revolve around it. All I have to do now is save and invest enough to max it out TAX FREE!
@robmcclasky6676
3 жыл бұрын
There is an advantage to 401K plans not mentioned. That is, it is most often automatically deducted from your paycheck, which results in greater savings over one's working life, since no self discipline is required for accumulating a nest egg. I do agree, however that a Roth IRA approach to retirement savings is more advantageous.
@mizzmolly7649
3 жыл бұрын
The problem with the brokerage account is that when you buy and trade throughout the year, the long-term and short-term capital gains count toward your adjusted gross income That could make you ineligible to contribute to your Roth that year. For example, if you're single and your AGI is more than 140k in one year, you no longer are eligible to contribute to your Roth.
@travis1240
3 жыл бұрын
@@mizzmolly7649 just plan on doing a backdoor Roth at the end of the tax year
@freddiejonesy6168
2 жыл бұрын
Great video! I love my Roth IRA and ordinary brokerage accounts!
@alecgalbraith5604
3 жыл бұрын
I liked the breakdown of this video, though I think it’s a little bit of a false dichotomy to say you should invest in a taxable account and not in a traditional 401k past the employer match amount. Since so much is unknown about the future, including tax rates, I think a prudent investor would utilize all the buckets-traditional, Roth, and taxable-in fairly even proportions. This will allow us to use the tax code to the fullest advantage by the time we retire.
@JakeBroe
3 жыл бұрын
For sure! Lots of different ways people can play it. All depends on the individual and nobody can predict the future!
@utubedaveg
3 жыл бұрын
taxes will be higher in the future.
@johngill2853
2 жыл бұрын
@@utubedaveg yes but you will still have the standard deduction to take advantage of. And then there will still be lower tax brackets. Just because taxes will raise doesn't mean you'll pay more taxes, of course it depends on who you are and what you save.
@pvic6959
2 жыл бұрын
lol meanwhile ive been making out my 401k sinc e2019 (when i started work). i think something like 33% of my net worth is in my 401k at 25. i hope 60 year old me is pleased lol
@pferkler9426
2 жыл бұрын
You are wrong about the ROTH, you said only can take out after 59.5 so you could not retire until 60. But direct contributions to a Roth can be withdrawn anytime, without taxes. I think it's best to have money in all three locations Roth, 401K and taxable account.
@chrisbrown8748
3 жыл бұрын
My guy Jake never disappoints, great video as always.
@JakeBroe
3 жыл бұрын
Thanks Chris! Cheers!
@frankb1
2 жыл бұрын
One advantage to traditional 401(k) and IRAs: the funds are exempt from creditors.
@JakeBroe
2 жыл бұрын
This is true Frank! Cheers!
@BluishLizard
3 жыл бұрын
Really thought provoking. This wouldn't have really occurred to me at all based on how these different accounts are advertised to the investor. Another great video man, keep it up! Also looking forward to seeing how the dead hand strategy plays out.
@JakeBroe
3 жыл бұрын
Thanks BL! I think anytime the market goes crazy or dips, I'll update people on my Fidelity account where I am running the Dead Hand. But anytime the market is green... just assume I locked in a profit of $100 to $200.
@mj625
2 жыл бұрын
Everyone forgets to mention that money in your retirement account is protected from bankruptcy, whereas money in a brokerage is not. Unless something has changed recently....
@asishprabhakarkottala3371
3 жыл бұрын
Great video Jake. I always appreciate the technical analysis in your videos. But I do think you missed one point. In case of traditional 401k, since the tax burden is lower, theoretically you'll have more money on hand to invest. In traditional 401k, I can invest roughly $19000 every year. If I choose to keep the same money in a taxable brokerage account, it becomes $14440 if I'm in the 24% bracket. Over the long term, this $4500 difference could end up becoming significant.
@JakeBroe
3 жыл бұрын
"In case of traditional 401k, since the tax burden is lower, theoretically you'll have more money on hand to invest."
@asishprabhakarkottala3371
3 жыл бұрын
@@JakeBroe "They don't realize they get a tax savings until they do their taxes"
@53block92
2 жыл бұрын
@@asishprabhakarkottala3371 your math might be right for that scenario but people don't invest like that, I think you are over analyzing this. If someone makes 5000 a month and decides to invest 1000 dollars each month, they don't sit down and figure out what the exact number is of the taxed amount before investing their money, they just invest the 1000 in one or the other, or they may even split it up, but it's the same total amount (or contribution percentage) that they put into the account. By doing it this way they are investing the same amount and getting hit with the higher tax now (less take home pay) but when they go to pull money in retirement, they would have invested the same amount (1000 monthly) and the account would have grown the same, so they will reap the benefits of not paying taxes as they pull that money out. I have never known someone who decided to invest 1000 into an account and say, hold up, wait a minute, since this is being taxed now, I can't invest the whole 1000, I have to only invest 800 because of taxes....
@mitchellsmith4601
5 ай бұрын
This is so obvious. You defer the taxes until retirement because you’ll have paid off your home and car by then, so you can afford to live on a lot less, and therefore pay lower taxes. Duh.
@pw_jc
3 жыл бұрын
Did you mention being able to take advantage of losses in a non-RET ACC, while you can't in a RET ACC. But RET ACCs have better legal protections incase of lawsuit, bankruptcy, etc...
@Chris.Brisson
3 жыл бұрын
Also, 401K has protection superior to that of IRA, which is something to consider wrt divorce when your wife realizes the fortune you have amassed whilst following Jake's channel.
@JakeBroe
3 жыл бұрын
Hey pw jc! For sure! You can tax loss harvest in an ordinary brokerage account, but cannot in a retirement account. But yes, 401ks are protected from bankruptcy court.
@MrRentageek
2 жыл бұрын
@@Chris.Brisson Not protected in divorce. QDRO.
@johngill2853
2 жыл бұрын
You compared Long-term capital gains vs 401k taxes but didn't mention the 401k was never taxed at time of earning. The brokerage account contributions were taxed at your Highest tax rates
@seanohara5754
3 жыл бұрын
You're tax free up to the standard deduction in a traditional 401k as well. That means tax free going in and tax free coming out. If you carefully balance a brokerage, Roth and traditional, you can pay no tax. I think a 3 bucket strategy is pretty good. As far as lower marginal rate in the future, my plan isn't to have more at the end but to get to the end earlier and use conversions to access the money.
@funkybunch5701
3 жыл бұрын
Can you elaborate on the use of conversions to access the money? You have access to the brokerage account and the 401K if you use the 55 rule and that is all you need until you are 59 1/2, right?
@aaron___6014
Жыл бұрын
Please explain the 401k being tax free both ways.
@seanohara5754
Жыл бұрын
@@aaron___6014 up to the standard deduction you do not pay taxes.
@danh2716
2 жыл бұрын
This is a poor argument for multiple reasons. First, the money put into a brokerage account has already been taxed at essentially a person's top marginal tax rate, which means in this scenario the money would have been taxed at 12% at the very least (and most likely at much higher than 12%.) Which is how much money taken out of a 401k will be taxed at in this scenario the uploader uses (up to $105k per year, married filing jointly.) So the very best possible outcome would be parity. The more likely outcome is that most or all of the money contributed to the brokarege account would be taxed at the 15%, 22% or even 24% rates. Making it a significantly poorer outcome to use a brokerage account instead of a 401K. Second, the uploader is totally dismissing the effect of being taxed for qualified dividends held in a brokerage account, each and every year. Even when holding really efficient index funds like VTSAX, the amount is not negligible over a long time span. Last year VTSAX gave off about 1.4% in qualified dividends. For a person with a $500K "retirement fund" held in their brokerage account, that would equate to an added $1,050 in taxes owed just last year. Who's honestly interested in paying an extra grand in federal taxes *each and every year* just for the ability to have your savings taxed at a higher rate? I do happen to think that there is a place for an after tax brokerage account in retirement savings (especially if a person is looking to retire before 59.5.) But to argue that a brokerage account should be used instead of a 401k, for most scenarios, is just daffy.
@tomm8025
3 жыл бұрын
This is exactly why I often suggest to people to convert traditional retirement funds to a Roth in any years where there income is down. You want to get as much as you can in a Roth so you have more flexibility during retirement. I have all three types of accounts. I have had years where I got a big income surprises from my regular brokerage account as mutual funds don't disclose Dividends & CGs until a couple weeks before year end. That can continue when you are retired as well. But I do like that it still provides me more flexibility in the future on where my money is coming from and the taxes that will be due. You should use the end of the year, to plan and pull the money you'll need to the upcoming year. Finally, if you own individual stocks, putting those in your regular brokerage account rather than the traditional retirement account will allow you better control as you'll generally not have any triggering events until you elect to sell.
@pvic6959
2 жыл бұрын
except I cant have a roth ira because of income limits (i make more than the limit). however my employer gives both 401k and roth 401k so im contributing in both
@tomm8025
2 жыл бұрын
@@pvic6959 - Wow. You need to do some educating. First, I love when someone makes a proclamation then essentially counters their own argument. You can't have a Roth IRA but DO have a Roth 401K?? So you have a Roth!! Second, you can have a Roth IRA and you can fund it via a backdoor contribution. At least at this time. Third, you whole post demonstrates you did NOT read what I wrote!
@pvic6959
2 жыл бұрын
@@tomm8025 i said i dont have roth _ira_ I DO have a roth _401k_. didnt say i dont have roth. just said i dont have roth _IRA_ i was more adding to your comment with my own experience for those in a similar boat edit: on further review, It seems like I accidently responded to the wrong comment... but i cant find the comment i _meant_ to respond to lol
@tomm8025
2 жыл бұрын
@@pvic6959 - Except you don't seem to understand what I wrote. I started stating that I recommend people CONVERT traditional retirement funds to a Roth, especially in down income years. Anyway, you stated you replied to the wrong comment so that would make more sense....I was re-reading my original comment from MONTHS ago and was wondering how it got twisted? Now we know. Take care. And maximize what you can in your 401K Roth over the traditional. You be glad you did as you approach retirement and are in retirement. If your income bracket is taxed too high, just keep in mind converting in the future.
@pvic6959
2 жыл бұрын
@@tomm8025 Yeah not sure how it replied to the wrong comment haha thats never happened before. I had been contributing to the "normal" pretax 401k for the last 2 years (I only started in 2019 when I started working). I had seen the roth 401k option but didnt know what it meant but now I do. So now I'm contributing a LOT more to the roth 401k to catch up there. My thought is if im about 50/50 in both, it cant hurt. all of it is in the vanguard 2060 target fund I also have some in the after tax 401k (vanguard automatically put it there once i hit the max) Sorry for the confusion my comment created
@robby95036
Жыл бұрын
Don’t forget that you can withdraw contributions from roth ira if you need a bit to carry you over until full retirement age.
@richard1113
3 жыл бұрын
Thanks Jake! I guess I never thought of my brokerage account as being a possible retirement vehicle. I've always had to pay capital gains on sales in it because I have regular income from my job. Good to know that when I am retired I can take advantage of the first $40K of gains not being taxed if that's my only income.
@JakeBroe
3 жыл бұрын
Yep! And that is just on gains, not including whatever your cost basis was on what you sold. Cheers Richard!
@donaldlyons17
3 жыл бұрын
Yeah and many will not need more than 40K in retirement either!!! I can live on 15K but will likely not need more than 40K after taxes to survive 30 years from now!!! Your quote: (Thanks Jake! I guess I never thought of my brokerage account as being a possible retirement vehicle. I've always had to pay capital gains on sales in it because I have regular income from my job. Good to know that when I am retired I can take advantage of the first $40K of gains not being taxed if that's my only income.)
@chrisolivo6591
3 жыл бұрын
My biggest fear is in 10 years, these politicians increase all these tax rates because they know they have a gold mine of people retiring. The National Debt is 28 Trillion dollars as these politicians have bankrupted this country since we last balanced the budget in 2000. The Fed has propped up this economy with low interest rates and stimulus so eventually the damn will break and they are going to look for sources of new revenue. People who are setup to retire comfortably will be made the villain (even though they sacrificed to invest money throughout their 20’s, 30’s, 40’s and 50’s). Don’t put it past these people in Washington as they know how to scare the masses and get what they want.
@behrensf84
3 жыл бұрын
What if you contribute to the normal 401k, retire early, and then roll the cash into a Roth IRA slowly over the years while you live of your brokerage account. that way you get the tax deduction up front, and only take the money out once you exhaust funds in your brokerage account. That’s my plan…
@JakeBroe
3 жыл бұрын
Sure, there are lots of ways to slice it. But you are still paying your marginal tax rate on ANY money you pull out of your normal 401k. But you are spot on to use traditional money before Roth money since the Roth will be more tax free in the future.
@saiyjin98
3 жыл бұрын
@@JakeBroe If he retires and only converts up to the 0% tax bracket each year, he would pay no taxes for the 401k withdrawal. This is a valid strategy.
@joelcorley3478
2 жыл бұрын
You don't pay taxes on traditional pre-tax account earnings. Assuming your marginal rate when contributing is the same as at distribution, the math shows that all you are paying in taxes are the *DEFERRED* taxes plus the earnings on those deferred taxes - nothing more. However, if you are in a lower tax bracket in retirement - like you are trying to propose here - the traditional pre-tax account lets you keep some of the deferred taxes and their earnings. That's a huge win because it means you get to keep / spend money you would not have had otherwise. The only ways you can lose with a traditional pre-tax account is if you wind up in a higher tax bracket in retirement (probably due to RMDs). Or if your employer's 401(k) plan sucked and it or the investment options charge outrageous fees.
@Cpopit
3 жыл бұрын
You're not taking into account that the money used in an ordinary brokerage account is already taxed (like a Roth). Yes, with proper and strict planning, you could sell every year with no federal taxes. However, if your income is slightly higher that year, you will be taxed (for the second time, although at a lower bracket).
@leahh.6277
3 жыл бұрын
The tax is only on the earnings above cost basis correct?
@Cpopit
3 жыл бұрын
@@leahh.6277 The second time, yes.
@cybrainx72
5 ай бұрын
I don't understand the argument why high earner plan to be poor in retirement. They would have amassed capital and not necessarily on dividend stocks or rentals which are forced income. You could always do disciplined asset liquidation to support retirement living. It is mental block to depend on fixed income.
@ChristopherAbelman
4 ай бұрын
Most Americans find it hard to retire comfortably amid economy downtrend. Some have close to nothing going into retirement, my question is, will you pay off mortgage as a near-retiree, or spread money for cashflow, to afford lifestyle after retirement?
@HildaBennet
4 ай бұрын
Mind if I look up the consultant that guides you please? only invest in my 401k through my employer for now, but enthused about diversifying my investments for a prosperous financial future
@HildaBennet
4 ай бұрын
Thank you for this tip. It was easy to find your coach. Did my due diligence on her before scheduling a phone call with her. She seems proficient considering her resume.
@ntmiller01450
2 жыл бұрын
A couple following your advice and receiving Social Security benefits (and the dividends from their big taxable retirement stash) is unlikely to be in the 0% capital gains bracket when they sell their retirement assets in order to fund their retirement. And any capital gains tax they pay will put them behind a couple that simply used their 401(k) plan to save for retirement - since this second couple would have a larger pre-tax stash thanks to the upfront tax deduction they got. [This assumes identical marginal tax rates both when the couples are accumulating the savings and when spending them]. But I agree with other posters who say that a mix of all three (traditional, Roth and taxable) is best, depending upon individual circumstances.
@jnab0
3 жыл бұрын
it's only a waste if you're not getting a employer match, which is free money.
@EE-ie9gm
3 жыл бұрын
My employer matches 5% but i contribute 15% every pay period.
@jasonfbaker
3 жыл бұрын
401k have legal shield as well that standard investments don’t. One thing to consider if one does not have umbrella insurance
@rene.s.s
3 жыл бұрын
You can also get a match on your ROTH 401k. Then move to ROTH IRA and then Taxable brokerage account.
@JakeBroe
3 жыл бұрын
Getting a match is a 100% instant return on your investment! Can't beat that!
@jeffreywashington5461
7 ай бұрын
Waste of time is a very strong statement
@WallersWallet
3 жыл бұрын
Message unclear. Dump my kids college savings and life savings into Crypto? Great video Jake. Definitely made me think. 🙌🏼
@JakeBroe
3 жыл бұрын
Bitcoin is down 50% in 4 months! Now is the time to pounce and make your fortune!! (this is sarcasm to anyone who doesn't know Dustin)
@michealsizemore1
3 жыл бұрын
I agree with this video 100%. Thanks for posting.
@JakeBroe
3 жыл бұрын
Thanks Michael! Cheers!
@birbsandsports
3 жыл бұрын
Great video Jake! Although I think the title should be "Your Traditional 401K is a Waste of Time", emphasis on the Traditional aspect. As a Roth 401k is still a beast.
@JakeBroe
3 жыл бұрын
I agree! The Roth 401k is still supreme. Only downside is you have to wait until 59.5 for full access to funds. Cheers Abid!
@jr.2461
3 жыл бұрын
@@JakeBroe Do the taxes end up a little complicated in a Roth 401K because as an employee you contribute after-tax money, but your company match is with "pretax" money, so a portion of your withdrawals later in life are still taxed?
@gregorylee1395
3 жыл бұрын
Couldn't you do a backdoor roth conversion and get access to the money early that way?
@birbsandsports
3 жыл бұрын
@@jr.2461 yes, the company's match is with "pretax" money, but that doesn't go into the Roth 401k. The pretax match money goes into a separate, pretax retirement account made by the company (i.e. a separate Traditional 401k bucket account). So when it's time to roll over a Roth 401k into your own Roth IRA (such as when you leave the job), all of the money transferred from the Roth 401k is truly all Roth money (i.e. after-tax). None of it will be taxed later in life when you withdraw (assuming you're age 59.5 and had the Roth account for at least 5 years). The pretax match money, in that separate account, Would be taxed, when you withdraw from there or when you have to take required minimum distributions from it. Hope this helps.
@MrRentageek
2 жыл бұрын
Traditional beats Roth. Pay 22% (or more) now with Roth, or pay 14% (effective) later. Which is better?
@5x106
2 жыл бұрын
This video is for entertainment purposes only
@davidko6635
3 жыл бұрын
Really great video and content. Definitely more people need to see this before making decisions in their retirement plans.
@adreniln
2 жыл бұрын
1) If you’re one dollar above a tax bracket, you’re entire income isn’t suddenly taxed at that higher bracket. Only that one dollar is. Your comparison of the tax rate for each account should be focused on effective tax rate, not marginal tax rate. 2) You get taxed on all income before you even put it in the brokerage account, reducing the amount you can invest and grow in the first place. The lost potential here has been discussed in great detail and pre-tax contributions essentially always makes more sense. 40 years of growth on higher contributions adds up quickly. 3) There are multiple ways to or reduce or completely avoid paying taxes on 401k investments when withdrawing. 4) Your point about needing to wait until 60 for Roth is misleading. You can pull out all contributions at any time tax free, only the growth would be taxed.
@rabik_dev
3 жыл бұрын
Hey Jake, like you also mentioned in the video, I think the better comparison should be ROTH 401k vs ordinary brokerage accounts. I'd be interested in a video where you compare the two.
@JakeBroe
3 жыл бұрын
Hey Rabik! I briefly mentioned it, but it all depends if you want to keep working until you are 59.5 or if you want access to your money WAY sooner than that. Otherwise Roth 401k/IRAs are great!
@timothyumunna4605
3 жыл бұрын
I just started Roth 401k with 2k this at 34 years old but about 70k in tradition 401k 😬
@OscarCastillo-fl9dw
Жыл бұрын
Like Jake say I not looking to retired at 60 to use my money some people don’t even make it at that age yes wife and I have a 401k we invest together 13% we do have one Roth IRA that we max out but the big one is are brokerage account we invest 3,500 every month to retired in 10 years we are 31 and 30 doing the fire movement if I work pass my 40 is because I want to not because I need to.
@Compounddeznuts
2 жыл бұрын
You will pay taxes inside of a taxable brokerage account when you realize a capital gain, Based on how long you held that position will determine if you pay short term capital gains which is income tax or long-term capital gains which is 0 to 20%
@rickpyper690
3 жыл бұрын
Worth mentioning is that a benefit of a traditional IRA, 401k (or other qualified retirement account) vs. a brokerage account is potentially qualifying for the Savers Credit (currently worth up $1440 for a married couple and half that for a single filer, once you factor in the standard deduction).
@Scott-by9ks
2 жыл бұрын
That is true for many low income savers. Most households don't get to take advantage of this but yes. However there is nothing preventing them from doing all of the above.
@Fuzzybeanerizer
Жыл бұрын
@@Scott-by9ks If you are low income, then there IS something preventing you... practically speaking. What I do is file my income taxes fairly early, "promising" to contribute money to a traditional IRA for the previous year, then use that (and my wife's contribution, and our HSA contribution) to reduce our taxable income enough so we get a decent-sized tax refund. Then before "tax day" I make good on my promise to contribute the money -- contributing mostly the money I already received as my tax refund. Often times I have gotten our taxable income low enough to qualify for that "saver's tax credit" and maybe other things that make a real step change in the tax refund. If it was not for the reduction in taxable income that a traditional IRA (and an HSA) offers, and the resulting increase in our tax refund, I would not be able to save nearly as much for retirement, in ANY kind of account. This strategy also acts as a great motivator, making us want to scrape together every penny we can from other sources, just to "cheat" the government to the greatest degree legally possible.
@robertgarcia217
2 жыл бұрын
After tax and or Roth 401k contributions grow tax free with tax free withdrawals. So no, a regular brokerage is rarely better.
@TJMelrose
3 жыл бұрын
Sounds interesting, but do the math, taking into consideration that you're able to contribute more on a pre-tax basis, because of the tax savings. Due to compounding, that will far-outweigh the taxes you'll have to pay in retirement.
@samgreene7961
3 жыл бұрын
Exactly - so many people are wrong on this? Show some numbers!
@IndianOutlaw1870
3 жыл бұрын
Yes, and you can retire to a zero-income-tax state and save all those nasty state taxes you would have otherwise paid.
@Putseller100
2 жыл бұрын
A taxable brokerage gives by far the most freedom of choices. A 401k may be filled with fee’s and only offer poor choices. A Roth IRA is great but the 6,000 limit really slows down the wealth accumulation. A regular brokerage allows a lump some to be invested where a 401 can only be funded by payroll deduction. The regular taxable account allows you to enhance gains by using options and most of all you can retire at any age, not have to wait until 59.5
@JakeBroe
2 жыл бұрын
100% Putseller! Well said!
@Joeylikeswakkie
3 жыл бұрын
Actually just watched a year old video discussing this topic, so it’s very important that people see this information. Thank you for the refresher training!
@JakeBroe
3 жыл бұрын
You are very welcome Joe! Cheers!
@SergiuM42
Жыл бұрын
This was a brilliant video. Thank you for this information!
@matthewmaurin9054
3 жыл бұрын
Hold the ETF instead and that’ll be much more tax efficient then the index fund. Most people would raid the brokerage so those without self control should still do the 401k. Don’t forget retirement accounts have special legal protections that a brokerage doesn’t.
@narutobroken
3 жыл бұрын
How so? I know the fee is lower but it's so minuscule
@matthewmaurin9054
3 жыл бұрын
@@narutobroken ETF’s are taxed more efficient when it comes to dividends and such.
@muffemod
3 жыл бұрын
@@matthewmaurin9054 True but unless it's a regular brokerage account it really won't matter as you don't pay tax on dividends and such.
@JakeBroe
3 жыл бұрын
VTI (Vanguard's Total Stock Market Index ETF) and VTSAX (Vanguard Total Stock Market Index Mutual Fund) perform the same. They are the same for tax purposes as well if you are just buying and holding. The only real difference is ETF's can be bought and sold in real time like a stock can and mutual fund shares can only be bought and sold at the end of the day directly from the brokerage firm. But you are right about a 401k is protected from bankruptcy and people who don't have self control are better off locking up their money in a 401k.
@matthewmaurin9054
3 жыл бұрын
@@JakeBroe I thought ETF’s passed on distributions differently which made them more tax efficient, even compared to an index fund
@twigglyfiggly3429
5 ай бұрын
This is the first video I've watched that speaks negatively of the 401k that I can actually take seriously. Most of the people criticizing the 401k are clowns who mischaracterize investing for retirement and proceed to sell you a real estate course. But you have a sound argument that is educated. Well done.
@treyshaffer
3 жыл бұрын
In regards to your question at 14:00, I don't think the idea of having way lower expenses in retirement than while you're working is unreasonable. For one thing, people usually have everything paid off by the time they're retired-- so mortgage payments, car payments, student loans, etc. will be gone meaning just that will cut a HUGE chunk out of your expenses. Also if you have kids, usually they're out of the house, plus you also don't have to commute to a job meaning you have lower transportation costs. Furthermore, with more free time, you can easily cook most of your meals meaning that even just those basic maintenance things are cheaper. Hell, old people also need less food than young people. Really the only thing that goes up in cost is medical expenses, and of course I think people should look into an HSA for those if that makes sense for them. For a real world example, my grandfather who made a pretty solid 6 figure salary much of his life retired a while ago, and when talking recently he told me that him and my grandma actually spend only half of their social security check each month on living expenses. They have a large house, they travel frequently, and they definitely don't deprive themselves in any way, it's just it costs so little for them to live (and they're in good health) so they don't need to spend all that much. In my own case, my salary is in the 32% marginal bracket, but my expenses are only around 30k/yr, and I don't really anticipate that going up all that much as I get older, so for me, the traditional makes sense tax-wise. The one thing I think may happen though, is that tax rates are going to go WAY up in the future -- on both income and capital gains -- so I also hedge that risk by keeping a Roth (both the backdoor and mega backdoor).
@lifeofsui3864
3 жыл бұрын
you forgot that having money in an 401k generally gives you protection against creditors should you ever have to file bankruptcy. They also give you limited protection against lawsuits....if your going to be carrying your life savings in a non retirement account I would be looking at off shore asset protection trusts to keep it out of the hands of creditors....if not your going to be a juicy target for an ambulance chasing attorney
@parthmehta93
3 жыл бұрын
You’re talking about marginal tax rates nit effective tax rates. The argument is flawed!
@joelhurtado3652
3 жыл бұрын
There's an assumption that you won't have any (or negligible) earned/employment income when you're drawing down on investments.
@JakeBroe
3 жыл бұрын
You are correct in that I spoke in terms of marginal tax rates and not effective tax rates. But it doesn't matter how you average it out. Long term capital gains effective tax rates still crush marginal effective tax rates by greater than 2:1 in many income ranges.
@orangeblock3792
3 жыл бұрын
People always use exclamation marks. Just calm down!
@dimitri933
2 жыл бұрын
Wow! This is very helpful. Thank you so much Jake, God bless you.
@JakeBroe
2 жыл бұрын
You are very welcome LFG! Cheers!
@racewiththefalcons1
3 жыл бұрын
Honestly, the best approach is to do a little bit of everything. I take the max employer match in my 401k, which is invested in VFIAX, AMEIX, and FINSX (essentially S&P growth). I also have a Roth IRA and a regular taxable brokerage account, which is the one I put the most money into, typically.
@JakeBroe
3 жыл бұрын
Solid plan!
@killersentra
3 жыл бұрын
Except there is no savings to taxes unless they were to lower the taxes. All other wise it's only delayed. BIGGEST GARBAGE THEY DON'T TELL YOU.
@cfont4939
3 жыл бұрын
Always had a “hunch” that’s traditional 401k sucked but you put out a quality video to hammer out the details! 👏 Amazing
@JakeBroe
3 жыл бұрын
Thanks for watching CFont! Glad you liked it!
@MrRentageek
2 жыл бұрын
Except his only argument really is that 'humans are irrational when it comes to deciding how much to contribute to 401k. Even he admits this, but only in response to those who challenge him on this.
@RedScareClair
3 жыл бұрын
While you made a valid point there are several other considerations to keep in mind. One big one is human behavior. We live in the most wealthy country on earth but that average person would struggle to come up with $1000 for emergencies. The average person probably benefits from having barriers to their money as it would slow down the speed at which they spent it. The other really big thing is that investment accounts are not protected nor are they disqualified from being counted as part of your financial picture if you are applying for something. For example, should something awful happen and you file for bankruptcy, retirement accounts are protected. Investment accounts are not. Another example is I recently just applied for a disability benefit for my newborn and my retirement accounts were not considered - but I did have to disclose investment accounts outside of retirement. So there is a whole lot of other factors people have to consider before following this advice.
@brucebanksshow
3 жыл бұрын
This doesn't tell the entire story. Of you're investing the government's money(which is pretty much what you're doing) then getting taxed when they take it back isn't a downside because the money was never yours. You can't compare the two accounts when one is before tax and one is only after tax. When you give the government their tax you take out a lot of that capital in the beginning in a brokerage account. When you use a 401k you invest everything.
@TrulyEpic
3 жыл бұрын
I work for the state and have a pension and they also offer deferred compensation which is a 457b plan, but it has no match 😔. So, last year I said, no way to that and opened a roth ira. I would rather have my money going to that. I completely agree with the, "let's plan to be rich" concept instead of poor, why would anyone not do that? I just hope the government always allows the roth and doesn't make any changes to how great it is currently.
@JakeBroe
3 жыл бұрын
Unfortunately people don't plan. My parents are 67 and both still work because they didn't save and invest for retirement. For them honestly, putting money in traditional accounts does make sense because they don't have enough saved and they will be living on less income (lower tax rate) when they finally stop working. But if someone is young, a high income earner, and watching investing videos on KZitem... Traditional makes no sense.
@lairdmichaelscott
2 жыл бұрын
An employer matching contribution can make a 401k worthwhile at some level, at least up until that level is reached, which you agree with. Also, if you are working in a state with an income tax, it can make sense as you can move to a state after retirement that does not have a state income tax. Thus you legally avoid ever paying state income taxes on the funds you put in your 401k. For example, you might be paying 25% of your 401k drawing to the Feds, but if you also have to pay state income taxes on it? Well, where I live, you would then be giving up a third of your drawings in taxes (after the first 20k per individual, which is excluded from state taxes for retirees here). Finally, there are some real advantages to being able to convert 401k money into a Roth IRA, particularly if there is a substantial gap between when you retire and when you must begin RMDs (currently at age 72, probably moving to age 75), when your income will likely be lower than when you were working, and after you begin drawing RMDs (when it will just keep going up, according to values the IRS provides. Also, know that the market has averaged 10% per year (averaged over the past 80 years or so) and this means that money invested in it will double just about every 7 years, on average. So be aware that a married couple with a reasonable amount in a 401k at retirement (say a couple of million at retirement at age 62, coupled with a solid passive income) could eventually be forced to take and pay taxes on RMDs totaling hundreds of thousands per year by the time they reach their late 80s and beyond, substantially driving up their tax brackets (and this will probably be at the same time their medical expenses and costs of living assistance are skyrocketing). Open a spreadsheet and work it out. And if that sounds like a lot of money now, keep in mind that by then it will be less so, especially with today's inflation rates. Never feel guilty about looking for legal ways to pay less taxes. The government is essential, yes, but it wastes a lot of money. Give the government every penny it is due by law, always, but know the rules and make sure it is no more than you have to give it. After that amount is paid, everything you could have saved, but did not, is more in the nature of a charitable contribution to Congress (and/or your state legislature) and, if you want to make charitable contributions to society, those are probably not who you want to give them to.
@Bob-lt5hf
3 жыл бұрын
I have reservations on this dudes financial information. 401K does not have a broker fee for moving your money. I retired at 56 yrs old under the 55 yr old law with my 401K with no tax penalty. I developed a 401K fund worth over 1.5 mil and retired early. The cavoite was the company I worked for is giving me Free Medical Ins. till 65. Why work! Talk to a professional financial advisor that is well educated in retirement. Also talk to a lawyer who specializes in elder retirement and living trusts! You will be fine!
@tomoliver9985
3 жыл бұрын
Another good video and perspective. I will have to look at it again and apply my situation (single, government employee, high earner). Keep up the "out of the box thinking"!
@JakeBroe
3 жыл бұрын
Thanks Tom! I like being a contrarian. No box can contain me!
@mikebayless4268
3 жыл бұрын
You forgot one major aspect! Inheritance!! 401k = taxes on every cent! Brokerage account = no taxes because of step-up in basis at the time of passing away!
@JakeBroe
3 жыл бұрын
Yep... this is true!
@mikebayless4268
3 жыл бұрын
@@JakeBroe but that doesn't benefit me! Helps the kids out! And I see Congress changing step-up basis rules eventually
@ajtoy7723
3 жыл бұрын
15:00, you dont have to wait until 59 1/2. You can take advantage of 72T
@JakeBroe
3 жыл бұрын
72T? I don't follow.
@headshotdave
3 жыл бұрын
@@JakeBroe Rule 72(t). In general, it's fixed annual withdrawls over a specific time period prior to age 59.5. I don't know much about it, but it's easy to find if you Google it.
@drdougful
2 жыл бұрын
Jake doesnt appear to take into account that when you contribute pre-tax, you will be investing a lot more money. The most important factor in growing your investments is, simply, time. If you can invest more when you are in your earlier years, it will grow thru compounding in a pretty amazing way. The best thing you can do is get as much money invested as early as possible. Thats just what pre-tax investments allow. (I do agree, though, that when your salary is low- and thus your tax rate also low- it is best to bulk up your Roth first!)
@Marl-hj8hh
3 жыл бұрын
Another damn good video Jake! As we say in the Navy, Bravo Zulu sir!
@JakeBroe
3 жыл бұрын
Thanks Marl!
@bettier
3 жыл бұрын
Thanks! You make some good points. I do not have access to a 401k, but only to a self funded roth. And i had begun to think a taxable brokerage account couldn't help me. So, thanks for the insight this is helpful to me as a part-time/temp worker.
@JakeBroe
3 жыл бұрын
Awesome! Buy and hold is a winning strategy to avoid taxes! Cheers DM!
@jerryp967
3 жыл бұрын
Nobody explains it better than Jake. Another great thought provoking video. It's too late for me as I'm in my 70s and saved for years in a traditional account. I say make more of these videos. The options videos are interesting but most people need this type of info.
@JakeBroe
3 жыл бұрын
Thanks Jerry! I still have more options videos coming soon, but I promise to make more broad finance investing applicable to everyone soon as well!
@johngill2853
2 жыл бұрын
Unfortunately most people don't. Do you actually know what the median retirement savings is?
@Scott-by9ks
2 жыл бұрын
Oh, Jake, one more thing to point out. Contributions to IRAs, 401k, and TSP have to be from wages. The 401k and the TSP are kind of duh because they are deducted from your paycheck but a IRA and also a SEP which you didn't talk about, have to come from wages. A SEP can't exceed 25%(or $58,000) of self employed profits and an IRA can't exceed gross wages or $6000 ($7000 if over 50) whichever is less. I used tax year 2021 for this, I'm sure it has gone up since.
@moxiangmingxin
3 жыл бұрын
always good and care for American people's financial life
@JakeBroe
3 жыл бұрын
Thanks, I try!
@1drummer172
3 жыл бұрын
That was fantastic information; I’ve been retired for some time now but I’m certainly passing this on to my children and grandchildren. Thank you!👍
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