In today’s post I’m going to give you information on picking between a Roth IRA or Traditional 401K. By the end of the post you should be motivated to do some type of investing for your future long term. If you find this blog post helpful then consider sending it to a friend that will also benefit with investing for their future.
Remember, everything that I say in this post is based only on opinion by me and the research that was conducted. Seek a professional for expert help (or do your own research)
Let’s jump right into it..
What’s A 401K?
When you get a job for a company the employer will offer employees a 401K. With this retirement plan you’re allowed to invest money from a Paycheck into your own 401K. The money that is invested is not tax, therefore once you decide to retire and take money out of your 401K it will be taxed.
Side Note: your money is invested in CDs, money market funds, treasury bonds, and corporate bonds.
Another thing to note about withdrawing your money from a 401K is that you will be taxed from how much you are getting. This means that getting taxed on $250,000 will put you in a higher tax bracket.
How long does it take to cash out my 401K? According to Sapling,
It typically takes around one to two weeks to get cash from your 401(k), though it can take considerably longer. The countdown starts when you request your payout and ends when you actually receive the cash, either as a check or a bank deposit.https://www.sapling.com/8343663/long-cash-out-401k
You also might want to know how much money your should have in your 401k when you retire. Investopedia answers that question for you. On the website it states,
If you are earning $50,000 by age 30, you should have $25,000 banked for retirement. By age 40, you should have twice your annual salary. By age 50, four times your salary; by age 60, six times, and by age 67, eight times. If you reach 67 years old and are earning $75,000 per year, you should have $600,000 saved.https://www.investopedia.com/articles/personal-finance/010616/whats-average-401k-balance-age.asp
Should I have a 401K?
If you are not the type that is going to be an entrepreneur then opening up a 401K will be really good for retirement. I know with everything that is going on with COVID-19 is hard because you are losing money. Don’t worry though, save your money, invest because it’s all about longterm.
Now I am going to talk about my personal favorite in terms of saving longterm.
What’s A Roth IRA?
A Roth IRA is an individual retirement account for any person that pays taxes can open. With this path toward investing, when you retire the money that is received isn’t taxed. Yes, that means if you have a 1 million dollars in your Roth IRA, you will get all that money. The reason for that is because the money that your are putting into that account will already be taxed.
Downside of a Roth IRA?
The only downside that could be a turn off for some that there is a limit to how much can be put into your Roth IRA account. That limit is $6,000. The second downside is that you’re only allowed to contribute if the money you make is under $139,000 for singles, and $206,000 for married couples.
If I don’t work can I contribute to a Roth IRA?
You are only able to contribute to a Roth IRA if you are working full time or part time. This means that a college student couldn’t go open an account and invest their financial aid money.
When Can You Withdraw Money?
You are allowed to start taking money out of your Roth IRA once you reach the age of 59 1/2 years old. Of course there can be exceptions if you have had the account for at least 5 years, but you most likely will be hit with a penalty to take money out.
Should I always try to max out my Roth IRA
Yes. If you have the money to max out the 6,000 limit do so. This is because you are investing for the long term and will gain the most amount of gains. Another thing to note that opening an account at 20 (while having a job) will give you the best advantage long term.
Which One should I pick?
In my opinion, If you have the ability to invest in both then I don’t see why you shouldn’t. Sometimes companies even offer a Roth 401K. This is basically a company sponsored investment account for employees that can put after taxed money into a savings account. If you don’t have that option, then I suggest just opening an Individual Roth IRA and invest money yourself. Click this link HERE to do some calculations to see how much money you will have when retirement comes.
Below is a video to help explain what I wrote above
I hope that you found this article helpful with deciding between a Roth IRA Or Traditional 401K. Send this to a friend that will also benefit from this post. Thanks for supporting The Finance Starter and check out other blog post that I have written.