Financial Coaching Blog,  Investing In Retirement

Breaking Down A Roth 401K

Looking at retirement options like….

Most of us who are actively in the workforce have access to an employer based 401k or 403b. Some employer’s offer a match some don’t. Some offer a traditional 401k, some offer a Roth 401k.

Gone are the days of pensions. Most of us Elder Millennials missed the employer pension window and while it doesn’t compare to a pension, a 401k…in particular, a Roth 401k can still be maximized, but you have to understand the difference. Especially the difference between a Roth 401k & a Roth IRA. The good news is, Both offer you to pay tax on the funds contributed today, grow tax free, then available to you in retirement without paying additional taxes.

Spoiler: You should have both.

Here’s the advantages of a Roth 401k:

1. Lack of an income limit. High income earners can still contribute (unlike the Roth IRA).

2. Higher contribution limits. A Roth 401k can contribute an annual maximum of $19,500.

3. Employer matching funds. If an employer offers a “match” this is an added benefit to you. Some offer a 4%, some offer a 6% that match on the funds you contribute. You may have heard some people say “that’s free money”. Which it is, however, you should know that the funds an employer matches in your Roth 401k are PRE TAX. Simply meaning that you will have to pay tax on those funds at withdrawal. Your funds will have already had tax paid by you.

Disadvantages of Roth 401k’s:

1. At age 72, you are required to withdraw the funds saved. This is called “RMDs” or Required Minimum Distributions. If you don’t withdraw at age 72, you will be subjected to a financial penalty.

2. Your investment options are limited. Usually a few choices offered by your employer’s plan manager. For 90% of the population this isn’t a big deal, since most employers offer mostly mutual funds with a variety of differences, but often come with expense ratios. Expense ratios are fees associated with mutual funds that are actively managed by plan managers. (With Roth IRAs, you can choose your own investment options).

Stay tuned for my breakdown on Roth IRAs!

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