Where to Invest Based on Salary Range: Roth IRA vs 401(k)

Transcript:

(00:00) Ira or 401K what’s best for you I’m going to give you the complete guide today whether you make 50k a year 100K a year 200k a year you got a 401k at your job or not I’m Matt sson let’s build wealth all right so where do you get started the first thing you got to look at is whether you have a 401k or other plan at your job now you might be self-employed I’m going to come to that here in a second but we got to determine whether you have a 401k at your job because most companies offer a free money match there is typically a match
(00:29) involved that says hey employee if you put money in the 401K plan out of your paycheck we’re also going to match that and put money in for you for free they’re incentivizing you to do that and we want to pick up that free money match I’m going to explain how that works here in a moment and why you’ve got to pick up that money cuz that is where you need to start first is a 401k where there’s a free money match now again I’m going to go through this buy income level you’re making 50k 100K and 200k I’ll show you
(00:53) how that free money match works but first here we want you to determine do you have a job with a 401k or not the next category is you might be like Matt I don’t have a 401k the employer I work at or the job I have there’s no 401K there or nor company plan okay hang tight here we’re going to skip 401ks and go to IAS for you but for those of you that have the 401K we got to dive into that now the third category here is you’re like Matt I’m self-employed I don’t have a company that puts the match in if there is a match coming in it’s
(01:20) coming from me because I own the business well there’s an awesome strategy for you as well it’s called the solo 401K so we’re going to come to that here in a moment all right now let’s start with the most common scenario which is you have a job that has a 401k or other plan with the match now we got to explain what that is now first of all in a 401k you as an employee can put $23,000 a year into that 401k it can be Roth or traditional dollars now you might want to put the whole thing in we’re going to go over that based on
(01:46) income you might want to just put enough in to get the match now you have to understand how the 401K free money match works this is going to be free money going into your retirement account as long as you contribute a certain amount so let’s break it down by numbers this is the typical 401k plan and how the match Works let’s say you make $50,000 the rules say if I put in 3% of my salary which would be $1,500 the company will match that 100% dollar for dollar so they’ll put in 1,500 bucks so I end up having $3,000 in my 41k like that’s a
(02:16) 100% rate of return on your money now if you make 100K 3% 3,000 they’re going to put in dollar for dooll match 100% that’s going to get you to 6K and of course 200k you put in six they put in six you got 12K now some of you might be like Matt I want to do more than 1,500 bucks a month okay I’m just starting there let’s talk about the next level of match that most company 41k plans work this is why it gets complicated and everybody hates retirement accounts because they get so complicated but the next match works and this is how most
(02:43) 401ks work this is called The Safe Harbor 41k that says the next 2% you put in gets you 50% match so if I put in another 2% the company will put in one so let’s start with someone at 100K if you’re making 100K or more a year you might be able to say I can afford to throw more in so if I put in five 5K I’m putting in the 3% plus the additional 2% the company is going to match my first 3% dollar for doll and then the second 2% 50% that gets me $44,000 total which gets me up to $9,000 in my 401k again $4,000 of that 9,000 is money from the
(03:19) company this is additional compensation they’re giving me to incentivize me to save I only had to put in 5K to get $99,000 now from here on out you can put more money in you can get a to $23,000 of contributions on your end but there’s no more match anymore from the company this is all going to be employee contributions now where we’ll see people hit this is if they’re in the 200k plus is they’ll say hey I’m making more money I want to do more than just get the free money match so here if I’m making 200k I put in $10,000 the company did the free
(03:54) money match I got 8,000 and I have a total now of 18K in my account but I want to do more M I’m making more money I want to save more how do I do that you can get up to $23,000 of employee contributions so instead of just putting in 10 I can put in $23,000 of employee contributions now there’s no more matching the most match I get here is $8,000 so I still have $8,000 coming in from the company which is going to get added in here and now we’re up to $31,000 now there’s some Advanced strategies here called the mega backdoor
(04:27) Roth and such that will get you up to $69,000 000 a year we have other separate videos on that this is the getting started video so I’m not going to show that but I just want to show you the potential of what you can get into the account and where it makes sense to go get free money so let’s start here and get the 100% dollar for dooll match Next Step go get the 50% match after that you have additional contributions you can make and again here you can see at 200k I can get easily 31k into the 401K now another strategy we like to
(04:54) play something called matching out just put as much money into the company 401K and then get out don’t put any more money in just max out get the free money match and then the rest let’s go dump it into an IRA which we’re going to come to IAS here in a second you can do an IRA and a 401k just cuz you have a day job with a 401k or even you self-employed people with a solo 401K doesn’t mean you can’t go do an IRA so let’s come back here and check some boxes so you know what to do in your situation if you have
(05:20) a job with a 401k you’re making 50k a year go and contribute to that 401k go and at least go get the free money match same thing if you’re 100K or 200k this is a no-brainer go get the free money match anything on top of that you decide to contribute it depends on your situation we’re going to come to that once I explain IRAs and you can decide whether you want to put more money in the 401K or put more money into an IRA now I know some of you are listening and you’re like Matt my 401k at my company doesn’t have a match or the company I
(05:44) work for doesn’t have any retirement account at all cool hang tight we’re coming down to IAS you’re going to have an ability to put money into IAS here in a second now for those of you self-employed with no employees other than business partners or family you have what’s called a solo 401K where you can put up to 69,00 ,000 a year into it and I would do this at any freaking income level maybe here at 50k it’s a maybe actually you may want to just do an IRA cuz you may not want to put a lot of money into the 401K but the solo 401K
(06:11) is a 401k just for you the difference on the solo 401K than a 41k with a job where you have a match is you’re the employee and the employer any matching that’s going in is coming out of your pocket cuz you’re the employer and the employee so there’s no free money there to be picked up but there is a vehicle where you can put up to $669,000 a year into your solo 401K we have separate videos and trainings on how to use a solo 401K okay now let’s come to the IRA conversation cuz you might be like all right Matt I’m going to go pick up my
(06:40) free money match at the 401K and I want to throw a little bit more money in can I do an IRA or maybe you don’t have a 401k or company plan so you have no option you got to start at the IRA first now the IRA you can put $7,000 a year into it if you’re 50 or older you can extra thousand you can do $8,000 a year now let’s follow down this category here where you have a job with a 401k should you do an IRA if you already have a job with a 401k that has a match at 50,000 I’m going to say no we have a company directed Ira we open Ira accounts all
(07:06) the time I’m actually going to say no at 50k you should be putting in enough money to maximize the contribution you probably don’t have enough discretionary income to also do an IRA on top of it now if you make 100K I’m going to say yes you’re making enough money where you can get the free money match at the 401K and as we showed down here that might be $9,000 a year going into your 401k but only costing you five but you can throw an extra $7,000 a year into an IRA now a lot of people might ask well Matt why
(07:34) don’t I just throw $7,000 more into my 401k instead of opening a separate IRA and putting $77,000 into an IRA there’s two primary reasons why you might want an IRA separate from your company 401K the first reason is your company 401K has high fees most company 401ks have a 1 and a 12% annual fee and you don’t see this fee it’s kind of hard to find if you just Google and look for all the reports the average business 401K is 1.
(08:00) 5% in fee so if you have a $100,000 balance you’re actually getting charged $1,500 a year to have that 401k so in general fees for 401ks are higher than Ira the second reason you probably want an IRA instead of a 401k is more investment options like you might have your 401K with John Hancock and that’s just the company you work for that’s who they chose so your only investment options is mutual funds and Target date funds that John Hancock allows for but you might be like Matt I want to trade stocks I want to do a self-directed IRA and buy real estate or invest in
(08:24) alternative assets that’s not available typically in most company 401ks so the IRA have greater investment options and flexibility and typically lower fees all right now let’s say you make the 200 plus a year you got the free money match in the 401K you might even maxed out your employee contribution to the 23k I’m going to say do an IRA on top of this now at 200k of income if you want to do Roth you may have to do what’s called a backdoor Roth IRA we have other videos on that if you’re making 100K or 50k you’re don’t stress about this yet
(08:54) this is a problem for you later down the road and you’re making more money but the backd door Roth IRA is a high income strategy where you can do a 401k and a Roth IRA in the same year all right so let’s jump back here and I just want to explain someone in the middle here you’re making 100K a year and I did say you should do an IRA and a 41k go get your free money match so we know here at 100K I have $99,000 in my 401k and I’m saying if you can afford it and this is your budget and your discipline to save drop another 7K into an IRA now I’ve got
(09:22) a total of $116,000 that I’m setting aside for long-term wealth building in my retirement account now again if you’re getting started and you’re starting at zero don’t get overwhelmed by this maybe just do the 401K first and then your two or three let’s come around and maybe then we add in the IRA and you start saving the 16k a year all right now I’m sorry I know you’ve been waiting here those of you without a 401k at your job or any company retirement account we’ve got to start at an IRA so at 50k you should be doing an IRA there’s no
(09:49) free money match anywhere here but you can put $77,000 a year into the IRA and really at every income level you’re going to need to be doing the IRA there’s no company plan there’s no match out there so it’s up to you to do an individual retirement account now if you make 200k a year or more and you’re like Matt 7,000 bucks a year isn’t going to cut it I want to set aside more money I have higher income how can I do more than 7K a year well maybe you have a spouse you could do 7,000 a year into your spouse’s Ira even if they’re not
(10:17) working or if they also have a job with a company that doesn’t have a 41k they can be do $7,000 a year into their Ira so between the two Ira accounts you’ll have an IRA on your name and an IRA on your spouse’s name you could be doing $14,000 a year and really that’s a tip for everybody if you have a spouse and you’re talking about setting aside money for both of your retirements in your future make sure you’re throwing your spouse into the mix here and whether they can be doing an IRA or 401K as well do they have a job with a free money
(10:43) match do they have the ability to put $7,000 year into their Ira let’s make sure we’re not excluding the spouse in the calculation here because we get certain buckets of money that we can put into and it’s not based on a couple even though you may file your tax or married filing joint the actual calculations of how much you can put in your retirement account is individually based so you can do $7,000 a year in your IRA your spouse can do $7,000 a year in their Ira your 23,000 you can put in a 401k as an employee as per person your spouse could
(11:10) also be doing $23,000 a year into their 401K at their job or you’re both self-employed you can both do a solo K and do $69,000 a year so the contribution limits are individually based so keep that in mind for those of you that are married now I know some of you are asking the question right now in your brain but Matt should I do a Roth IRA or a traditional IRA I’m going to come back to that here in a second don’t worry we’re going to go over the difference of Roth and traditional and when you should choose one over the
(11:32) other I want to come back to those of you that are self-employed now remember we said there’s no 401K with the match so you should consider a solo 401k if you’re at 50k of income I don’t know that the solo K is best for you it might be too expensive you can put $69,000 a year into it you don’t need that it’s going to be easier to just do an IRA get 7K a year set aside in the ira now if you’re making 100K or 200k plus the ability to put more money in past $7,000 makes sense and you should be doing a soul okay but you can also do an IRA on
(12:03) top of it it’s optional I’m not saying start with the IRA if you’re making 200k or plus a year you might want to just do the solo K but just know the IRA is on the table and it is an option for you for those of you making 200k a year or more if you’re doing an IRA you need to be doing a backdoor Roth IRA that is critical if you’re making more than 200k a year you’re going to need to be considering the backdoor Roth IRA all right now I know everyone’s got that lingering question all right Matt you said I could do a 401k or an IRA but
(12:29) should I do a Roth 401k or traditional 401K should I do a Roth IRA or traditional IRA well it depends on your situation you need to understand the differences here so let’s walk through the difference between a traditional IRA and a Roth IRA and it’s the same for 401ks when you put money into a traditional account here you get a tax deduction now when that money is invested and it grows you don’t pay any tax on the investment growth that’s one of the great benefits of retirement accounts in general as you’re saving and
(12:55) investing that money and the money’s growing it’s not going on your 1040 it’s not going on your tax return you get to reinvest every penny and that money is growing but the downside on a traditional account is we have taxation on the way out as you’re Distributing that money at age 59 half or later you’re paying tax as you’re taking that money into income so if you’re like all right Matt I’m 60 now I want to take 50k a year out of this Ira or 401k and it’s traditional dollars that 50,000 is going onto your taxable income in that year
(13:24) now remember the benefit of the traditional account is you got a tax deduction when you put the money in so if I put $7,000 into my traditional IRA and I made 50k that year I’m only taxed like I made $43,000 so that’s the benefit of the traditional IRA is tax deductions now but I pay later as I’m pulling the money out at retirement now the Roth is the exact opposite when you put money in the Roth account you get zero tax deduction the government’s like thank you for saving in your retirement account but zero tax deduction you made 50k you’re
(13:53) still taxed as if you made 50k there’s no deduction taking place now we still get that benefit of no taxes you’re growing in in investing the money but the benefit of the Roth account and why I love Roth accounts is taxfree distributions on the way out once you H 592 and you’re pulling money out at retirement there’s no tax on the way out it’s totally taxfree on the way out a lot of people think of roths as I’ll pay tax on the seed I don’t get a tax deduction when I put the money in but I’m paying no tax on the Harvest as I’m
(14:19) pulling all the money out all the investment growth later on now this is a little more disciplined cuz I’m trading paying tax now for no tax later on the growth versus I’m trying to chase tax deduction now there’s not a right or wrong way to do it you just need to think about it for me and myself I choose Roth accounts the value of the tax deduction is super important in this decision if you’re making 50k a year you should always do Roth the value of a tax deduction for you at 50k when you’re in a 0 to 10% tax bracket is very nominal
(14:47) so we always want to go Roth at 50k at 100K I don’t know your situation your deductions some of the deductions might be valuable to you but I’m going to always lean Roth first but I could see someone doing a traditional account 100K the same thing at 200k and as the income goes up I get it we all want to pay less taxes now and we’d rather defer it and pay it later but the more discipline investors and the number one account type we have at directed Ira is Roth accounts and the reason they do it is they believe they’re going to grow that
(15:14) account so if I put a $100,000 of contributions in that account over the years that account is going to be worth a million dollars by the time I retire and I’m going to take out a million taxfree and if you think of taking out a million dollars out of a traditional IRA and let’s say you’re in a 30% tax br at retirement you’re really only going to get 700,000 of that million cuz 300,000 of that is going to go to taxes so that’s the thinking there on the Roth versus traditional there’s not a right or wrong way to do it I tend to lean
(15:41) Roth It’s debatable I hope you enjoyed this video but make sure you go take action already and get started the first thing you can do is go download My Guide go to the description click on the link to download the guide that has the charts here the explanations so you can figure out how you need to get started building your retirement