Retirement Information: 401(k) vs. IRA
This Bills.com video gives a basic introduction to 401(k)s & IRA's. Park Brees talks about the benefits of these retirement accounts, such as matching employer contributions and tax exemptions, and how an 401(k) differs from IRA. Additional information can be found at the Bills.com retirement page.
My name is Park Brees. I am going to talk about two types of retirement vehicles, a 401(k) and a Roth IRA. I’m a go ahead and start with the 401(k).
It’s actually called a 401(k) because that’s the section that references it in the IRS code. A 401(k) is generally a company sponsored plan. You contribute into this account pre-tax dollars this money will actually accrue each year and the nice, one of the nice things about a 401(k) is you actually don’t pay taxes on the money at the end of every year. So you are not paying capital gains. The max contribution allowed into a 401(k) is $15,500. You can take a loan against a 401(k) its up, it’s 50% or $50,000 and then you would pay a small interest rate when repaying this loan. Now, at the time of withdrawal which is generally 59 ½, that is when you, that would be the first time that you actually pay taxes on this money and the taxes you would actually pay on this money would be dependent upon which income bracket you are at the time of withdrawal.
Now the second type of investment or retirement vehicle is the Roth IRA. The Roth IRA, now there are several types of IRA’s but we are actually just going to talk about the Roth IRA which is actually named after a senator from Delaware his name was William Roth. This is another phenomenal investment vehicle. The max contribution for a Roth IRA right now is $5,000 dollars. This money is contributed with post tax dollars. So a 401(k) is contributed with pre-tax dollars a Roth IRA with post tax dollars. Now this money will accrue over time again you will not pay interest or capital gains at the end of every year and then at the time of retirement which again generally is 59 ½ in most cases, you actually, when you withdraw this money will never, you don’t pay taxes on the withdrawals.
So it is probably one of the better investment vehicles, kind of the only drawback being that there’s just a max contribution of 5K a year. A couple of the other restrictions would be income restrictions. As a single person if you make more than $105,000 dollars a year you are not eligible for a contribution into a Roth IRA and as a joint contribution you cannot make more than $166,000 dollars a year. Now after 5 years of contributing into a Roth IRA you are actually eligible to take money out of this account tax free. It cannot be more than the principle amount contributed into this account and the reason that you are allowed to take money out tax-free is because you have already paid taxes on this money at the time that you contributed the money into the account.
So that is a Roth IRA and a 401(k) both are phenomenal retirement investment vehicles. One of the more common questions that I actually get asked is which is better, a Roth IRA or 401(k)? Now in my opinion, if you are getting a company match on a 401(k), I would always invest in the 401(k) first. For example if you are getting a 5% company match and you contribute 5% into the account. You are essentially getting free money for that 5% that you contribute at that point if you have any money left over then I would, I would probably aggressively start contributing into the Roth IRA.
This has been a Vlog presented by Bills.com, my name is Park Brees and we hope you have a fantastic day.