Tax-Free Retirement Accounts

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/5.0
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What can you tell me about 401(k) and IRA accounts, and how do I know which is right for me?

Park Brees talks about the benefits of these retirement accounts, such as matching employer contributions and tax exemptions, and how a 401(k) differs from IRA.

Video Transcription;

"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."

4.3
/5.0
(9 Votes)

4 Comments

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  • AD
    Mar, 2013
    Alan
    Washington, DC
    I think the article is a good start but lacking in substance a little bit. I would hate to see someone make a decision about their retirement based on this short article.
    0 Votes

    • BA
      Mar, 2013
      Bill
      Thank you, Alan. We agree that the information we provided was only an introduction. It is advisable to speak with an experienced financial professional before making important decisions about a retirement account.
      0 Votes

  • BA
    Feb, 2010
    Bill
    Your question was somewhat unclear, so I will answer the best I can. If you are “removing” the annuity, it may not make sense to begin another and it may not give you the flexibility to withdraw the funds. A 401(k) would also not be an option as you are unemployed and a 401(k) is an employer sponsored program. A Roth IRA will require 5 years of contributions, regardless if you meet the withdrawal age requirements. You would have to wait until you were 63 to withdraw without penalty. Bottom line, none of these products meets your checklist of requirements for your situation. If you need to put the money into an account with the ability to withdraw at any time, a high interest savings account might be your best option.
    0 Votes

  • TH
    Feb, 2010
    Terria
    After a divorce, was awarded our annuity and wanted to remove it, so to get on my feet, and place some in a safe place that was fixed. The QDRO has been approved, freeing me from the 10% penalty, and I am aware of the 20% federal tax. I am considered disabled, unemployable, and receive $1,500.00 each month from spousal support, that is paid, but all through the month, making it impossible to budget, and escape from late fees. I am 57 and I must have a reserve and a safe place to put the remainder, and the flexibility to pull out . I have been told that annuities would be better than an IRA or 401(k) plan. Also not enough quarters to receive SS. Thank you for this, every where I turn for information, it seems there is a charge for the answer, and I just don't have it yet.
    0 Votes

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