Retirement Accounts

Ahh retirement accounts. Ahh retirement. We're all ready for it and preparing for it, right? Nope. One in three Americans have nothing saved for retirement. The average 50-year old has only $60k saved for retirement. Only 25% of Americans plan not to work when they are retired. Those of you in student: $30k in student debt can mean $325k less in retirement savings. As of November 2016, the average Social Security check is $1,335 for the retired worker, which is nothing. Millennials are one of the worst demographics in our country when it comes to planning for retirement. More than 2/3 of millennials have not started investing for their retirements, usually because it's so far into the future that they think they have plenty of time, but remember time is your friend when it comes to accruing compound interest. There are several ways to go about saving for retirement, one of which is through a retirement account, either an IRA or an employer-based 401(k) plan. They can be traditional or Roth accounts. What are those and what's the difference? Let's compare and contrast.

Traditional 401(k)...

The main difference between a Traditional and Roth retirement account is in their tax structure. With a traditional retirement account, regardless of whether its an employer 401(k) or an IRA, we are putting in pre-taxed dollars. This means the tax gets deferred to when you cash out after the age of 59 1/2. You will get taxed at your income tax rate. Now that's a big deal especially if you're young, because as you get older your presumably going to make more money and therefore move up in tax brackets. Also in general we can expect everyones taxes to go up as that seems to be the general trend throughout history. With the traditional 401(k) the yearly contributions you can make are quite high. As of 2019, you can make yearly contributions of $19k a year if you are below the age of 50 and 6$k more if above the age of 50. And you can get your employer to match 50% of your contributions. There are, however, less investment options which is dependent on what your employer offers as well as high maintenance fees.

Roth 401(k)...

The Roth 401(k) is similar to the traditional 401(k) except for the fact that you are putting in taxed dollars into the account. Since you are putting in taxed dollars in, you no longer have to pay taxes when you cash out after 59 1/2. This is especially great for the younger generation since they will be presumably moving up in the workforce and earning higher wages. Since they have continually put in taxed dollars into the account, they won't have to pay the higher income tax rates that they will reach when they cash out at their retirement age. If you are below the age of 50 you can contribute up to $19k as of 2019, and those who are above 50 can contribute an additional $6k. There is one catch with the Roth 401(k): If you are a single tax filer and make more than $137k then you cannot contribute to a Roth 401(k). For married couples filing jointly and making more than $203k you cannot contribute into a Roth 401(k). Now there is a way around this through a backdoor Roll-over which I will explain in the next blog post.


IRA's stand for Individual Retirement Accounts. These are retirement accounts opened by individuals on their own and not through an employer. You can have a employer-based 401(k) plan and an IRA at the same time and contribute to both in the same calendar year as long as you follow the guidelines set up by the IRS. People usually open a Roth IRA if their employer does not offer Roth retirement accounts. The limits for both a traditional and Roth IRA, as of 2019, is $6k for people younger then 50 and $7k for people older than 50. With IRA's, since they are not company sponsored they do not offer any employer contributions, however, because they are owned and run by you, there are many more options available for you to invest in.

Which One to Choose?...

There are quite a few options to choose from when it comes to retirement accounts. There are other types of retirement accounts that I haven't even covered in this blog post that I will save for a future blog post. Now, before I go on, I must preface that I am not a financial advisor, so whatever opinion that I now share, please be aware of this fact. Always do your own research and if possible speak to a trustworthy tax professional. BUT, with that said if I had to choose, I would always look for a Roth Retirement account. It just makes more sense to me because my bet is that taxes will go up for everyone in the future due to the increasing costs of entitlements and student loan debt. SO pay taxes on your contributions NOW and keep all of your money tax free when you retire. If your employer doesn't offer a Roth 401(k) then you can open your own Roth IRA and contribute to that on your own. It's really up to you as always since it's personal finance. Maybe you don't even have a retirement account and you keep it all in your real estate investments and a brokerage account. Who knows!?! That's the art of investing, you can do it anyway you like, but remember we have to have a strong understanding of what's out there and understand the key points of all of those investment vehicles if we are to make informed decisions.

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