FINANCIAL ADVISOR Explains: Retirement Plans for Beginners (401k, IRA, Roth 401k/IRA, 403b) 2024 #Finance

hey all’ in today’s CashNews.co we’re going to cover the differences between very popular retirement plans such as the 401K the IRA the Roth versions of the 401K and the IRA the SEP IRA as well as 403b and 457 plans if you’re new here my name is Humphrey Yang

I’m a former financial adviser and I created this CashNews.co as an all-in-one guide for retirement plans I created this actually back in 2020 but it’s been a while since that CashNews.co and I wanted to update it with 2023 and 2024 numbers I’ll leave time stamps down below for

you guys as well as chapter markers so that you can just skip around to whatever section is relevant to you but the idea is that you can use this CashNews.co as a reference moving forward and just whenever you’re making a decision about retirement accounts just reference this CashNews.co all

right so we’re going to start off with the 41k which is one of the most common retirement accounts out there we’re going to talk about when you’re allowed to withdraw from these accounts What are the main benefits of these accounts as well as any other relevant information so with

the traditional 401K earnings grow what’s called tax deferred what that actually means is that any gains that you make in your 401k you’ll have to eventually pay Taxes on those gains whenever you withdraw them after the age of 59 and a half a lot of these retirement

accounts will have a minimum age when you can withdraw the money and if you withdraw the money before that age you typically will take a 10% penalty that you owe to the IRS that’s basically to discourage you from taking out your money prematurely and the government knows that if you take your

money out prematurely you’re basically shooting yourself in the foot when it comes to compounding your wealth for retirement in this way if 401k is a retirement account where you basically have to have a mindset of okay I’m going to put this money in the 401K and just basically forget

about it the idea here is that you’re not supposed to touch it until retirement age now one of the best benefits of the traditional 401K is that it actually lowers your taxable Income so what do I mean by this well let’s take an example where you’re earning

$775,000 a year let’s say you contribute $10,000 into your 401k well lucky you you only will owe Taxes on the remaining $65,000 a year that you’re earning instead of owing Taxes on 75k a year because you contributed that 10K to your 401k that part is

not taxed and so you get a lower amount that you’re actually taxed on effectively in a state like California where I am that means you’ll save $3,814 in Taxes and you’re also contributing to retirement at the same time so it’s basically a win-win the maximum

that you can contribute to a 401k in the year 2023 is $22,500 if you’re under the age of 50 now if you’re over the age of 50 you can actually contribute more because it’s a catchup mechanism the government allows you to kind of catch up in case you’re behind and you can

contribute up to $30,000 a year in 2023 alone in 2024 the contribution limit will actually move up to $23,000 for those under the age of 50 and 30,500 if you’re over the age of 50 now in terms of the investment choices within a 401k every 401k plan will have a different menu of funds that you

can invest in that’s typically chosen by your employer as well as the fund providers as long as you can find one with pretty low fees that’s probably what I would opt for and in addition I’d probably look at funds that are like index funds which track an entire index such as the

S&P 500 because those are really well Diversified and you get a little piece of every company that the index owns now one of the biggest factors in deciding whether or not you should go with a traditional 41k or not is if you think you’re still going to be working by the time you’re

592 because if you’re the type that’s still going to be working at 59.2 that means your tax would be rather High it could be in the 30 percentile so that means whenever you withdraw from your 401k at that age and you’re still working then you’re going to pay ordinary

Income Taxes on that withdrawal if you plan to not be working at the age of 59 a half then that’s a pretty good thing because when you withdraw from your 401k your tax rate is going to be effectively so low that it doesn’t really even matter and so at

that point the traditional 401K becomes pretty attractive so if you’re someone that you know that deep down you really love working and you can’t imagine a life where you’re just retired and fishing all day every day then perhaps you really want to make a consideration on if you

should get the traditional 401k or maybe opt for the Roth version which we’re going to talk about shortly another benefit of the 401K plan out there is that sometimes your employers will actually match your contributions up to a certain percentage now if they do that you want to make sure you

take advantage of that because that’s literally free money that your employer is giving you for your own retirement okay so that was the 401K let’s now talk about the traditional IRA which is an indiv ual retirement account that operates very similar to the 401K except for two main

factors the first is that with an IRA you don’t need an employer all you need is what’s called earned Income so that means that you could be a contractor without a full-time employer yet still open an IRA however I do want to make one clarification which is you can have

a 401k and an IRA at the exact same time the other biggest difference with the traditional IRA is that the contribution limits are a lot lower compared to the 401K I’m going to put them on the screen right now now but you can see that the 2023 contribution limit of the traditional IRA here is

$6,500 for those under the age of 50 that’s per year and $7,500 for those over the age of 50 for 2024 that number is actually increasing to $7,000 a year for those under the age of 50 and $88,000 a year for those over the age of 50 now one caveat and important thing I want to tell you guys

about is that if you’re watching this in the year 2024 but it’s between January and tax day so let’s say it’s March 15th so it’s before tax day of 2024 you can still contribute to the previous year 2023 is IRA contribution limit that’s true for any year that

means if you haven’t contributed to your IRA for the previous year yet it’s still before tax day you can still do that hopefully that’s not too confusing but I hope that makes sense now that we’ve covered both types of traditional accounts the 401K and the IRA let’s

actually talk about the Roth versions because this is where I think it gets really interesting so Roth accounts were actually created not too long ago in 1997 by the senator named William Roth and it’s actually really interesting how crazy popular they’ve become in the last 27 years the

biggest difference when it comes to the Roth versions of these accounts and the traditional versions is that in the Roth version you are funding them with after tax dollars so in the Roth 401k that means you’ve already paid Taxes on the money that you’ve received and

then you’re taking the after tax money and then investing that or contributing that into a Roth 401k since you get no tax advantages upfront with the Roth 401k can you actually guess where you would get them if you said that you got them when you withdraw then you would be correct the biggest

benefit of having your money grow in a Roth for 1K account is that all earnings are taxfree so this is actually a really big benefit if you think about how big your balance is going to be growing by the time you retire it’s going to be really advantageous to have it all taxfree especially if

you’re the type that still likes to work when they are a lot older that means you’re not going to even have to worry about the tax code and what that looks like when you retire personally I just like knowing that whatever I earn in a Roth account is what I’m going to be keeping at

the end of the day whenever I make that withdrawal now in terms of contribution limits for the raw 401K it’s exactly like the 401K the traditional 401K which is $23,000 a year for those under the age of 50 and 30,500 for those over the age of 50 in the year 2024 the Roth 401k as of 2024 will

also not require you to have required minimum distributions which I think is pretty fascinating the idea here is that since your money has already been taxed there’s no designated time that you should be required to actually withdraw it which could actually be a really good thing and

advantageous thing if you’re trying to build your wealth and compound it for your future Generations all right so that was the Roth 41k but now let’s switch gears and talk about the Roth IRA because I think this is one of the most powerful accounts that anybody can have for the Roth IRA

contribution limits in the year 2024 are going to be $7,000 under the age of 50 that’s per year and $88,000 over the age of 50 also per year now there are a few differences that the Roth IRA carries compared to the traditional IRA that we really need to talk about first is the Roth IRA 5-year

rule this is a specific rule tailored to the Roth IRA and this basically states that you must wait at least 5 years after your first contribution to a Roth IRA in order to withdraw your money tax-free that means if you put some money into a Roth IRA and you invest it in say Apple stock and

let’s say Apple stock goes up 500% in the next year year even if you withdrew it within that same year your earnings are not taxfree yet because it hasn’t met this 5-year rule so whenever you’re contributing money into a Roth IRA or any retirement account you should be thinking

this money is for way later on the other interesting thing about the Roth IRA is that it’s very flexible with the contributions that you put into it so let’s say you put $7,000 into your Roth IRA you can withdraw any contributions that you’ve ever made to the Roth IRA without any

penalties this is in stark contrast to the traditional Ira which doesn’t allow you to withdraw basically anything without paying a 10% penalty to the IRS so let me make one clear distinction here a contribution is not the same thing as earnings a contribution is your own money that you put

into the Roth IRA versus the earnings are actually what you earned on top of your investment anything that you earn on top of your investment is subject to penalties still and also ordinary Income Taxes if you withdraw before the 5-year rule the other nice thing

about the Roth irate is that it’s not subject to the required minimum distributions as well and the other caveat that I need to bring up about the Roth IRA is that it actually has what’s called an Income limit so that means if you earn more than $146,000 a year if

you’re single or the head of household you cannot contribute into a Roth IRA I’ll leave a link to the exact article on Roth IRA that you guys can reference after this CashNews.co in case I just missed anything in this section all right let’s talk about if you own your own business

you actually have an additional option for yourself which is called the self-employed Ira this SEP IRA as it’s known functions in the same way as a traditional IRA with two big differences the first is that you can actually contribute up to $66,000 a year into it or 25% of your

Income whichever is less now in 2024 that’s actually going to move up to $69,000 a year which is pretty crazy same thing with the traditional IRA the contributions are going to be tax deductible in terms of reducing your tax liability as well as the earnings are tax deferred

I’m going to keep this section really short since it’s doesn’t really apply to many of the viewers out there but if you want more reading on the SEP IRA I’m going to leave a hefty link down for you guys down below okay I also want to make sure that I cover 403bs in this

CashNews.co so a 403b is very similar to a 401k except that the 403b is catered to those that are working in nonProfit organizations so that means if you work in the public sector let’s say you work for a school perhaps certain religious organizations or just a

nonProfit you may have access to a 403b the contribution limits of a 403b are the exact same as the traditional 401k and you’ll typically have access to a limited menu of funds that your school or your nonProfit will provide you with one nice note about the

403b is that if you work for a certain Organization for more than 15 years and you have the 403b you can actually start contributing more to it compared to let’s say someone who works at a traditional company with a 401k if you do work at a place for longer than 15 years you’re able to

contribute an additional $3,000 per year to your 403b up to a cap of $155,000 all right now A 457b is the last retirement account that we’re going to cover in today’s CashNews.co and then we’ll get into some frequently asked questions so make sure you stick around for that a 457b

plan is more directed at state and government employees and some nonProfits might qualify for this as well it’s basically the same as a 403b you have the same contribution limits but the biggest difference is that the 457b does not have what’s called a 10% early

withdrawal penalty however the caveat here is that you could you can only start making withdrawals once you leave your employer or you retire but then once that happens you can withdraw at any time without any penalty of course if you’re still with your employer and you have a 457b plan then

you can still withdraw after the age of 59 and a half without any penalty as well all right I’m going to leave some more links down below for you guys for the 457b plan I feel like I’ve been saying that a lot today but yeah there’s just a lot to cover and this is just simply an

overview CashNews.co okay guys now we’re at the frequently Asked question part of this CashNews.co and let’s talk about the five most frequently asked questions about retirement accounts frequently Asked question number one can you contribute to both an IRA and a 41k the answer here is

that yes you can do both but if you are doing both just know it takes a lot of money every single year to maximize both of these accounts frequently Asked question number two what’s the most optimal order for investing in retirement accounts okay so the answer to this is uh rather Nuance but

this is my personal opinion I think you should contribute to your 401k up to an employer match because that’s going to be free money money then max out the individual retirement account due to flexibility so the Roth IRA or the traditional IRA version it’s more flexible because you can

invest in individual stocks you can invest in things that you choose yourself versus the funds that are just given to you by your 401k provider lastly after that then you can decide if you want to continue contributing to your 401k or not frequently Asked question number three what types of funds

should I invest into in my 401k all right the answer for this is pretty simple you want to stick to index funds with the lowest fees possible so anything with an expense ratio of less than 2% is really good sometimes you’ll see some even up to 0.5% I think that’s still fine in general

because 41k plans generally have higher fees but if it’s close to 1% that’s when you want to kind of have alarm bells ringing off in your head frequently Asked question number four can you still get a Roth IRA if you make more than the Income limit of $146,000 per year

the answer to this is yes you can do what’s called a backdoor Roth IRA that’s where you start with with a traditional IRA and then you just convert it into a Roth I hear this process is pretty easy but you can look it up yourself I haven’t actually done it personally so I

don’t want to comment on it altogether frequently Asked question number five should you have both the traditional 401k and the Roth 401k the answer to this is that you can definitely have both typically people just have one but the contribution limit across all 401ks is $23,000 per year so

that means you can’t do $23,000 in a traditional 41k and then 23,000 additional dollars in a Roth 401k it’s just $23,000 for all of them same thing goes with the IRA versions it’s $77,000 for those under the age of 50 for both traditional or the Roth IRA versions I don’t

think it’s a bad thing to have both a Roth and a traditional in fact it’s just a little bit more to keep track of but if you want to keep things simple then you want to convert the traditional into a Roth and just keep it all Roth all right that was the CashNews.co If you still have

questions make sure to leave them down in the comments below and either I or someone in the community will hopefully get back to you for the most part if you do have questions specific to your own situation what you can always do is call your own Brokerage that is running your 41k

or your IRA plan in case you have questions about that or you can talk to your employer they usually have good resources to answer these types of questions make sure to subscribe to this channel for more text-decoration: none;">Finance and investing content as well as Retirement content and if you’re interested in another CashNews.co related to retirements I will leave that up for you guys right up here so that you can check that out after this CashNews.co all right I’ll

see you guys in the next one this