Beyond the Wallet EP 7: Explaining 401k & Roth IRA

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80% of millionaires built their wealth by doing this one thing – and I’m going to share with you exactly what it is and how you can do it too.

Hey MoneyLion, my name’s Austin Hankwitz and I talk about personal finance and investing online. Despite growing up in a small town in northeast Tennessee, I plan to retire wealthy – here’s exactly how.

Did you know that there are different types of retirement investing accounts? Let’s take a minute and touch on the two most popular ones.

First – let’s talk about 401k’s. 56% of employers in the United States offer a 401k plan to their employees. Simply put, this is a retirement savings plan with specific tax advantages. It was created by Congress in 1978 to encourage Americans to save for retirement – and it worked! The 401k plan is the main wealth-building vehicle 80% of millionaires credit their success to (credit source to Dave Ramsey research).

Here’s how it works – as an employee, you delegate a specified percent of your annual salary to be contributed toward your 401k retirement plan. People usually choose between 3-6%. Every paycheck, the money is automatically invested on your behalf. The best part? You’re able to write the total amount invested annually off of your taxes.

From a tax perspective, these can be great if you anticipate being in a lower tax bracket during your retirement.

If you’re really lucky, your employer might even match your contribution with money of their own. But don’t worry if your employer doesn’t do this – only 27% of companies in the US do. If you’re currently working a job that offers retirement planning, make sure to review all of the available options and choose what works best for your long-term goals.

Let’s now pretend you’re on the other side of the aisle and your employer doesn’t offer any sort of 401k plan – then what? Simple. Roth Individual Retirement Account.

Generally speaking, it’s the same thing as I just described with a 401k plan – BUT there’s no employer investing the money on your behalf. It’s you! There are a few rules you need to follow – like not investing over $6,000 into the account per year and still making sure that this isn’t money you’re planning on pulling out until you’re nearly 60 years old.

From a tax perspective, this is great for those that would rather go ahead and get taxed on the money they’re investing now – and enjoy the benefits of any appreciation later tax-free.

Bonus cheat code: if you have a 401k through your employer AND the means to invest in a Roth IRA on the side – this is totally fair game!

You may want to start by thinking about what you’d like your finances to look like in 30 years.

That can help you consider your options and put together a plan. But whether it’s a 401k, a Roth

IRA, or even an investment account that is not specific to retirement, the most important thing is setting money aside.

A brief heads up: this is a sponsored video. MoneyLion and I have partnered with the goal of making important financial lessons easier to understand. See you on the next Beyond the Wallet.

Video Summary

Many people build their wealth through investing. Your money can grow over time in a retirement account and assist with your financial goals. Many retirement options exist, but most people hear about the 401(k) & Roth IRA accounts. We’ll cover both retirement accounts so you can make informed decisions around your retirement planning.

What is a 401(k) retirement account?

More than half of employers offer 401(k) retirement accounts to their employees. These accounts come with tax advantages and let you contribute with pre-tax dollars. You will pay less in taxes while growing your portfolio. 

Congress created this program in 1978 to encourage people to invest towards their retirement. It’s worked well, and some companies make it easy for employees to contribute. Businesses take a small percentage of an employee’s weekly paycheck and put it into the 401(k) account.

Some businesses also offer 401(k) matching. They will invest $1 for every dollar you put into your 401(k). Price matching is a risk-free way to double your money. Some people can’t take the money out for decades since it’s going into a retirement account, but you’ll have access to the funds when you reach the age of retirement.

What is a Roth IRA?

Not every business offers a 401(k) plan. You can set up a Roth IRA account to provide retirement perks as a backup. Roth IRAs let you make after-tax contributions. You won’t put as much money into your portfolio because taxes will sap away some of your contributions.

However, qualifying Roth IRA withdrawals are tax-free. Traditional 401(k) plans don’t have this perk since their contributions are pre-tax. Different tax treatments and rules apply to Roth IRA accounts. You’ll have to conduct further research on each plan to find the best account for your objectives.

Roth IRAs also have income limits. If you make too much money, you can’t contribute to a Roth IRA. You’ll need to make six figures to trigger this rule, which is a good problem to have. You can still open up a brokerage account and invest that way.

Planning for the future

Both 401(k) & Roth IRA retirement accounts help you plan for the future. Some people create a Roth account to complement their employers’ 401(k) accounts. These people get to invest into an additional retirement account after maxing out their 401(k) contributions. 

These accounts make retirement less stressful and provide a financial layer of protection. Every contribution adds up and enables you to hit your net worth objectives.

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