Overview of Retirement Plan Options

What's up guys, Humphrey Yang here. Today I have a video for you guys all about retirement plans. Now I had a comment from my last YouTube video, which I'll pull up right here, basically asking me, hey Humphrey, why don't you do an overview of retirement plans? And I thought that was a great idea because a lot of people have a ton of questions about, you know, what's the difference between a 401k, an IRA, a Roth IRA, a Roth 401k, a SEP IRA, all this stuff. And I know that it can get really confusing. So today I have an overview video for you guys. of just the basic differences between all the different types of retirement accounts. So without further ado let's get right into it and I'm gonna try to put up like a black bar to my left here that'll hopefully have all the different details that you might need about the different types of retirement accounts that we'll be talking about today. Make sure to LIKE the video because it really helps my channel out and also because the YouTube algorithm is a little bit funky if you like the video sometimes I get more views. So make sure to do that and then also subscribe to me here because then you'll get me in your feed and you'll get more Humphrey all the time. Please let me know how my audio sounds. I've been really messing around with it for the past two hours and I think I finally figured it out. I really like this option which is the clip-in mic. I know that one of my viewers has suggested using like a shotgun mic in the past and I was using that. I did a bunch of tests but I could still hear some white noise so I just didn't really like it. So let me know how it is and... Without further ado, let's get right into the video. We're gonna be talking about 401ks and IRAs first. So retirement accounts, what are the main differences between them? How do you contribute to them? What are their tax advantages or disadvantages? And how do you take distributions out? We're gonna be answering all those questions in the next segment here. Now, I like to think about retirement accounts in two different types of buckets. There's the 401k and the IRA in one bucket, and then the Roth IRA and the Roth 401k in another bucket. And the reason I like to think of them as two buckets is that the way that they're taxed are very different. Here's a little history lesson. The 401k was started by this guy named Ted Benna in 1978 and it became really really popular in the 80s and the 90s up till today. And now most companies will offer a 401k plan for their employees as long as they have that benefit. Now really quickly I just want to give a quick disclaimer out there which is I am not a financial advisor so any opinions that you see in this video are just purely my own opinions. Now I used to be a financial advisor but still these are just my opinions. So you might be here because your company offers a 401k plan and you're just not too sure if you should invest into that or if you should invest into your own IRA or Roth IRA or perhaps your company offers a Roth 401k plan and you don't even know the difference. So let's get into 401k plans and what the exact details of that are so that we can then understand the differences between that, an IRA, and a 401k. So the biggest benefit of having a traditional 401k is that the earnings grow tax deferred. So what does that actually mean? It just means you only pay taxes on the earnings. when you withdraw it, which is probably at the age of 59 and a half or later, because if you withdraw it any earlier, you actually take a penalty. The penalty is typically 10%, so any earnings that you earn from now and before the age of 59 and a half, if you do withdraw them before that age, you would take that 10% hit. The other nice part about a traditional 401k is that it lowers your taxable income. So what does that mean? That just means if you have a salary of 75k a year and you contribute 10k a year into your 401k, well... Lucky you, you only have to pay taxes on 65k a year instead of 75k a year because 10k of that went to contribute to your 401k. The maximum contribution limits of a traditional 401k in the year 2020 is $19,500. And if you're over the age of 50, the government lets you have some sort of catch-up mechanism and you can actually deposit $26,000 a year into your 401k. Now the investment choices of a traditional 401k are pretty limited typically. It's usually just whatever the plan. that your company offers you, you can kind of invest into. And sometimes those plans might not be the best investments. However, as long as you find one with pretty low fees, that's generally a better investment than one that has really high fees. Now, the other very interesting part about a traditional 401k is that you'll pay taxes when you withdraw. And I think I already went over this a little bit earlier, but basically this is gonna be a huge factor in your decision-making because... If you plan to be working at the age of 59 and a half, it really just depends on what your income tax rate is at that age. If you plan to not be working at 59 and a half, for example, and retired already, your income tax rate is going to be so low that when you withdraw your earnings from your 401k, you're actually not even paying that much in tax. However, if you think you're going to be working at 59 and a half, like let's just say you love working and you just know that it's always going to be part of your life, well... Maybe your income tax rate might be pretty high. Like let's say you're making a million dollars a year by the time you're 59 and a half, like that's pretty awesome. Your tax rate is gonna be so high that if you want to withdraw your earnings on that traditional 401k, it actually might take a pretty big hit. So that's something to consider when thinking about a 401k versus the Roth 401k option, which I'll explain to you in a little bit. One of the great things about having a 401k is that companies often match a certain percentage of your contributions. And if they ever do this, you should definitely take advantage of it because it's literally free money. They're literally giving you money so that you can take care of yourself in your retirement. The other fascinating thing about these retirement accounts is that you're required to take money out of them at a certain age. So after you pass the age of 70, I believe the age is 70 and a half, you start to take required minimum distributions. Now some of these retirement accounts actually make you wait till the age of 72, but the majority of them are 70 and a half to 72 years old, you start to take out money from them. So the traditional IRA is very similar to the traditional 401k, it's just that the contribution limits of an IRA are significantly lower. In a traditional IRA you can only contribute $6,000 a year according to this year's 2020 rules or $7,000 a year if you're over the age of 50. The other big difference between the IRA and the traditional 401k is that the IRA is somewhat self-directed in what types of investments you can choose versus the 401k you've kind of just limited to whatever your company is offering you at that time. The biggest difference between the Roth 401k or the Roth IRA and the traditional versions is that they're after-tax dollars. So basically you get your paycheck and you've already paid taxes on it. At that point, you can contribute to a 401k. That's Roth or a Roth IRA. It's just you've already paid taxes on it. You don't have to worry about taxes anymore. You put it in your Roth 401k and all of a sudden the earnings will grow tax-free and when you withdraw it, this is the biggest thing about a Roth IRA or a Roth 401k, when you withdraw money from a Roth account, it is completely tax-free. You don't even have to worry about taxes anymore. So that is the biggest difference in my eyes between the Roth IRA, Roth 401k, and the traditional options is that When you do withdraw it eventually, it is tax-free. Now with the Roth 401k, many of the same principles apply to the Roth 401k that the traditional 401k has, which is you're required to take a minimum distribution when you're the age of 70 and a half, your investment options are typically limited to whatever your company is offering you, and also the contribution limits are $19,500 thousand dollars for this year or $26,000 a year if you're over the age of 50. In all of these retirement accounts, you're going to be hit with a 10% penalty if you withdraw early, and the early age is anything before the age of 59 and a half. This counts as early. There are a couple nuances between the Roth IRA and the Roth 401k that I think are worth mentioning. One of the things with the Roth IRA is that you can actually take out your contributions at any time without penalty. Only the earnings are penalized, so that's kind of one of the cool things about the Roth IRA. The downside of the Roth IRA is that if you make too much money, you just can't contribute to it. So if you make more than $139,000 if you're single, you can't contribute to the Roth IRA. And if you make, I think it's a combined $206,000 a year with a married spouse, you can't contribute to your Roth IRA either. Now, you know how I said you could withdraw your contributions from a Roth IRA at any time? Well, the same does not apply for the Roth. 401k and the roth 401k you can withdraw your contributions but you have to have had those contributions in the roth 401k for five years minimum so that basically sums up the differences between the traditional and then the roth versions of these retirement accounts and i just want to quickly talk about a sep ira and what that is so really quickly the sep ira is for self-employed people and if you own your own business, you can set up a SEP IRA. It basically functions in the same manner as a traditional IRA. The only difference is that you can actually contribute way more in a SEP IRA. You can actually contribute $57,000 a year into your SEP IRA as of 2020, or 25% of your income. I believe it's whichever is lesser. While we're here, let's talk about rollovers of 401ks, because that's a pretty common question is, you go from one employer to the next, how do you roll over your 401k? Well, you can either roll over your 401k into an IRA or a Roth IRA. Now, if you do roll over from a traditional to a Roth format, you're going to have to pay taxes on your rollover amount. But if you go from traditional to traditional, you don't have to pay any taxes at all. You just have to make sure that you actually roll it over into the correct account. If you go to a new employer, they typically have a method for you to roll over from your old employer to your new employer. So you just have to check in with your employer. And then if you're trying to roll over between... a 401k to an IRA or a Roth IRA, you can just do that with any trading platform that offers an IRA or Roth IRA option. I would just consult with them. Some popular ones include like TD Ameritrade, Fidelity probably does it, Vanguard, and Betterment. So I would just look into those and ask them if you have any questions. Really quickly, I forgot to talk about the 403b, but the 403b is basically the non-profit version of the traditional 401k. So if you work for a school or an institution that uses the 403b. that's basically what it is. There is one little difference in the 403b which is if you work for the same place for 15 years in a row you're able to contribute even more to your 403b than a traditional person would be able to do in a traditional 401k and I believe that difference is $3,000 a year. A lot of these retirement accounts will have situational differences between them so as an example if you're a first-time home buyer you can actually take a loan against your 401k to make that first down payment. The other thing is with Roth IRA and IRAs you're actually able to take out with withdrawals without any penalties if you're a first-time homebuyer. But of course that differs from retirement account to retirement account, so I'm going to leave another link in the description below. I'm going to leave a ton of resources for you guys so that you can kind of take a look for yourself and figure out which one's right for you. So guys, that was the video. I apologize if you can hear the rain out there. It just started pouring really, really hard. So if you do hear the rain, I hope that you enjoy it. To sum up, my personal opinion is that the Roth IRA is my favorite type of investment vehicle because it grows tax-free. And I like to get my taxes out of the way when I contribute to it. And also, I don't know what I'm going to be doing when I'm the age of 59 and a half. So that's also one of the reasons I really like the Roth IRA is because it gives me a little bit more flexibility than a traditional IRA probably would. So I hope you learned something from this. Let me know how I did in the comments and let me know what you'd like to see next. I'm always here for you guys. So again, I appreciate all your support and I'll see you for the next one.

And I know that it can get really confusing. So today I have an overview video for you guys. of just the basic differences between all the different types of retirement accounts. So without further ado let's get right into it and I'm gonna try to put up like a black bar to my left here that'll hopefully have all the different details that you might need about the different types of retirement accounts that we'll be talking about today.

Make sure to LIKE the video because it really helps my channel out and also because the YouTube algorithm is a little bit funky if you like the video sometimes I get more views. So make sure to do that and then also subscribe to me here because then you'll get me in your feed and you'll get more Humphrey all the time. Please let me know how my audio sounds.

I've been really messing around with it for the past two hours and I think I finally figured it out. I really like this option which is the clip-in mic. I know that one of my viewers has suggested using like a shotgun mic in the past and I was using that. I did a bunch of tests but I could still hear some white noise so I just didn't really like it.

So let me know how it is and... Without further ado, let's get right into the video. We're gonna be talking about 401ks and IRAs first.

So retirement accounts, what are the main differences between them? How do you contribute to them? What are their tax advantages or disadvantages?

And how do you take distributions out? We're gonna be answering all those questions in the next segment here. Now, I like to think about retirement accounts in two different types of buckets. There's the 401k and the IRA in one bucket, and then the Roth IRA and the Roth 401k in another bucket.

And the reason I like to think of them as two buckets is that the way that they're taxed are very different. Here's a little history lesson. The 401k was started by this guy named Ted Benna in 1978 and it became really really popular in the 80s and the 90s up till today. And now most companies will offer a 401k plan for their employees as long as they have that benefit.

Now really quickly I just want to give a quick disclaimer out there which is I am not a financial advisor so any opinions that you see in this video are just purely my own opinions. Now I used to be a financial advisor but still these are just my opinions. So you might be here because your company offers a 401k plan and you're just not too sure if you should invest into that or if you should invest into your own IRA or Roth IRA or perhaps your company offers a Roth 401k plan and you don't even know the difference. So let's get into 401k plans and what the exact details of that are so that we can then understand the differences between that, an IRA, and a 401k.

So the biggest benefit of having a traditional 401k is that the earnings grow tax deferred. So what does that actually mean? It just means you only pay taxes on the earnings.

when you withdraw it, which is probably at the age of 59 and a half or later, because if you withdraw it any earlier, you actually take a penalty. The penalty is typically 10%, so any earnings that you earn from now and before the age of 59 and a half, if you do withdraw them before that age, you would take that 10% hit. The other nice part about a traditional 401k is that it lowers your taxable income. So what does that mean? That just means if you have a salary of 75k a year and you contribute 10k a year into your 401k, well...

Lucky you, you only have to pay taxes on 65k a year instead of 75k a year because 10k of that went to contribute to your 401k. The maximum contribution limits of a traditional 401k in the year 2020 is $19,500. And if you're over the age of 50, the government lets you have some sort of catch-up mechanism and you can actually deposit $26,000 a year into your 401k.

Now the investment choices of a traditional 401k are pretty limited typically. It's usually just whatever the plan. that your company offers you, you can kind of invest into.

And sometimes those plans might not be the best investments. However, as long as you find one with pretty low fees, that's generally a better investment than one that has really high fees. Now, the other very interesting part about a traditional 401k is that you'll pay taxes when you withdraw.

And I think I already went over this a little bit earlier, but basically this is gonna be a huge factor in your decision-making because... If you plan to be working at the age of 59 and a half, it really just depends on what your income tax rate is at that age. If you plan to not be working at 59 and a half, for example, and retired already, your income tax rate is going to be so low that when you withdraw your earnings from your 401k, you're actually not even paying that much in tax.

However, if you think you're going to be working at 59 and a half, like let's just say you love working and you just know that it's always going to be part of your life, well... Maybe your income tax rate might be pretty high. Like let's say you're making a million dollars a year by the time you're 59 and a half, like that's pretty awesome. Your tax rate is gonna be so high that if you want to withdraw your earnings on that traditional 401k, it actually might take a pretty big hit. So that's something to consider when thinking about a 401k versus the Roth 401k option, which I'll explain to you in a little bit.

One of the great things about having a 401k is that companies often match a certain percentage of your contributions. And if they ever do this, you should definitely take advantage of it because it's literally free money. They're literally giving you money so that you can take care of yourself in your retirement. The other fascinating thing about these retirement accounts is that you're required to take money out of them at a certain age. So after you pass the age of 70, I believe the age is 70 and a half, you start to take required minimum distributions.

Now some of these retirement accounts actually make you wait till the age of 72, but the majority of them are 70 and a half to 72 years old, you start to take out money from them. So the traditional IRA is very similar to the traditional 401k, it's just that the contribution limits of an IRA are significantly lower. In a traditional IRA you can only contribute $6,000 a year according to this year's 2020 rules or $7,000 a year if you're over the age of 50. The other big difference between the IRA and the traditional 401k is that the IRA is somewhat self-directed in what types of investments you can choose versus the 401k you've kind of just limited to whatever your company is offering you at that time. The biggest difference between the Roth 401k or the Roth IRA and the traditional versions is that they're after-tax dollars. So basically you get your paycheck and you've already paid taxes on it.

At that point, you can contribute to a 401k. That's Roth or a Roth IRA. It's just you've already paid taxes on it. You don't have to worry about taxes anymore. You put it in your Roth 401k and all of a sudden the earnings will grow tax-free and when you withdraw it, this is the biggest thing about a Roth IRA or a Roth 401k, when you withdraw money from a Roth account, it is completely tax-free.

You don't even have to worry about taxes anymore. So that is the biggest difference in my eyes between the Roth IRA, Roth 401k, and the traditional options is that When you do withdraw it eventually, it is tax-free. Now with the Roth 401k, many of the same principles apply to the Roth 401k that the traditional 401k has, which is you're required to take a minimum distribution when you're the age of 70 and a half, your investment options are typically limited to whatever your company is offering you, and also the contribution limits are $19,500 thousand dollars for this year or $26,000 a year if you're over the age of 50. In all of these retirement accounts, you're going to be hit with a 10% penalty if you withdraw early, and the early age is anything before the age of 59 and a half. This counts as early. There are a couple nuances between the Roth IRA and the Roth 401k that I think are worth mentioning.

One of the things with the Roth IRA is that you can actually take out your contributions at any time without penalty. Only the earnings are penalized, so that's kind of one of the cool things about the Roth IRA. The downside of the Roth IRA is that if you make too much money, you just can't contribute to it.

So if you make more than $139,000 if you're single, you can't contribute to the Roth IRA. And if you make, I think it's a combined $206,000 a year with a married spouse, you can't contribute to your Roth IRA either. Now, you know how I said you could withdraw your contributions from a Roth IRA at any time? Well, the same does not apply for the Roth. 401k and the roth 401k you can withdraw your contributions but you have to have had those contributions in the roth 401k for five years minimum so that basically sums up the differences between the traditional and then the roth versions of these retirement accounts and i just want to quickly talk about a sep ira and what that is so really quickly the sep ira is for self-employed people and if you own your own business, you can set up a SEP IRA.

It basically functions in the same manner as a traditional IRA. The only difference is that you can actually contribute way more in a SEP IRA. You can actually contribute $57,000 a year into your SEP IRA as of 2020, or 25% of your income. I believe it's whichever is lesser. While we're here, let's talk about rollovers of 401ks, because that's a pretty common question is, you go from one employer to the next, how do you roll over your 401k?

Well, you can either roll over your 401k into an IRA or a Roth IRA. Now, if you do roll over from a traditional to a Roth format, you're going to have to pay taxes on your rollover amount. But if you go from traditional to traditional, you don't have to pay any taxes at all.

You just have to make sure that you actually roll it over into the correct account. If you go to a new employer, they typically have a method for you to roll over from your old employer to your new employer. So you just have to check in with your employer.

And then if you're trying to roll over between... a 401k to an IRA or a Roth IRA, you can just do that with any trading platform that offers an IRA or Roth IRA option. I would just consult with them.

Some popular ones include like TD Ameritrade, Fidelity probably does it, Vanguard, and Betterment. So I would just look into those and ask them if you have any questions. Really quickly, I forgot to talk about the 403b, but the 403b is basically the non-profit version of the traditional 401k.

So if you work for a school or an institution that uses the 403b. that's basically what it is. There is one little difference in the 403b which is if you work for the same place for 15 years in a row you're able to contribute even more to your 403b than a traditional person would be able to do in a traditional 401k and I believe that difference is $3,000 a year.

A lot of these retirement accounts will have situational differences between them so as an example if you're a first-time home buyer you can actually take a loan against your 401k to make that first down payment. The other thing is with Roth IRA and IRAs you're actually able to take out with withdrawals without any penalties if you're a first-time homebuyer. But of course that differs from retirement account to retirement account, so I'm going to leave another link in the description below.

I'm going to leave a ton of resources for you guys so that you can kind of take a look for yourself and figure out which one's right for you. So guys, that was the video. I apologize if you can hear the rain out there. It just started pouring really, really hard. So if you do hear the rain, I hope that you enjoy it.

To sum up, my personal opinion is that the Roth IRA is my favorite type of investment vehicle because it grows tax-free. And I like to get my taxes out of the way when I contribute to it. And also, I don't know what I'm going to be doing when I'm the age of 59 and a half.

So that's also one of the reasons I really like the Roth IRA is because it gives me a little bit more flexibility than a traditional IRA probably would. So I hope you learned something from this. Let me know how I did in the comments and let me know what you'd like to see next. I'm always here for you guys. So again, I appreciate all your support and I'll see you for the next one.

Transcript for:Overview of Retirement Plan Options

Transcript for:
Overview of Retirement Plan Options