The speaker, Graham, compares and contrasts investing in a Roth IRA versus a traditional 401k. He explains the benefits and drawbacks of each option and provides his personal recommendation.
A Roth IRA allows individuals to contribute post-tax money, which can be withdrawn tax-free after age 59 1/2. The benefits include tax-free growth and withdrawals, flexibility in withdrawing contributions at any time, and no required minimum distributions (RMDs). However, the downsides include contributing with post-tax money, a 10% penalty for withdrawing earnings before age 59 1/2, and a contribution limit of $6,000 per year.
A traditional 401k, on the other hand, allows individuals to contribute pre-tax money, which reduces their taxable income. The benefits include a higher contribution limit of $19,000 per year, potential employer matching, and tax-deferred growth. However, the downsides include paying taxes on withdrawals, a 10% penalty for withdrawing before age 59 1/2, and RMDs starting at age 70 1/2.
Graham recommends prioritizing a Roth IRA if you're young and in a low tax bracket, as the tax-free growth and withdrawals will be more valuable in the future. However, if you're making a high income and expect to retire in a lower tax bracket, prioritizing a traditional 401k may be a better option. He also suggests considering a balance between the two options and exploring a Roth 401k, which offers a higher contribution limit and tax-free growth.
Here are the key facts extracted from the text:
1. A Roth IRA is a retirement account where you can contribute up to $6,000 per year with post-tax money.
2. After the age of 59 and a half, you can withdraw all the money in a Roth IRA account, including profits, completely tax-free.
3. With a Roth IRA, you can withdraw your contributions (not the profits) at any time without paying taxes or penalties.
4. The contribution limit to a Roth IRA is $6,000 per year.
5. A traditional 401k is an employer-sponsored retirement plan where you contribute pre-tax money.
6. With a traditional 401k, you don't pay taxes on the money you contribute, but you'll pay taxes on withdrawals after age 59 and a half.
7. The contribution limit to a traditional 401k is $19,000 per year.
8. Some employers offer an employer match in a 401k, where they match your contributions dollar for dollar.
9. If you take out money from a 401k before age 59 and a half, you'll be subject to a 10% penalty and ordinary income taxes.
10. You're required to withdraw some of your 401k money starting at age 70 and a half.
11. A Roth 401k is similar to a Roth IRA but has a higher contribution limit of $19,000 per year.