Roth 401k Explained

Today I'm going to talk about the Roth 401k this is a really powerful

retirement planning tool that can help you control your taxes if you pick the

right investment choices and you know some of the rules of the Roth 401k if

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Travis Sickle CERTIFIED FINANCIAL PLANNER with Sickle Hunter Financial Advisors

The Roth 401k is over two-thirds of all retirement plans that have a 401k so you're gonna see these

plans with a 401k the Roth 401k goes in after tax grows tax-deferred and

comes out tax-free so all the growth you're not gonna pay taxes on in

retirement so from a tax point of view the Roth 401k works identically to the

Roth IRA again it goes in pre-tax grows tax-deferred and then comes out tax-free

another way to look at it is you get your paycheck you've already paid taxes

on it they've already been withheld then you take that money and you put it into

the Roth 401k and then it grows tax-deferred well the Roth 401k will

come out through payroll deductions it works just like a Roth IRA and the way

it works it's like you've already received that money in your paycheck

you've already withheld those taxes and then that money goes into the Roth and

then grows tax-deferred comes out tax-free and just like the 401k we can

put up to $18,500 into the Roth 401k but you have

to split that up so it's an aggregate amount between the traditional 401k and

the Roth 401k so you can't put in $18,500

into both you can only have an aggregate of $18,500 so if

you're put in nine thousand into your 401k you could put up to $9,500

into your Roth 401k why because $9,000 plus $9,500

equals your maximum limit of $18,500 is

should you put more money into your Roth 401k

Well if you're in the same tax bracket today and in retirement then it

actually doesn't matter and here's why using the Roth 401k to control your

taxes I've done this example before and it's the identical to the traditional

versus the Roth IRA but let's take a quick look at what that looks like so if

we contribute $1 into the 401k it goes in pre-tax so that single dollar will

then be invested and let's say over time that $1 becomes $10 and

you're in the 20% tax bracket well that $10. then is $8.

when you pull it out because you pull out the ten you pay taxes of 10%

that's $2. leaves you with $8. now let's say we

put that same dollar into the Roth 401k well it's gonna work just like the Roth

IRA so that goes in after-tax if you're in the 20% tax bracket that means

80 cents would go into that Roth 401k -- 20 cents is 20% of a dollar so let's

say this was in the same investment so it increased 10 times over that becomes

$8 well you're not taxed on anything you

pull out of the Roth 401k so you're gonna get $8. as you can see both

of those are identical where this becomes powerful is when you're reducing

your tax liability from an overall standpoint so how does that work so

there are really two ways of figuring out how much to contribute into the Roth

401k the first you want to control your taxes so the more money that you put

into your traditional 401k today it reduces your tax liability on the other

side in retirement that Roth IRA will help keep you in a lower tax bracket

because if you need more money you pull it out of the Roth 401k

well you're taxed on those dollars but not on the Roth 401K dollars so if you

think about the tax situation right now in 2018

most tax brackets have been reduced and some of the deductions have increased

such as the standard deduction so if you think or know that your taxes are going

to be lower this year you might want to consider looking

more at a Roth 401k so the first way to figure out how much you should put into

the Roth 401k versus a traditional 401k is taking a look at your taxable

situation if you're trying to get into a lower tax bracket then putting more

money into the traditional 401k will help that but once you get yourself into

that lower tax bracket you might want to put those additional dollars in the Roth

401k for later on in retirement to help reduce your taxes then and since tax

brackets have been reduced in 2018 this might be a good opportunity to take a

look at the Roth 401k when taxes go up you might want to consider leaning

towards the traditional 401k again each year could be a little bit different so

you want to look at everything in your taxable situation how do you figure out

how much you should put into your Roth or traditional in advance you have to

look at your estimates where can you find these you can look at the w-4 if

you use things like the w-4 calculator at the IRS website I'll put the link at

the bottom I've done a ton of videos on the w-4 as well if you use this tool you

can estimate how much your tax liability is going to be to give you a good idea

of how much you should put into the Roth 401k versus the traditional 401k the

Roth 401k also has no income limits so doesn't matter how much you make if you

have a Roth 401 K through your employer then you can contribute to it so this is

why it's so powerful now there are a ton of other strategies to get money into a

Roth IRA if you don't have access to a Roth 401k I've also done a ton of videos

on that as well I'll put those links at the bottom choosing which investment

options to put into the Roth 401k and the traditional IRA can hugely impact

your taxable situation if you're more aggressive investments are in your Roth

401k then those investments won't be taxed when they come out so if you have

more growth in there you're gonna be better off and if you have you're more

conservative assets into your traditional 401k while those will grow

less because they're more conservative over time you might be better off

splitting up your portfolio rather than looking at

complete diversification or a complete strategy in each portfolio so choosing

the right amount into the Roth 401k can really impact your taxable situation

today and your taxable situation in a retirement not to mention the amount of

money that you can live on in retirement if you use the traditional and there are

401ks effectively if you've enjoyed this video be sure to subscribe and leave

your comments down at the bottom