Stretching Your Dollar: Understanding 401Ks

<div class="block">We&#39;re celebrating National 401k Day with all the things you need to know. Sara Stanich, certified financial planner, joined &#39;Stretching Your Dollar&#39; to talk about the difference between Roth and traditional 401k accounts. </div>

Stretching Your Dollar

Stretching Your Dollar: Understanding 401Ks, Roth Accounts Versus Traditional

Well, this year there's a new retirement savings option available for the first time Congress passed a law allowing employers to make matching contributions after tax directly to an employee's 41. So for more on how the Roth 401k works and whether it's right for you, I'm joined by Sarah Certified financial planner and founder of cultivating wealth. Uh Sarah, it's great to have you on the show. Hi, it's good to see you. Great topic. So, what is the difference between the 401k and a traditional 401k? Well, the main, the main difference is the taxes. So you're in a traditional 401k or a traditional retirement plan, you make contributions with pretax dollars and when you withdraw down the line, your distributions are taxed with a Roth retirement plan. It's the opposite. You make contributions with post tax dollars. But down the line when usually in retirement, it's tax free. How does a Roth 401k compared to an IRA? There's many benefits to the Roth 401k. So one is that you can contribute more so you can contribute more to this tax free pot of money. Um In a 41 K, your limit is 22,500 if you're under 50 that you can contribute annually. Whereas in an Ira a Roth Ira, it's only 6500 who would be a good candidate for a ross of 401k Sarah. We like it for, for anyone who thinks that their taxes may be higher in the future for one thing or anyone who just wants to have more tax planning options available to them in the future, is there anyone who might not be a good fit for this type of plan or who should really kind of give it a good think and maybe map it out before moving forward. Well, one is to check that your employer does do a match on Roth contributions. You would never want to lose your match. And I know that there's a, a new rule that they can do a match on Roth contributions, but I, I would still uh check the plan to make sure that yours will, will allow it. Um And, and potentially if you're having a very high income year, well, this may not be the best year to uh to make post tax contributions. Is it ever a good idea to keep multiple different kinds of retirement accounts that is growing perhaps at the same time. Yes, we like it because then you have tax diversification. So then you have more options when it comes time to withdraw funds down the road, any tips to maximize the growth of a raw 401k. Uh There are a few things. Um I would say that to consider your timeline and your tolerance for investment risk, I would say check the default investment option. Sometimes the default option is something very conservative like a money market or a stable value fund. And if you want those funds to grow, they need to be invested for growth. I would also check the expenses on the different investment options in your plan. There can be, you know, quite a variance between the different options and lower expenses mean more of your money is being invested. Um So obviously individuals can invest in a 41 K or an IRA if, if they're working and earning an income. But what about parents and kids? Is it possible for parents to set up a account for their kids? Yeah. Well, I love this question because I just did it. Um It is possible to open a custodial Roth Ira but your child must have earned income. So my son worked at a pizza shop and we opened up a custodial Roth Ira when he turns 18, it will be in his name. Um and, and you know, he can do as he looks interesting. Save it, hopefully, save it. Yes, hopefully continue to let it grow. How can workers find out options uh that are available to them through their employer? There's usually lots of information on your internal company benefits website. You can also ask hr you know, human resources, you can also talk to your financial advisor. Ok. Uh Sarah, thank you so much. We appreciate it.