Do you have a Roth 401K? What is a Roth 401K? And, How can you use a Roth 401K for Retirement?

Troy Sharpe:  One of the biggest mistakes that a lot of workers make is not taking advantage of the right strategies inside their 401(k).

 

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income Show, and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®). I want you guys to comment below. I’m curious how many people are aware that the 401(k) has two sides, the pre-tax side and the tax-free side. At your workplace, you may have a 401(k), and oftentimes, one of the biggest mistakes that we see people making is they don’t understand how the 401(k) works and what other options are.

I want you to go to either HR or the person who custodies, maybe it’s a Fidelity or a Vanguard that custodies your 401(k), I want you to get this answer, or this question answered. Ask them, “Do I have a Roth part to my 401(k) where I can contribute my retirement savings?” Most of you have been contributing to the traditional part of the 401(k).

This is when money comes out of your paycheck, it goes into the traditional part of the 401(k), you get a tax deduction, so you don’t pay income taxes today on that income. It grows, you don’t pay taxes as it grows, but as you get to retirement and take the money out, every dollar you take out, you have to pay income taxes on.

You should have another option inside your 401(k). It’s called the Roth portion. This is a tax-free portion. Now, in order for it to be tax-free, that means you have to pay income taxes on that income that comes out of your paycheck today. Instead of putting it into the traditional part and letting it grow  tax-deferred and paying income taxes later when who knows what the tax rates will be in 10, 20, 30 years, if we go ahead and take advantage of the low tax rates today,  pay income taxes but still have it deferred from our paycheck and go into the Roth portion, that money is going to grow tax-free forever, and when you get to retirement,  you are going to be able to work it out tax-free.

Part of my job as a retirement income planner is helping to position my clients for retirement. One of the ways we do that is by making sure that our clients have multiple streams of income coming into retirement. One of the things we want to do also is make sure we have as much tax-free income in retirement as possible.

Contribute to the Roth portion of 401(k), understand you’ll pay taxes on that income today. Any employer match that you receive, it’s important to point this out, it’s going to go into the pretax portion. Your employer match can’t go into the Roth portion. It’s still going to go into the pretax, and that’s fine, but your money, if take advantage of the  Roth portion, it’ll grow tax-free forever, it’ll be there for you in retirement to not pay taxes on any of the deposits or any of the growth, and that’s going to help you have a much more secure  income in retirement that you won’t have to worry about what taxes are.

If you like this video, share it with a friend or a family member. Let’s get more people saving in the tax-free portion of their retirement account at work as opposed to the tax-infested side of the retirement account. Of course, hit that like button and subscribe to the channel. When you subscribe, make sure you hit that little bell icon, so you can be notified whenever we upload more content, which is going to help keep you more connected to your money and make you a more informed and intelligent investor.