FINANCIAL ADVISOR Explains: Retirement Plans for Beginners (401k, IRA, Roth 401k/IRA, 403b) 2024

Summary

In this video, Humphrey Yang, a former financial advisor, provides an updated all-in-one guide to popular retirement plans, covering the 401k, IRA, Roth IRA, SEP IRA, 403b, and 457b plans. He explains key differences, contribution limits, tax benefits, withdrawal rules, and strategies for maximizing retirement savings in 2023 and 2024. The video includes practical advice on choosing between traditional and Roth accounts, taking advantage of employer matches, and understanding specific rules like the Roth IRA 5-year rule. It serves as a comprehensive reference for anyone looking to make informed decisions about their retirement planning.

Takeaways

• 📈 The traditional 401(k) allows for tax-deferred growth, meaning you pay taxes on contributions when you withdraw after age 59.5.
• 💼 The maximum contribution limit for a 401(k) in 2023 is $22,500 for those under 50, and $30,000 for those 50 and older, increasing to $23,000 and $30,500 in 2024.
• 💰 Contributions to a traditional 401(k) can lower your taxable income, providing immediate tax savings.
• 🚫 Early withdrawals from retirement accounts like 401(k)s and traditional IRAs typically incur a 10% penalty if taken before age 59.5.
• 🤑 Employers may match 401(k) contributions up to a certain percentage, offering 'free money' for retirement.
• 🏦 Traditional IRAs are similar to 401(k)s but have lower contribution limits and are accessible without an employer.
• 🌟 Roth IRAs allow after-tax contributions with qualified withdrawals being tax-free, a benefit if you anticipate being in a higher tax bracket during retirement.
• 🔑 The 5-year rule for Roth IRAs requires you to wait five years after your first contribution to withdraw earnings tax-free.
• 👵👴 The SEP IRA is ideal for self-employed individuals, with higher contribution limits compared to traditional IRAs.
• 🏫 403(b)s are tailored for nonprofit and public sector employees, with contribution limits similar to 401(k)s and the potential for additional catch-up contributions.
• 🌐 The 457(b) plan is for state and government employees, with no 10% early withdrawal penalty and the same contribution limits as a 403(b).

Q & A

What is the main difference between a traditional 401K and a Roth 401K?

The main difference is that a traditional 401K allows for tax-deferred growth, meaning you contribute pre-tax dollars and pay taxes upon withdrawal in retirement. In contrast, a Roth 401K uses after-tax dollars, and qualified withdrawals in retirement are tax-free.

What is the maximum contribution limit for a 401K in 2023 for individuals under 50?

The maximum contribution limit for a 401K in 2023 for individuals under 50 is $22,500.

Does contributing to a 401K reduce your taxable income?

Yes, contributing to a 401K reduces your taxable income because the contributions are made with pre-tax dollars, effectively lowering your adjusted gross income.

What is the penalty for early withdrawal from a traditional 401K?

Withdrawing from a traditional 401K before the age of 59.5 typically incurs a 10% penalty from the IRS, in addition to ordinary income taxes on the amount withdrawn.

How does a traditional IRA differ from a 401K?

A traditional IRA differs from a 401K in that it does not require employer sponsorship, can be opened by individuals with earned income, and has lower contribution limits compared to a 401K.

What is the 5-year rule for a Roth IRA?

The 5-year rule for a Roth IRA states that you must wait at least 5 years after your first contribution to withdraw earnings tax-free. This rule applies regardless of your age.

Can you withdraw contributions from a Roth IRA without penalty?

Yes, you can withdraw contributions (but not earnings) from a Roth IRA at any time without penalty or taxes, provided the account has been open for at least 5 years.

What is a backdoor Roth IRA, and how does it work?

A backdoor Roth IRA is a strategy for high-income earners to contribute to a Roth IRA by first contributing to a traditional IRA and then converting it to a Roth IRA, bypassing the income limits for direct Roth IRA contributions.

What is a SEP IRA and who is it designed for?

A SEP IRA, or Simplified Employee Pension IRA, is designed for self-employed individuals and small business owners. It allows for higher contribution limits compared to a traditional IRA, up to $66,000 in 2023 or 25% of net self-employment income.

What is the main advantage of a 457b plan for state and government employees?

The main advantage of a 457b plan is that it does not have a 10% early withdrawal penalty, allowing for penalty-free withdrawals once an employee leaves their employer or retires, unlike other retirement plans.