The Best Way to Invest for Retirement (Roth 401k vs Traditional)
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Ladies and gentlemen, welcome to the financial arena where titans collide and fortunes are at stake. It's the retirement ring of glory where nest eggs hang in the balance and only one can emerge victorious. These two powerhouses have been training for years. Both opponents have loyal followers, staunch defenders, and passionate advocates. But today they enter the ring to settle the score once and for all.

So grab your calculators and click that like and subscribe and get ready to witness the ultimate showdown. Raw 401k versus the traditional 401k. Is my voice that hot? Is that really? I don't even know what's normal anymore. What happened to me? And share this with a wrestling fan in your life who needs to see an actual real life showdown, not one that's made up filled with acting.

Other than being asked how tall I am, this is one of the most common questions I get. Should I save for retirement using a Roth 401k or a traditional 401k? And it's probably because employer benefit packages can be as confusing as the use of decorative pillows. What am I supposed to do with these? They're called shams for a reason. It's a sham. I can't even put my head on it. It's strictly decorative. It's a sham.

It's all a sham. So let's talk through the two retirement options and what they mean when it comes to your money. In one corner, we have the traditional 401k. This is where your contributions go in pre-tax, which means you haven't paid taxes on that money yet. But you will owe the IRS taxes when you start making withdrawals from your 401k later on in retirement. Plus, any employer contributions and growth on those contributions are also taxed when you withdraw later. Just like God's love, there's no escaping it. Ah!

But I'll take God over the IRS any day. It's a no-brainer. In the other corner, we have the Roth 401k, which uses post-tax dollars. That means your contributions have already been taxed before they go into your Roth account. The benefit here is that the money you put in grows tax-free, and you'll get to withdraw that money tax-free when you retire. You heard that right. No more hands in the honeypot, Pooh Bear. No, brother.

Empty again. I'm Pooh. Side note, where were his pants? I mean, if I roamed around pantsless in the forest eating honey, you'd call the cops on me. But he does it, and it's cute. It's weird. Why does he need a t-shirt but know nothing on the bottom? Either let him roam around naked like a normal bear, or make him completely clothed like the Bernstein bears. And that's right, it's Berenstein, not Bernstein. Look it up. Sorry to destroy your childhood. Oh, oh, oh, oh, oh, oh, oh, oh, oh.

Now, since your Roth 401k contributions are made after tax, you're paying those taxes now and taking home a little less in your paycheck. But again, because you already paid taxes, the money you put in and the growth is all yours later, tax-free. Now, a couple of notes on this one. If you've got an employer match, the money they match legally can't be Roth, so it will be put in a separate traditional account. Don't worry.

That's normal. That portion will still be taxable in retirement. Now, one reason people love the traditional 401k is because it lowers your taxable income and your tax bill for that year. So tax break now with traditional, tax break later with the Roth. So let's break this down and see how it would play out with some real numbers. Let's pretend you have $1 million in your nest egg when you retire, which is a thousand percent likely because you've been watching this YouTube channel.

I like those odds. Now, if you've got it invested in a Roth 401k, most of that $1 million is yours free and clear when you hit retirement since you already paid taxes on it. Now, if that $1 million was in a traditional 401k, you'll pay taxes on every single penny you withdraw. Now, depending on your tax bracket and what the tax rates are when you retire, and who knows what they will be, you could wind up sending hundreds of thousands of dollars in taxes to Uncle Sam throughout your golden years. Now, for some, that could be a hard pill to swallow.

Especially because by that time, you'll probably have a color-coded medicine box full of other hard pills to swallow. My multivitamin is a choking hazard. And it goes without saying that your retirement savings will last longer if you're not paying taxes on your withdrawals. And that's what gives a Roth 401k and a Roth IRA, for that matter, a huge advantage. Now, another slight difference between a Roth and traditional is your access to your money. In a traditional 401k, you can start receiving distributions at age 59 and a half, no matter what. Well, the government clearly understands the validity of a half-birthday.

But that's where I draw the line. We're not doing birthday months, okay? A half birthday, I'll deal with that. Get out of here with your birthday month. With a Roth 401k, you can start withdrawing money without penalty at 59 and a half as well, as long as you've had the account for at least five years. So if you're approaching 59 and a half and you're thinking about starting a Roth 401k, be aware that if you have to access that money in the first five years, you'll pay a penalty. Now, if you're still wary of the Roth option, here's something else to think about.

No one knows how the tax brackets or tax percentages will change in the future, especially if you're still decades away from retirement. So the question is, do you want to take that risk later in life? I certainly don't want to take that risk. I mean, there's no life alert when it comes to your money. I can't just hit a button and yell, help, I didn't plan to pay higher taxes in retirement and I can't get up.

As for me and my house, we stick to the Roth options. It may hurt to pay taxes on those 401k contributions now, but I think future me is going to love me for it. And I hope future me loves me because present me, not so much. Why are you the way that you are? Plus, once you're in the habit of investing 15% of every paycheck into that Roth 401k early on, you won't even miss the money you're paying in taxes. You just learn to live on less than you make, which is a great habit. And just so we're clear, here's my official investing strategy. Match beats Roth.

beats traditional. And here's a mnemonic device to remember that: Mufasa beats Rafiki beats Timon. It's not necessarily easier to remember, but it is more fun.

So let's talk through this. So match beats Roth beats traditional. If your employer offers a match, invest enough to get all of that. That is free money and it's a 100% return on investment. Next, do all the Roth you can through your employer's retirement plan or individual accounts like an IRA. Then if you, let's say, max out the Roth IRA and you're still not at 15%, go back to the traditional 401k and you can invest until you hit 15% in that account.

Now regardless of which one you choose, here's the cool thing about investing for retirement. When you hit retirement, about 90% of your account balance will be growth. That's crazy. Which means only 10% was actually your money. The other 90% was compound growth. And by that age, you'll be very familiar with growth. Now don't get me wrong here. There are a lot of similarities between a Roth 401k and a traditional 401k. Think of them like your eyebrows. They're sisters, not twins. I love finding a good set of twins. Something is wrong with

Now compare that to an IRA, which in 2023 has a contribution limit of $6,500. 401ks are where it's at.

Okay, so we understand the Roth and traditional options. But remember, that's just a type of account. You haven't actually invested into anything yet. You've chosen a cookie jar, but we've got to choose which cookies go inside. So which cookies go inside? Well, I like to invest my cookie portfolio evenly across four types of mutual funds. Growth and income, growth, aggressive growth, and international. That's what we call a diverse portfolio, and it helps keep your investments well-balanced, just like kimchi can help your gut stay well-balanced after eating all those cookies. Never, ever, ever.

Never ever let me have cookies again! Now, if you're not sure which specific mutual funds to choose for your Roth 401k, no problem. I think it's always a good idea to sit down with an investment professional who can help you understand the different types of funds so you can choose the right mix. And if you want to connect with one of these investing pros, I'll drop a link below to the ones that I trust. Now, if you have a traditional 401k and you're starting to feel a little FOMO, hear me say there isn't a one-size-fits-all answer when it comes to rolling over your retirement accounts to Roth.

In fact, all things equal, including income and tax rates, there's no mathematical difference when it comes to choosing traditional and Roth. But the way I see it, I'd rather have the discipline now to live on a little less and enjoy the benefits of a tax-free retirement later without having to worry about tax brackets and distributions and how much income I'm going to pull for that year. That's the last thing I'll need to worry about. The first thing I'll need to worry about is finding a good birdwatching group on Facebook.

And the second thing I'll need to worry about is why all these yellow rump warblers have been pooping on my car. What did I do to deserve this? I gave them a custom cedar birdhouse, organic seed, and this is how they repay me?

Rude. All right, back to investing. Here's an important sidebar. If you've been investing on the traditional side and you're wondering if you should convert it to Roth, proceed with caution. You're going to have to pay taxes on that conversion, and it only makes sense to do that when you have no debt and a paid-for house. So if you're not there yet, pump the brakes. Now, before you do any of these conversions and rollovers, sit down with an experienced investing pro to make sure it's the right move for you. And if you want to just learn more about investing in general, be sure to check out the Ramsey Investing Hub that I will link below. It's loaded with

articles and tools to help you make smart decisions

with your investments. As always, make sure to like this video, subscribe to the channel, and share it with a financial nerd in your life. Maybe it'll spark some friendly debate about Roth versus traditional, which will be the most controversial showdown since the old is a hot dog a sandwich fiasco. Which by the way, drop in the comments your hot take on that. Is a hot dog a sandwich? My vote, hard no. If it's connected, it's not a sandwich. It's gotta be separate pieces of bread to be a sandwich final answer. Hot dogs aside, thank you guys for watching. I'll see you next time.