 What's up you guys, it's Shane. So this is a question that's been coming up a lot lately and to be honest with you, it's kind of a confusing question and it's not sort of like a one size fits all sort of answer. So I thought I'd make this video to break down, you know, step by step, which one is better to invest in out of the Roth IRA and the 401K and then break it down even further and figure out which one is gonna be better for your specific situation and which one is gonna end up making you the most money in the long run. And seriously, if you're at all confused about which one would be better for your specific situation or which one would be better for you to invest in in the long run, it's your lucky day. Because just by watching this video until the end and understanding a few of these simple concepts will make it to where I can pretty much guarantee you that you will save tens of thousands if not hundreds of thousands of dollars in the long run. Which means you'll be able to basically buy anything you want, you'll be able to just eat hummus on the beach all day long and have someone feed you grapes and hire somebody to fan you. And I know that guaranteeing anything is a very bold claim to make, but I can pretty much guarantee you that if you pay attention, you watch the video till the very end and you smash that like button because this video took forever to make, then you'll understand exactly why and that will help you to make a good decision for you. And in turn, you will save a ton of money. So first thing I'm gonna do is I'm gonna basically go over what a 401k is and a Roth IRA is and then I'm gonna go over the pros and cons of each one. So a 401k is basically a retirement plan that is sponsored by your employer and it basically allows you to take a piece of your paycheck out before you actually get the paycheck and invest that piece of money before you get the check and before you're taxed. So it's basically pre-tax, pre-paycheck money. Now a lot of the time different employers will offer some sort of matching program where they'll basically match the amount of money that you put into your 401k. So maybe up to 5% of your paycheck, they will match dollar for dollar. And so if you're making $50,000, they will match you as long as you put up to 2,500, they'll match you an additional 2,500. And if your employer offers this, you pretty much have to take it. I mean, it is basically free money. Like if your employer offers that, definitely, definitely go for that up to the point where they stop matching. Now, another thing about the 401k is it has a $19,000 contribution limit as of 2019. And that's a lot more than what the IRA offers. So you can put quite a bit of money into your 401k every single year. Another great thing about the 401k is you can use it as a bit of a tax write-off. So any amount of money that you put into the 401k doesn't get taxed that year. So if you're in a slightly higher tax bracket, you could put a certain amount of money into your 401k and get yourself down to a lower tax bracket by doing that. So as an example, if you make $50,000 a year and you put $5,000 into your 401k, you would only get taxed $45,000 a year. Pretty simple. To take this a step further, let's say you're making $50,000 a year and you put $11,000 into your 401k, so therefore your profit is showing as $39,000 a year, well, you'd go into a lower tax bracket. You could potentially pay 10% less on the profit that you make because you're in a lower tax bracket. Now, this is all kind of complicated and you do have to basically talk to a professional that's in your state because different things can make it more complicated. I'm simplifying things quite a bit here. So you do need to look into your specific situation, speak with a licensed CPA that is familiar with your state. And then another advantage of the 401k is you're not taxed now, you're taxed later when you pull it out. So if you're planning on not making as much money later on in life, for instance, if you're retired, then this is perfect for you because you wouldn't have to pay as much in taxes later on in life. That's actually one of the cons of doing the 401k as well. Because if you do end up making more money later on in life, you're going to end up paying even more in taxes than if you would have just paid taxes at the very beginning when you were first contributing to your 401k. And another thing is you can only keep your 401k until you're 70 and a half years old. At that age, you are forced to withdraw it. And the problem with that is, the market could be down at that time, like let's say the market crashes right when you turn 70 and it hasn't recovered by the time you're 70 and a half. Well, you're kind of going to be SOL. And because of this, you really have to time when you pull your 401k out and you have to really get strategic and figure out when you're going to pull it out and when you're going to retire. Now another problem with the 401k is in the event that taxes get higher in the future, which there is a very good chance that taxes will get higher in the future, like a very good chance. Just look at the US debt right now. I mean, we are so far in debt. How do you think the US is going to pay off that interest to other countries in the future? They're going to have to tax us more. So I would say that there is a very good chance that taxes are actually going to be higher in the future than they are right now. And if that happens, you will actually end up paying more for taxes than if you were to have just paid taxes now. And another con for the 401k is your employer has a lot of control over your investment. You don't have full control over your investment like you do with a normal investment account or an IRA. Your employer does have some control and some say over what your investments are. And the last thing is, is there's a lot of hidden fees with the 401k that you have to pay people to manage your account. Whereas if you were to just put your money in an IRA, you could pay very, very low fees if you want, if you just invested your money into index funds, they have like 0.03% fees for handling your money. Now the Roth IRA on the other hand is a special retirement account that you fund with what's known as post tax income. And that basically just means you can't deduct those contributions on your taxes. And this allows you to have tax-free compounding which is even better than normal compounding. And normal compounding has been said to be the eighth wonder of the world. So that's pretty good. So one of the biggest pros to having an IRA is that you don't have to pay taxes on the money that you earn in that account in the future. This means that, let's say you're paying 25% in taxes right now and when you're 60 years old, you're paying, let's say 50% in taxes, well, you wouldn't have to pay that 50% and you would end up saving 30% in taxes or more. So this is especially good if you're young and you're in like a lower tax bracket right now. This is especially good for you because you're not making that much money and therefore you're not paying that much in taxes. Now, you can pull out your contributions to the account anytime you want. And what I mean by that is, let's say you put 20,000 into an account and through the magic of compound interest, it goes to 30,000, you can pull that 20,000 that you put in anytime you want without getting taxed or without getting penalized. However, if you try to pull the additional 10,000 out, you will get taxed on it and you're going to get penalized on it. So you really do not want to do that. And another great thing about the Roth IRA is you have pretty much complete control over your investments. If you wanna go really aggressive and you really believe in one company, you can do that. Or if you wanna be really safe and conservative, which I recommend and just go into an index fund, you can also do that. Now, one of the bad things about a Roth IRA is you do have to wait until you're 59 and a half before you can pull that money out. This is why it's considered to be a retirement account. And like I said earlier, if you try to pull the interest out before that age, 59 and a half, having the account five years or more, you are going to get taxed and penalized 10%. And then another bad thing that kind of sucks about the Roth IRA is you can only put $6,000 in every single year. And if you take any money out, it doesn't matter. You can't put it back in. So if you put 6,000 in and then take 6,000 out, well, you already put 6,000 in, you can't put anything more in until the next year. And then another thing is there's a lot of income limits with the Roth IRA. At the time of recording this video, if you're single, the income limit is $135,000 a year and it changes every couple of years. So you definitely want to look into that if you're watching this and you're looking into a Roth IRA. So now that you know the pros and cons of both, now let's go ahead and get into which one is a better option for your specific situation. Now, if you're young and you're not making a lot of money and you're in a low tax bracket, the Roth IRA is probably going to be better for you. So let's say like a theoretical scenario, you're in high school or college and you're making about 20,000 a year from your part-time job and your side hustles, you definitely would want to be putting at least, maxing it out, putting $6,000 a year into your Roth IRA. However, if you're in a very high tax bracket and you're making a lot of money every year, the Roth IRA may not be the best option for you. For instance, let's say you are currently running a business making $500,000 a year and you don't think this business is gonna last very long. Let's say you opened up like a bunch of avocado toast shops and five years from now you think avocado toast isn't gonna be popular anymore and you'd only expect to be making, let's say $100,000 a year when you retire. Well, in that case, then the 401k would likely be a better option for you. Now, if you're making 500k a year but you still think you're gonna be making more money around the time that you're going to retire, then you would still want to look into the Roth IRA. Now, most people are going to be in a lower tax bracket when they retire and the reason for that is because they've already bought their house so they don't have to pay rent, they don't have a lot of overhead expenses and they're pretty much just living off of their savings. Now, the other big problem with the 401k like I mentioned before is that you have no idea what the tax situation is going to be like in the future. So with all that being said, here is my personal recommendation on what I would do. But before I say that, I just want to quickly tell you that I am not a finance professional. I do this for educational and entertainment purposes only. You know, this is just my opinion and you need to do your own research. So in my opinion, if your employer offers matching 401k, you should absolutely do both. They are both really, really good options but if you're young and you're not making much money then you should prioritize the Roth IRA. So let's go over a theoretical example so you can kind of get an idea of what I'm talking about. So let's say that you're 18 and you just got a really good job, an entry level job making, let's just say $50,000 a year because you watched my videos and you followed my recommendations and you did your research. Well, the Roth IRA would probably be better for you at this time because you're likely going to be making less money now than you are in the future because you will probably be making six figures at some point. However, if your employer offers matching then you absolutely should take advantage of it. So again, let's just say out of the $50,000 you make every year, you can only invest 10,000 every year and your employer offers 5% matching. You would want to put all 5% of that matching into your 401k, which would be 2,500 and then your company would match you dollar for dollar. So you'd be putting $5,000 a year into your 401k. Then out of the 7,500 that's left, you would put 6,000 of that into your Roth IRA and then you would have about 1,500 left over to either put into an index fund, you know, invest in real estate or whatever you want to do with it. And assuming you withdraw all of it at 65 years old with a 7% return on investment, adjusted for inflation, then you would actually end up pulling over $2 million out of both the Roth IRA and the 401k. And then after taxes, you'd have a little bit less than $4 million total. And if you put that on the stock market and you got again, 7% returns, you would be getting basically almost $300,000 a year you could easily live off in your retirement. And that means you could retire on almost $300,000 a year and you wouldn't even be touching the principal. You would just be living off of the interest. And that's really not too bad considering you would probably have at least one house, if not several houses that are already paid off and you would have a very, very low cost of living. All right, that's it. So if you made it to the end, I really appreciate you watching. Please, if you haven't already done so, go ahead and smash the like button, hit the subscribe button, hit the notification bell and go ahead and comment below as well. I really appreciate everybody that watches and comments and I respond to every single comment. So thank you again for watching and until next time.