PART 2: KEY TAKEAWAYS

• Tax-Exempt accounts provide future tax benefits because your withdrawals at retirement will not be subjected to taxes, unlike a traditional IRA, and 401k where you are taxed when withdrawing money later in retirement.
• Two types of Tax-Exempt accounts are 
  • Roth IRA
    •  Is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided that certain conditions are satisfied. While Roth IRA’s are similar to traditional IRAS the main difference is of course how they are taxed. Roth IRAs are funded with after-tax dollars. 
  • Roth 401 (k)
    •  Is employer-sponsored investment savings account that is funded with after-tax dollars up to the plan’s contribution limit. Think of a Roth 401 (k) as a hybrid retirement savings vehicle that combines the best features of a traditional 401 (k) and a Roth IRA. The contributions made by you the employee are made using after-tax dollars with no income limitations to prevent you from contributing.
      

      Tax-Exempt Accounts

      These accounts, on the other hand, provide future tax benefits because your withdrawals at retirement will not be subjected to taxes unlike a traditional IRA, and 401k where you are taxed when withdrawing money later in retirement hence why they are tax-deferred accounts. Keep in mind that since contributions into the account are made with after-tax dollars, there is no immediate tax advantage. The advantage of these types of accounts is that investment returns grow tax-free.
      
      

      Types of accounts

• Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided that certain conditions are satisfied. While Roth IRA’s are similar to traditional IRAS the main difference is of course how they are taxed. Roth IRAs are funded with after-tax dollars. These contributions are not tax-deductible. But once you start to withdraw your funds, the money is tax-free. Traditional IRA deposits are generally made with pretax dollars; so you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

1. 1. 1. 1. Let’s go over an example of how this account works

• Example: Now we’re gonna do some math here so bear with me. I’ll be sure to post it on my Instagram as well if you wanna review it. Now let’s say you contribute $5,500 to a Roth IRA instead of a traditional. Rather than pay taxes on withdrawals 35 years down the road, contributing to a Roth IRA account allows us to “get the taxes out of the way now”.

1. 1. 1. 1. 1. Consider this: You contribute the $5,500 as mentioned to a Roth IRA account that’s taxed at 25% okay so that would be $5,500 minus the 25% on the 5,500 would give us $1,375 so your net after-tax contributions to the account would be equal to $4,125. Now let’s say the account has an 8% return so the value after 35 years at an 8% return would be $60,989.55 which is your net aka what you’d be able to withdrawal out of the account because you already paid taxes on it when you made the initial deposit of $5,500 35 years ago.

Limitations on deposits?

Again like the traditional accounts, the IRS limits how much can be deposited in any type of IRA, adjusting amounts periodically. The contribution limits are the same for traditional and Roth IRAs.

$6,000 is the maximum annual contribution an individual can make to a Roth IRA in 2020 and remains the same in 2021. Those who are 50 years old and up can contribute up to $7,000

• Roth 401(k)

1. 1. 1. 1. Now a Roth 401 (k) is an employer-sponsored investment savings account that is funded with after-tax dollars up to the plan’s contribution limit. This type of investment account is good for people who think they will be in a higher tax bracket in retirement than they are now because withdrawals will be tax-free. By contrast, the traditional 401 (k) plan is funded with pretax money, which results in a tax on future withdrawals which is why traditional is referred to as a tax-deferred account. Think of a Roth 401 (k) as a hybrid retirement savings vehicle that combines the best features of a traditional 401 (k) and a Roth IRA. The contributions made by you the employee are made using after-tax dollars with no income limitations to prevent you from contributing.

Example: Suppose you earn $4,000 per month and have set aside 5% as a Roth 401 (k) contribution. Then $200 is deducted from your salary each month after tax withholdings. This is as opposed to a traditional 401 (k) contribution, which is deducted from pretax dollars.

So what are the benefits?

The benefits of a Roth 401 (k) as I’ve mentioned before have the most impact on those who are currently in a low tax bracket who anticipate moving into a higher tax bracket in the future. The reason for this being is because the contributions are taxed now at a lower tax rate and distributions are tax-free when the individual is in a higher tax bracket. The younger you are, the more time for the account to grow tax-free before retirement, and, thus, to benefit more from the fact that distributions of not just contributions but also earnings are not taxed.

Roth 401 (k) vs. Traditional 401 (k)

The main difference between a Roth 401 (k) and a traditional 401 (k) is the taxation of funding and distributions. When a traditional 401 (k) is funded, the contribution is deducted from the employee’s pretax income. Alternatively, contributions made to a Roth 401 (k) are made after taxes are already taken out. A Roth 401 (k) would be less beneficial if you expect to drop tax brackets, like someone who is already close to retirement who expects a drop in their income. So if you’re a younger person and your employer offers you the option between a Roth 401k and a traditional one it’d be wise to choose the Roth 401k if your salary is relatively low now but is likely to rise substantially over time. 

Conclusion:

No one can predict what tax rates will be decades from now, neither type of 401 (k) is a sure thing. For that reason, many financial advisors suggest that people hedge their bets putting some of their money into each. Also, Some open or convert to Roth IRAs because they fear an increase in taxes in the future, and this account allows them to lock in the current tax rates on the balance of their conversions. Executives and other highly compensated employees who are able to contribute to a Roth retirement plan through their employers [for example, a Roth 401(k)] can also roll these plans into Roth IRAs with no tax consequence and then escape having to take mandatory minimum distributions when they turn 72. So in conclusion, since most retirement plans are tax-deferred or otherwise tax-advantaged. A discussion of the different types of retirement plans requires an understanding of that taxation, along with who establishes and uses each account, the rules of the plan, and ultimately, which type is best for you. 

PART 2: FINANCE FACTS

• Nationwide gambling rakes in more revenue than theme parks, sporting events, cruise ships, and music combined. In total, gambling accounts for roughly $35 billion each and every single year!
•  Of all the currency in the world, roughly eight percent of it is actual physical money. The other 92% of money only exists digitally, which makes a lot of sense considering how often people shop online or by using a credit card
• Over time, rats are said to have consumed nearly $10 billion of famed drug lord Pablo Escobar’s cash. Apparently, he had so much extra money lying around his warehouses that he lost approximately $1 billion a year to the rodents.
• The largest counterfeiter of U.S. currency in North Korea. In fact, it’s practically mastered the art of creating fake $50s and $100s. Also known as “superdollars,” these bills are typically only able to be identified by machines at the Federal Reserve. Since 2009,  they’ve collected roughly $45 million worth of counterfeits.

• Lastly, there are numerous tax-advantaged accounts. I only covered the most popular types of retirement accounts in this two-part episode. If any of the accounts I went over interest you whether it’s Traditional or Roth make sure to either seek a financial advisor, ask your employer for more info or do your own thorough research so that you can start saving towards retirement with an option that best suits your needs.