Ep 111: The Essence of Prosperity: The Ins and Outs of 401Ks and IRAs

Welcome to the Thank Generation of Wealth Podcast. This is the personal finance podcast for the black community. I am your host, amir Estebo. Thank Generation of Wealth was created to empower the culture, to thank wealth, assets and prosperity for future generations. If you are someone who is inspired to lead a legacy and needs actionable steps and I do not know what to do with it this is the podcast we use. Join me every week as we discuss various topics from personal finance, building assets and mindset. Our goal is to leave the planet better than how we found it by enriching our future generations with the right tools for success. Thanks for joining us on this journey. Welcome to the Thank Generation of Wealth Podcast, and this is episode number 11. I am your host, amir Estebo. Today. We have a great show for you today, actually even a short episode. Today we're going to talk about the difference between 4141K and IRA. So if any big guys who don't invest and the reason I want to record this episode today is basically for anybody that finds investing hard investing is not hard Now, it is intimidating. I can say that for a fact. But even if you were to just put something away, just start with something, whether it's just investing in a small stock or also just investing in your 401K or even an IRA that can probably set you off for when you are older and you're older years. So today's episode again it's going to be a short episode we're going to highlight the differences between the 401K, 401k and the IRA. So let's start with the 401K. The 401K is basically is an employer sponsored program. So if you have a JLB, a job, generally your employer would offer a 401K. So the 401K is basically this was actually just to kind of give a brief history of it is it began in 1978 when Congress passed the Revenue Act of 1978. Now the 401K was not, this was not a time to be a source of retirement, because at the time people have pensions. But, as we can see, as years have gone, what have we seen? We've seen that now the 401K has now replaced the pension. So now companies are not even offering pension like they used to anymore. So which means you have retire with a company after working a certain amount of years. They would give you a pension when you retire, so basically a small stipend to basically take care of you until you pass away. But now, as you can see, d410k has now basically has now took over. Now this is what companies are now using. They don't even use a pension, no more. So the 410K basically again, is a company sponsored program. So the company, if you have a JLB, the company will provide this to you. What it does to is if you in general, the company will match whatever you put in. So let's say, for example, if you have a salary of, let's say, you put in 3% in your 401K, the company will put 3%. So basically you would get 6%. Now there's some companies you do work for that will require you to put in a certain percentage. So they won't match if it's under, let's say, 5%. But there is companies that if you put in 3%, if you put in 3%, they'll match you 3% and then basically you would get 6% about the end of the year. Okay, so keep that in mind. Now you have two different types of 401K. You have the pre 401K and you have the raw 401K. So the amount of difference between the two is the pre is you pay taxes later. So that means if you think that you're going to be in a higher tax bracket, you would save on taxes right now, but you will pay for your taxes later. But what you have to keep in mind. The reason why the pre 401K could be may not be as intangible to you is because as you get older, you want to be able. You're probably going to be in a lower tax bracket in your older years, in your retirement years. So you're not probably not going to have the working power to work like you used to, right? So it would probably be best. Before I get more into this, I like to put a disclaimer. I am not a financial advisor. I would suggest you meet with someone who can be able to guide you through your investment. So this is only for educational purposes, right? So now, the pre 401K is you pay taxes later, and that's if you think you're going to be in a higher tax bracket in your later years. So, also, that means that they take taxes before. So when you get paid for your job, taxes are taken out and you're falling, okay, before the government takes taxes out, okay, so you paid taxes beforehand, not after you. Okay, now again. So if you think you're going to be in a higher tax bracket, this will probably work for you. Now there is contribution limits. So contribution limits for a year 2023 is 22,500. If you're under the age of 50, but if you're over the age of 50, it is $30,000. So that means you can only put a certain amount. So, for example, if you were to make 100,000, let's just say you made 100,000, then you put 22,500, you're full on K. Not sure these? I think the exact math would probably be what if you do 100,000 and 20. So you probably have what? 77,500. My math may be off, but 77,500. So that will be your taxable income. So the reason you would want to contribute to your full on K is, if you're someone, that when you're an employee you do not have many tax advantages. So one of these is the 401k. That helps because it helps reduce your taxable income. So what the government can tax you on, or the IRS at the end of the year, okay, so keep that in mind. Now, the raw 401k is you pay taxes now. So what it is is that let's you can contribute to the raw 401k after, after taxes. So once the government takes their taxes and they hand you your net pay, you contribute to the 401k. Okay, proff, this works is right now. You're paying taxes now versus later. So that means they're wrong because it's already, the money's already been taxed and then the money can go tax free, interest wise. You don't pay any taxes later because you cannot pay taxes twice. Okay, so this works. If you're younger, if you're someone who's of working age you have a lot of working death right now or power right now you can say this would work for you is if you are someone who prefers to pay taxes now, then later, Okay. But the thing about the Roth 401k is you actually pay or contribute a little bit more. Money is because, again, you're paying the taxes now versus later. So whatever you contribute to the Roth 401k is you're going to pay a little bit, you're going to contribute a little bit more. So, like if you were to do 3%, let's say the pre-full 401k, and then 3% Roth is going to be a little bit higher, okay. So that works for someone. Again, if you're looking to pay taxes, you rather just pay your taxes now versus later, because obviously, when we're older, we are probably not going to have the strength or we're not going to be able to. We're not going to be able to not only just the strength, but we're not going to be able to work as much as we did in the past. Right, okay, so that's the 401k. So now that's the pros. The cons of the 401k is, whatever you contribute, you don't have really a say so in your investment. So you have someone who's managing basically the 401k, who's putting in your money and whatever, whatever funds, whatever stocks, so you really don't have a say so. The other thing, too, is, if you take money out before the age of 59 and a half, you are actually going to be taxed. Not only will you pay your federal tax, but you also pay the pre-tax penalty. So this was attended because the government realized we as people were such consumers by the time we're retiring, we don't have nothing to show for it. So the reason the government do this is they say, okay, you guys obviously are not responsible enough. So we're going to have this, we're going to create this thing called 401k and what's going to do is you're going to take some of your money, whatever you work at, take some of that money and put it on the side for you. Okay. So that is the reason why because the government just don't trust us and therefore that is why this is around. Okay, so now, when you again you pay the pre-tax penalty, you don't really have an option. So you have to think of it as do you pay taxes on the seed or the harvest. That's kind of where you want to be when it comes to a 401k, okay. So again, if you're someone who doesn't have many tax advantages, you have a job. I know times are hard right now, so people probably are starting to cut down on what they're contributing to their 401k because they need the money. But if you're someone who don't have many tax advantages, this works for you is because this will actually help lower your taxable income. So, again, if you contribute 10,000 in the year, what is that 10,000, let's say you made 100,000, that's 90,000. So that becomes your taxable income. If you want to be able to lower your taxable income as much as you can because if you don't have a job, you have a job. If you don't have a business, you get taxed more versus if you did Okay, so that's the 401k. Now let's talk about the IRA. The IRA is called the individual retirement account. So what the IRA is is that is, if you're so, this is, you can actually invest this on your own. There's certain platforms Fidelity, td, ameritrade I think Robinhood even does that. Now is they offer IRAs, and now, generally with an IRA, though, there is no matching. So again, that is, you are controlling this investment yourself. So, for example, I have an IRA with Fidelity and in that IRA you can have stocks, you can have mutual fund ETFs. The IRA is basically just a shell and whatever in it is basically what you can invest. So, whatever you contribute, you can take that money and invest in. You can make, pick your own investments. Considering the fact that, versus the 401k, what you want to keep in mind is that you don't pick your investments on a 401k. Okay. So in the IRA you do 401k, you don't. Now, the contribution limits for 2023 in the IRA is 6,500. But if you're the over the age of 50, you pay 7,500. Just like before on a K, you will pay penalties on the IRA if you withdraw that money before the age of 50 by an a half. Okay. So it's not just because you, just because, let's say, for example, you wanted to, you think that, oh, you know 401k, I contribute money and you know pay. The same thing with the IRS. I mean, I got it with the IRA. Same thing. Roth IRA in the, in the pre tax for IRA is the same thing. Basically is you pay taxes now. You pay taxes later. What's what's powerful about the Roth IRA is the fact that if you were to contribute as you, let's say, everything in your Max fund, that IRA account right, and let's say that's probably the next two years that money grows right, that money grows tax free. So when you're in your older years, you don't pay any taxes on this Roth IRA. Okay, this is a lot. Yeah, you got the Roth 401k. You know that switches. So you probably you probably see me struggling with this, with the the. You're probably seeing me struggling with this because it's all this tongue twisting thing going on. Well, anyways, yeah, so the Roth, I would say probably. In my opinion, between, let's say, all these investments, the Roth IRA is probably the most powerful one. So what you have to understand, though, folks, when it comes to investing, is you have to be very disciplined. You cannot be someone who's going to invest in these and actually, could you have both? Yes, you could have both, considering the fact that, let's say again, if you're someone who don't have a business, let's say you were to contribute 22,500, and your 401k, and then you contribute, you can contribute 6500 in your IRA. Guess what? Now, that is what, 29,000. So if you're someone who makes 100,000 a year, 29,000, you might as that was that giving you 71,000. So now your taxable income is $71,000. Okay, so keep those two in mind. I just wanted to share that and go over that with you, because I know there's a lot of people who's out there who listen to this podcast who's intimidated when it comes to investing. I was sometimes, I'm still there, I'm still trying to figure this out, just as much as you are. So let's just say you're not the only one in this boat. But, however, sometimes we don't know about these things. We don't think about these things because the fact that you know right now, in today's society, with inflation and everything going up, and then now you're hearing about all these BRICs, you know BRICs start where, what the how does that affect the US if they, if they drop the dollar, right? So does how does inflation go up? What is the plan? Right? So you have to start thinking about these things because we don't know about these things. And let me tell you something Anybody who listened to this podcast, I know the intro. The intro now is I said this podcast is created for community, right? But also I want to talk to a certain demographic people, and I believe that demographic people is our Black. It is Black people, black Americans, and and the reason is is that I feel that we're not as educated when it comes to finances. That's why we're such so behind our counterparts, whether it's Caucasian, whether it's Asian or even Hispanics. We are now behind the eight ball because we are not educated about certain things. When it comes to this, this podcast is for everyone, but the demographic I want to reach to is Black Americans, is Black people, so we can mean being Black myself. I want to be able to share this information out to my Black brothers and sisters because we need to be able to. We got to be able to catch up Because right now, we are far behind. We're not educated when it comes to personal finance. That's why we're probably the few. We're probably the ones that are more in depth than death when it comes to our other other races. So this is the reason I created this podcast so to be able to help and assist us. To help us, because we need more of us with this content. Not content that is trashy, not content that does add no value, but when you're at your job, even if you started off your young, you're starting off at your job. You know these things. You already have an advantage than the previous generation, right? So that's why this podcast is called Things Generation of Wealth. The podcast is called Things, generation of Wealth because we want to be able to think about the next generation. But for us to do that is we got to get educated about these things. 401k, life insurance, ira these are things that we just don't take seriously. You see that people go out and buy Louis Vuitton and Gucci, spend money on that, but won't even put some money into their 401K or even an IRA, won't even open that up. So again, this podcast is created for y'all and I just want to. Again, I'm not here, I don't want to offend anybody or anything like that. I just want to be able to help and educate our people because we are behind. We are very lacking. So again, thank you for tuning into this podcast episode. Hopefully you found value in this episode and share it with someone. Again, I love this podcast. We're short today. I intended it to be. Again, appreciate the love. Talk to you next week, peace. Thank you for listening to the Things Generation of Wealth podcast. If you enjoy this podcast, here's three ways you can help the podcast world. One, subscribe to the podcast where you get your content. Two, leave a rating and review the podcast again wherever you get your content so others can find it. And three, share this content with someone that you think will find this a value. Thank you for listening again to Things. Generation of Wealth podcast. Peace and much love.