Here’s how much money you can save on taxes with a Roth 401k

Tax advantage of 401k

Choosing which kind of account to invest in is one of the biggest confusions I see with investing. Some investors think they can ONLY invest in tax advantaged accounts (like IRAs or 401ks). That’s not true! You can always invest an UNLIMITED amount of money in a regular brokerage account. On the flip side, some other investors are AFRAID of the tax advantaged accounts because they fear it will lock up their money that they need so they only invest in a regular brokerage account!

While there ARE some rules about accessing the money in tax advantaged accounts before you’re 59.5, it’s almost always a good idea to take advantage of those tax breaks. In this example, that tax break added up to over a HALF MILLION DOLLARS. There aren’t many other simple decisions in your life that will have that kind of financial impact.

One other issue I see is investors who have a large amount of cash or investments in savings or brokerage accounts, but who aren’t maxing out their 401k or IRAs. For example, if you make $60K/year and have $100K in a taxable brokerage account, it would make sense for you to max out your 401k for all $20,500 EVEN if that means you can’t afford to live on your salary. Instead, you can supplement your salary by withdrawing from your brokerage account. That has the net impact of essentially transferring those dollars from the taxable account to the tax sheltered account. It may not FEEL good because it looks like your take home pay went down, but you’ll pay less tax and be more rich in the long run.

All that said, these are more fine tuning tips. Even Meghan in this example ends up a multi-millionaire. So don’t let perfect be the enemy of good. Spend less than you make and invest the difference and you’ll be in great shape 🙂

As always, reminding you to build wealth by following the two PFC rules: 1.) Don’t invade sovereign democratic nations and 2.) Don’t succumb to hateful propaganda.

-Jeremy

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Jeremy Circle

Hi, I’m Jeremy! I retired at 36 and currently have a net worth of over $4 million. 

Personal Finance Club is here to give simple, unbiased information on how to win with money and become a multi-millionaire!

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