The Personal Finance Podcast - Roth 401(K) Vs Traditional 401(K): Which Should You Consider Based on Income!

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Starting point is 00:00:54 BetMGM operates pursuant to an operating agreement with Eye Gaming Ontario. What's up everybody and welcome to the person. finance podcast. I'm your host, Andrew, founder of mastermoney.com. And today on the personal finance podcast, we are going to do another episode of Money Q&A. If you have any questions that you want to ask us, hit us up on Instagram or TikTok at Master Money Co. And follow us on Spotify, Apple Podcast, or whatever podcast player you love listening to this podcast to. If you want to How about the show, leave a five-star rating and review on Apple Podcast? Now, today, we're going to be talking about if you were in a high income, should you invest

Starting point is 00:01:44 in a traditional 401K or a Roth 401K? In addition, we're going to be answering the question, should you get a real estate license if you're interested in investing in real estate? And then lastly, we're going to be answering the question, if something is not available to you within the stairway to wealth, what should you do next? What should you do if you don't have something available to you like having a 401k match? So that's going to be our episode today. If you guys are interested in that, then let's get into it.

Starting point is 00:02:14 My tax advisor recommended doing traditional instead of Roth 401K because my income is too high. Can you give me your thoughts on this? So I have a bunch of thoughts on this. And when you're trying to figure out which retirement account that you want to invest your hard-earned dollars in, the key is you got to figure out what your tax bracket is. Now, if you don't know your tax bracket, look at your last year's tax return or talk to your accountant

Starting point is 00:02:40 and figure out exactly where your tax bracket lies. Because your tax bracket is actually very important when it comes to figuring out what to invest in, specifically when it comes to retirement accounts. Now, this is something that we're going to be talking a lot more about on this podcast and in our YouTube videos as well because it is so incredibly important for you to understand exactly

Starting point is 00:03:01 where your tax bracket lies. So make sure you're talking to your accountant, make sure you're looking at the IRS rules and seeing where is my actual tax bracket? Now, when you're thinking about doing a Roth 401K or a traditional 401K, the first thing to consider, and this is the way to weed it out right away

Starting point is 00:03:16 if you're thinking about this, is if you are in a 30% tax bracket, then you need to go ahead and look at doing a traditional IRA or a traditional 401K. The reason for this is you are foregoing the taxes that you have right now, I mean, you're a very high earner.

Starting point is 00:03:32 So when you're a high earner, you want to not have to pay taxes right now because most likely you're going to be paying less taxes later on in life. Now, if you own multiple businesses and you think you're going to be making more and more money over time, then maybe you would want to consider doing the Roth. But for most folks, I would consider doing the traditional 401K

Starting point is 00:03:50 if you're above a 30% tax bracket for that reason, because what you're doing is you're deferring those taxes for a later date. So you don't have to pay the high taxes what you're making right now. you can defer those taxes to a later date. Now, this is incredibly important. So if you think you're going to make less money over time

Starting point is 00:04:08 or you think you're going to make less money in retirement, then definitely defer those taxes and look and consider doing a traditional 401K instead of doing the Roth 401K because the reason why you want to do the Roth 401K is going to be paying your taxes now and the money grows tax-free and you can pull the money out tax-free.

Starting point is 00:04:26 But the traditional, you defer those taxes to a later date. So that's the key difference between the two. If you don't understand the difference between the two, the traditional 401k, you don't pay taxes on the money that you put into the 401k, the money grows, and then when you pull the money out, you pay the taxes at that time. And in the Roth, you put money in and your tax on that money that you put in, the money grows tax free and you can pull the money out tax free. That's why for the majority of people, the majority of your income inside of these retirement accounts, if you're maxing them out, is going to be the growth if you have a long time horizon. So if you have a shorter time horizon, you can consider the traditional,

Starting point is 00:05:03 but if you have a longer time horizon, then definitely consider the Roth as well, because the majority of that growth is going to be inside of that Roth. The other reason to consider a traditional is if you plan to convert an IRA to the Roth IRA. So if you want to do the backdoor Roth, then you want to have a traditional IRA as well, because when you're putting those dollars into that traditional IRA, then you can convert it to the backdoor Roth IRA later or if you want to do the mega backdoor Roth IRA which we will be doing a podcast on and a YouTube video on as well here in the near future if you want to be doing that mega backdoor Roth IRA then you also want to be looking at the regular or traditional 401k now when should

Starting point is 00:05:41 you consider the Roth 401k if you expect to go to a higher income when you retire then you want to consider the Roth 401k because you're going to put money in you're going to be tax at the time you put that money in your money's going to grow tax free and then you can pull the money out tax free. So if you think you're going to make a lot more money over time and in retirement, you think you're going to make a ton of money, maybe you're investing in a ton of rental properties and your income is going to be increasing over time as you hit that snowball of rental properties. That would be an instance where you would potentially want to consider the Roth. Or if you want to invest in real estate inside of your IRA, then you may want to consider the Roth

Starting point is 00:06:14 as well. Now another consideration is if you think there's going to be legislative changes over time and you think taxes are going to increase over time by the time you hit retirement, maybe you're 30 years away and you think taxes are going to increase dramatically, then that's another reason that you may want to consider doing the Roth IRA. Or if you're very young and you expect your income to increase dramatically over time, then you want to consider the Roth IRA because you're paying taxes now and saving on taxes later. And then another reason is if you're getting closer to retirement and you want to minimize those taxes on Social Security, and that would be another reason to start contributing to a Roth if you have not as well. And you also have that

Starting point is 00:06:52 additional catch-up contribution that you could be utilizing with that Roth. So if you want to reduce your taxes on your Social Security as you approach retirement age, then there'd be another reason to consider the Roth. So if you're a high earner and you're making within that 30% tax bracket, then I would definitely consider the traditional and so the Roth. We talk about the Roth all the time on this podcast and on this YouTube channel. So you want to make sure that you're considering your tax bracket when you're thinking about this. Now, most people are phased out of the Roth when they start to hit that tax bracket.

Starting point is 00:07:21 so it actually works hand in hand. So you should be fine. But for the raw 401K, the income limits are a little bit different. So you want to make sure you understand where your tax bracket lies so that you can make the best decision and maximize the amount of money

Starting point is 00:07:33 that grows within those retirement accounts. The next one, should I get a real estate license if I'm interested in investing in real estate? So as we've started to talk about real estate more on this podcast and people have found out that I actually have a real estate license to invest in real estate. that's the only reason why I have a real estate license is to invest in real estate.

Starting point is 00:07:54 I'm getting this question a lot as well. And I have a number of thoughts on this. So when you go out and get your real estate license, there's a couple of things that you want to be considering. And we're going to go through the pros and cons here in a second. But one of which is you want to consider how much time that you have. Because going out and getting a license

Starting point is 00:08:11 and maintaining that license does take time. Now, I can tell you that it has helped me tremendously in my real estate investing career. There's a number of reasons why, but it saved me over six figures just by having that real estate license. Now, I've bought and sold a lot of real estate and invested in a lot of real estate.

Starting point is 00:08:27 So that's part of the reason. My volume is much higher than the average person. But if you're someone who is looking at investing in real estate, then it is definitely beneficial, at least for me. Now, as you scale up and as you start to buy a lot more, it's not going to be as beneficial. And as you go to different states, it's not going to translate in a lot of other states.

Starting point is 00:08:43 So it's only going to work if you're in your home state. Now, there are a couple of caveats and laws where some states will accept your license. But for the most, most part, you don't want to be dealing with a license outside of your state unless you actually know what you're doing. Now, first, I'm going to give you the pros on why I actually like having the license for real estate investing purposes. The first one is it allows you to make offers in high volume, meaning you can make a lot more offers if you have your license because what happens is when

Starting point is 00:09:09 you invest in real estate like we've talked about before, you're going to have to make a lot of offers out there. Volume in offers is what really matters. And making a lot of offers is what's going to allow you to get properties. I've made over 100 offers before I actually get one property, especially now when the market is really hot, there is not a lot of good deals out there. So you're going to have to offer what the property is worth, not what they're asking. So a lot of times you're going to offend people. There's going to be a lot of things that happen. And an agent doesn't want to do that. It's a complete waste of time for a real estate agent to have to make 100 offers before they get one. That is going to take them well over 100 hours just to get one offer accepted. So what you want to do

Starting point is 00:09:47 is start to make a high volume of offers. And since that is my overall strategy, that was the first reason why I decided to get my license. The second reason was I was having a hard time getting agents to meet me at properties when I needed to see those properties, which was right away. Because as you know, properties on the market fly off the market.

Starting point is 00:10:05 If you can't get an agent at that property within a couple of hours when it goes on market, then you have a problem. So having my license allows me to access properties whenever I want to, obviously checking in with the seller's agent first, but I can actually access properties immediately once I see those properties. Now, this is a major key and a major benefit in real estate.

Starting point is 00:10:25 So if you're close by to your properties and you're investing in your local area, this is something you definitely want to consider as well because it's definitely a huge benefit when it comes to investing in real estate. The third thing is you don't have to rely on another aging. It's your own wheelpower. It's you doing everything within that framework. You're searching for the properties. You're looking on the MLS.

Starting point is 00:10:42 You're finding those properties. Then you're going to see those properties. You're allowing yourself access to those properties. properties, then once you get into those properties, you can make offers on those properties as well, and you could do all the negotiations with the agents. So this is something where you have everything within your control and everything within your power, which is great within real estate investing. Another great benefit to having a license is you can always use it as a backup income or a side hustle. Say, for example, you lost your job. Well, at least you're going to have

Starting point is 00:11:09 that license in place where you can go out and actually work as an agent until you find another job, maybe make a little extra side income. In addition, you can also work weekends as an because that's actually the best time to work as an agent if you want to make extra income as well. Now, it's a little more difficult when the market is super, super hot when there's not a high inventory because there's just not a high inventory so it's harder to find properties to actually work. But if you're diligent in this, you can definitely make this a side hustle. Specifically, if you sit open houses for other agents or do something along those lines, you're going to find buyers who are going to want to buy properties. It just takes that extra work in sitting in those

Starting point is 00:11:44 properties to make sure that you actually find those buyers as well. But you can definitely make a side hustle about it. And we'll do an episode on that talking about how you can actually make being an agent a side hustle because it's something that's very interesting. And I have a very specific strategy on how you can do that. Another pro is that you save half of the commission when you sell your properties or your own personal residence. So we've sold a number of properties within my company. And in addition, with my personal residences. And each time you typically have to pay an agent two to three percent well within that range just to sell your property. And you have to pay the buyer's agent, two to three percent, whatever you agree upon.

Starting point is 00:12:17 And when you do that, saving three percent on a few hundred thousand dollars is a massive number. So every time you sell a property, you can save that money by selling it yourself. The only fees that you have to pay is towards your brokers or whatever other agreements you have along those lines. And then lastly, you make money every single time you buy a house. Now, you can use this in two ways. You can use it as a negotiation tool, meaning lowering the cost that you're buying into the property so you can actually get the property.

Starting point is 00:12:42 Or in addition, you can use it as a, negotiation tool with the other agent saying, hey, if you can get my deal through, I'll give you my entire commission barring that you get my offer accepted. In addition, you can also keep the money. So you can get 3%, 2 to 3%, whatever the contract is of each property that you buy, which is money that you can either put back in the property or pocket yourself or keeping an emergency fund for that property. Whatever you want to do, you can utilize that money in any which way you want to. Now, I've done that a million times before and I've used that for upgrades in the property so that I can get my rental properties almost free when I do some of the upgrades

Starting point is 00:13:17 on those rental properties. So it's a great tool to have at your disposal if you're buying properties and you want to save some money on the buying side. Now some of the cons are. If you're not doing this full time, if you're not an agent full time, like I'm not an agent obviously full time, what I do is I just use it to buy and sell real estate. So if you're not doing it full time, it's going to cost you some money each and every year. I found a low cost brokerage, which I will talk about here in a second. So my cost. are a little lower than most people. But here's some costs, for example. Just to be a member of the Relator Association, which you have to be in my state, to be an agent, that's about $600 a year.

Starting point is 00:13:51 Then you have to have an MLS membership or a multiple listing services membership, which is where you see properties. And that's where Zillow and Realtor.com and all those other companies, they actually pull from the MLS and get their listings from there. So you may see listings slightly early, but it's all pretty much at the same time. To have that license, which you have to have to be an agent in my state, that's another $400 a year. So right there, you're looking at about $1,000 a year. Then you have your broker. So your broker can make or break the costs on this because what you're looking at when you have your broker is some brokerages will take 30, 40, 40, 50% of your commission every time you make a commission. The one I have,

Starting point is 00:14:26 they charge a monthly rate and then take a flat fee of $250 every single transaction. So the monthly rate is actually comes out quarterly to about $110. So their business plan is to have a volume of agents. So they have thousands of agents who just want this low cost and it's absolutely perfect for me. Reason why is they don't bother me. They don't call me. They don't make me follow up on leads. They don't do anything. I haven't talked to anybody inside of that office in about a year. So understanding that if you can find a brokerage that's a standoff brokerage, that they're looking for a volume of agents, they don't need you to chase down leads. They don't need you to go look at open houses. They don't need you to do all these other things. That is what is perfect

Starting point is 00:15:02 for someone who is doing this just to invest in real estate. You don't want anybody bothering you. You don't want anybody getting involved in your business. You just want them to facilitate the transaction you as the broker. So you have to have a brokerage that you hang your license under. So finding a very low cost brokerage, and they have them across the country, but finding a low cost brokerage, unless you actually want to be a legit agent, then looking at those low cost brokeres are awesome. So avoiding things like remax or Codwell banker, all of those types of companies, they're going to take a percentage of your commissions every single time. So making sure that if you don't want that, if you're just looking to do it to invest in real estate, then you find a lower cost

Starting point is 00:15:41 brokerage. Now another con to being an agent is it's not super effective if you want to scale a massive portfolio. If you're buying a ton of buildings at once, over time it's not going to work. But it's still nice to have. If you're going to find the one-off single family house that you want to buy or you're going to flip properties as well, then it's still nice to have that on the side. But it's not going to work if you really want to scale because you're going to want to have a full-time agent looking for you and helping you out with that process as it gets more complicated. And then the other con, like we talked about is the time to get the license. In my state, It's about 63 hours.

Starting point is 00:16:10 I'm in the state of Florida. It's about 63 hours that you have to go through the process of the license. Then you have to study for the test and get ready for that test. So it will take you the better of about a month just to prepare for it and memorize what's going on so you can actually take the test and pass the test. The test isn't that difficult if you study, but just making sure that you understand what is going on if this is all very new to you is something where you're going to have to take some time

Starting point is 00:16:33 to study that as well. So that is my advice when it comes to getting your license, investing in real estate. Like I said, it's very beneficial if you're going to be buying properties. You know you're going to be buying properties and you're going to be buying a couple a year, then you can definitely get your license and it's going to help you out a lot. But it's not something that is absolutely necessary to invest in real estate. But would I personally do it again? I absolutely would. I think it's been beneficial for me. And I think it's something that's really helped my business and help me get properties faster, make a higher volume of offers and make

Starting point is 00:17:02 a lot more money doing it as well. In addition, one other perk that I didn't talk about was that when friends and family find that you have your license, you can actually help them out buy and sell properties. And one year, I made an additional 50 to 6, almost 60 grand just by doing that, just by having my license in place and friends and family asking me to help them out. Now, I give them as much of a discount as I'm legally allowed to, but at the same time, you can still make some good money just helping out friends and family buy and sell real estate as well. And you can use your knowledge. And if you become a savvy investor, you can use that investor knowledge as well and say, hey, you may be able to rent out this property later on if you buy this property.

Starting point is 00:17:38 And that may be one of your exit strategies if you're interested in real estate as well. So finding an agent that will help you in real estate if you don't have your license is something that you definitely want to do. You want to have an agent who knows what they're doing. And if you can't find that in your area, then that would be another great reason to get your license. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy. Clothes don't fit anymore and routines are changing.

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Starting point is 00:20:54 Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. I'm a government employee, so I have a 457. We do not get the employer match. How would you apply this to the rules of the stairway to wealth? So this is a fantastic question. Because the stairway to wealth, the way that it works, is step two is to get your 401k match or the equivalent.

Starting point is 00:21:16 So if you have a 403B or anything along those lines, you want to try to get that match if that match is offered to you. The reason why is this is absolutely free money. Getting that employer match is free money. So you always want to get that up front. But if that match is not available to you, and when it comes to anything within the stairway to wealth, if it's not available to you, then what you want to do is just jump to the next step.

Starting point is 00:21:37 So the next step in this situation would be going to high interest debt and paying down your high interest debt. The reason why we put the match before high interest debt is because your 401k match is 100% return. Then paying off that high interest debt, anything above 5, 6%, is definitely something you want to consider paying down so that you can get rid of those high interest debt. and start really building wealth over time. Now, if it's low interest debt below 5%,

Starting point is 00:22:01 maybe it's your mortgage or something along those lines, then you don't have to pay off the low interest debt. We're just looking at high interest debt here. Now, if you don't have high interest debt, the thing you'd want to do next is jump to the next step, which is to build up your emergency fund. And building up that emergency fund, making sure you have that three to six months expenses

Starting point is 00:22:17 is also incredibly important. But if you're looking at it from the investors level, say you want to get the 401k match, you already got your emergency fund in place, you already have your high interest debt paid off, then you want to jump to the next level, which is the Roth or the HSA level. Now, we have the Roth and the HSA level where it is definitely something you want to consider investing in because this is going to make you hit your minimum investment goals.

Starting point is 00:22:39 Now, we talk about minimum investment goals as something is the baseline that you want to actually hit some of your goals so that you can retire with at least at a minimum the amount that you want to retire with where you can live comfortably. Then after that, you do some wealth accelerators and some wealth builders at well, which we could talk about. And if you haven't heard the stairway of wealth episode, I would definitely check that out because that is the order to put your money in. It's the order we talk about to put your dollars in so that you aren't second guessing yourself,

Starting point is 00:23:07 like, what do I new next with my next dollar? Should I build up my emergency fund? Should I pay off debt? Should I invest in a Roth IRA? Should I invest in my 401K? Should I rest in real estate? All these different things, the stairway to wealth actually lays that out in the exact order. So if something's not available to you, like in this example, the 457 does not have

Starting point is 00:23:26 have a match, then you just jump to the next step and you always want to jump to that next step if something's not available to you. Now, we're going to be continually adding things to the stairway to wealth. A couple of things that we have in mind is we want to add some wealth accelerators in there like when should you invest in real estate. When should you buy your first house if you're interested in buying a house for you and your family? We're going to add some of those things to the stairway to wealth as well. And each year we're going to be adding to it as your questions come up. So if you have some questions and you think something is missing within the stairway to wealth, make sure you let me know.

Starting point is 00:23:57 Hit me up on Instagram at Master Money Co or hit me up on TikTok at Master Money Co. And let me know, hey, I don't know where this fits into the stairway to wealth. Can you let me know? We'll add it in there if it's something that we need to make fit. And in addition, we'll also answer your question on those platforms as well. So making sure that you check in with that because we want to make the stairway to wealth as we possibly can. And as we get closer to making it complete, we're going to release courses and things like that

Starting point is 00:24:22 on the stairway to wealth to do extreme deep dives on each step. for you guys so that you have that available to you, you have that information available to you, because the stairway to wealth is one of the most important things that we've released because we want you to know the order to put your money. It's the roadmap to follow so that you know where do I put my next dollar and what do I do next. So we love the stairway to wealth here at Master Money in the Personal Finance podcast. So make sure if you haven't heard that episode, it's one of the most important episodes for you to check out. And we will link it down below as well so that if you haven't heard that episode, you can check that out as well. And the

Starting point is 00:24:57 printable is also, we have a downloadable printable where you can read about the stairway to wealth in the show notes and down below as well. Thank you guys so much for listening to this episode of Money Q&A. If you guys have any questions, make sure you hit us up on Instagram or TikTok at Master MoneyCo and we'll be sure to answer those questions as well. And if you want to have your questions answered on the show, make sure you let us. me know, hey, will you throw this up on money Q&A, and we'll see if we have room to add it on money Q&A as well? Thank you guys so much for listening to this episode, and we will see you on the next episode.

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The Personal Finance Podcast - Roth 401(K) Vs Traditional 401(K): Which Should You Consider Based on Income!

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