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Roth IRA vs. Roth 401(k)

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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We’ve said it before, and we’ll say it again: Saving for retirement is one of the most important financial goals you can tackle. One of the best ways to maximize your nest egg is by taking advantage of tax-free interest — and Roth investment accounts allow you to do just that.

Although Roth contributions won’t get you a tax break today, you do get to withdraw the money without paying taxes later. That means you’ll fully benefit from all the growth (compound interest) and keep every cent your money earns while invested.

Depending on your personal financial circumstances, however, you may be better served by either a Roth IRA or a Roth 401(k) — or by skipping the Roth option altogether and investing in a traditional retirement plan instead.

Roth or traditional: which is right for you?

Before we dive into the definition of each of these Roth accounts, let’s back up a step. How do you tell if a Roth or a traditional retirement account is best suited for your personal financial goals?

The difference between a Roth investment account and a traditional account all comes down to timing. You’re going to pay taxes on your contributions either way, but the question is, when?

In a traditional account, your contributions are tax-deductible and don’t count toward your annual income tax in the year they’re made. That means you get a nice tax break today but will pay taxes on your withdrawals as you make them later. And since the invested funds grow, that means you’ll also pay taxes on your earnings.

In a Roth account, on the other hand, your contributions are taxed now, but you get to withdraw the money tax-free later. That means you’ll get to keep the full amount of the earned through the market growth your investments see over time, which can make for a hefty retirement bonus.

A Roth account can be especially beneficial if you expect to be in a higher tax bracket at the time of your retirement than you are currently. For example, if you’re just starting your career and earning an entry-level salary, it makes more sense to pay the lower tax percentage today so you can skip paying a higher percentage later. Alternatively, higher earners may end up migrating to a lower tax bracket once they’re on a fixed retirement income, which means choosing a traditional, pretax retirement account could make more financial sense. Here’s more information on how to tell which type of retirement account will work best under your individual circumstances.

Roth IRA vs. Roth 401(k): how they compare

Roth IRA vs. Roth 401(k) for 2019

Roth IRA

Roth 401(k)

Income Qualifications

Income limit of $137,000 (single) or $203,000 (married)

No income limit

Contribution Limits

$6,000 limit (or $7,000 including $1,000 catch-up contribution for savers aged 50 or over)

$19,000 in personal income; $56,000 including nonelective or employer contributions ($25,000 and $62,000 including $6,000 catch-up contribution for savers aged 50 and over)

Required Minimum Distributions

No requirement to take distributions during the account holder’s lifetime

Distributions must start no later than age 70 and a half unless the account holder is still working and not a 5% (or more) owner of the sponsor company

Withdrawal Requirements and Terms

Withdrawals of contributions and earnings are not taxed as long as the account has been held for five-plus years and the qualified distributions are made:

  • Because of disability or financial hardship

  • On or after the account holder’s death

  • On or after the account holder’s attainment of age 59 and a half

May also withdraw a qualified distribution for a first-time home purchase

Same withdrawal requirements and terms as a Roth IRA but no specific exception for first-time home purchases (although some plans may allow you to take out a loan against your 401(k) for this and other purposes)

Employer Match Availability

No

Yes

Where to Open Account

Any brokerage firm

Through your employer

What is a Roth IRA?

A Roth IRA is a personal retirement account whose contributions are taxed today but withdrawn tax-free later. For 2019, you can contribute up to $6,000 per year to this type of account, or $7,000 including the $1,000 catch-up contribution for those aged 50 and over.

Roth IRAs carry some specific benefits that Roth 401(k)s do not. For instance, Roth IRAs are not subject to required minimum distributions, or RMDs, which means you can let your money grow indefinitely for as long as you live. Additionally, since you’ve already paid taxes on the money, you can make withdrawals from your Roth IRA contributions at any time without incurring additional taxes or penalties. (The growth you earn, however, would be subject to income tax and a 10% early withdrawal fee if you’re under the age of 59 and a half.)

Roth IRAs have a much lower maximum contribution limit than Roth 401(k)s, and income limits may keep you from participating if you make more than $137,000 per year (or $203,000 per year if you’re married filing jointly). As self-directed retirement accounts, IRAs also are ineligible for the employer match feature that can help make 401(k) plans so profitable.

When a Roth IRA makes sense
A Roth IRA is a good choice if your company doesn’t offer a 401(k) or if the company-sponsored plan leaves something to be desired. Contributions can be withdrawn at any time, causing some people to use a Roth 401(k) as a kind of emergency fund — although this is not an advisable strategy, according to Malik S. Lee, a certified financial planner with Felton & Peel Wealth Management in Atlanta.

Taking money out of your account means you’ll lose out on the benefits of compound interest, and since growth is still taxable, your financial paperwork can become a total mess if you don’t maintain proper records of your contributions.

What is a Roth 401(k)?

A Roth 401(k) is a company-sponsored retirement plan that allows you to make tax-free withdrawals on post-tax contributions. It’s a good idea to take advantage of company-sponsored Roth 401(k)s, especially if your employer matches your contributions. Even a 1% match means you’re earning free money toward your retirement at no additional cost to you.

Roth 401(k)s provide the opportunity to maximize your retirement fund with employer match programs and other nonelective deferrals. You can participate in your company’s Roth 401(k) no matter how much money you earn per year — which isn’t an option with Roth IRAs, as they do have an income threshold.

When a Roth 401(k) makes sense
There are some instances where it may make sense to skip your employer’s plan altogether. For instance, if the 401(k) carries a high management fee, it may end up costing you thousands of dollars in the long run. It’s also important to note that all employer match funds on Roth 401(k) contributions will be put into a traditional 401(k) to grow pretax.

Another consideration to keep in mind with a Roth 401(k) is that it may be subject to company- or custodian-specific limitations. For example, your Roth 401(k) may have restrictions on how often you can adjust allocations and contributions, which doesn’t apply to a self-directed account like an IRA.

The bottom line

Both Roth IRAs and Roth 401(k)s can help you take full advantage of compound interest to ensure you have an ample nest egg for retirement.

Depending on your specific financial circumstances and earnings, one account may make more sense than the other. If you’re looking to save aggressively, you might benefit from an investment account with a higher contribution limit, such as a 401(k). If your company doesn’t offer a 401(k), however, a Roth IRA might be your best option.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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Investing

Great Financial Planning Networks for Millennials

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The youngest millennials turn 24 in 2020, and most of this generation has already entered the workforce. Whether it’s to evaluate retirement plans or simply to start budgeting more effectively, many millennials are seeking out the help of a financial advisor.

Financial planning is a great way to improve the health of your personal finances. However, just grabbing the first financial planning professional you come across is not an effective option. You need to take thoughtful, deliberate steps to evaluate your options and choose the right advisor.

Check out our advice for pursuing your own search for a millennial money advisory that measures up to your own expectations. In addition, we’ve provided brief profiles of five financial planners tailored to the unique needs of millennials.

Millennial financial planning: How to find the right advisor

With a variety of financial planning services designed to appeal to their generation, millennial clients should explore their options before choosing an advisor. It’s important to find the person who will be a match for your unique personality and needs. The planner you choose to hire will depend on a variety of criteria, and before you sign on the dotted line, take these five steps to find the right fit.

Look for the CFP designation

When choosing an advisor, check if they’ve received a CFP designation. “This means the person has completed extensive education and experience requirements and are held to high ethical standards,” said Lindsay Martinez, certified financial planner with Xennial Planning in Oceanside, Calif.

CFP professionals have to pass a comprehensive certification that test their abilities to apply financial planning knowledge to real-life situations. The exam covers the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management and insurance, to ensure the planner understands the complexities of the changing financial climate and know how to make recommendations in your best interest.

Get referrals, do background checks

Ask family, friends and professional colleagues if they use a financial planner and if they’re satisfied with their services. While your needs may vary depending on your life situation, it can help to hear about the experiences of others.

Whether your advisor candidates come from referrals or your own search, you should also do a background check on your advisors. The Financial Industry Regulatory Authority (FINRA) is not-for-profit industry group that oversees all entities in the United States that sell securities products. FINRA offers BrokerCheck, a website where you can research the background and experience of securities brokers and dealers.

Another place to find information is through the Securities and Exchange Commission (SEC). As it applies to the public, the mission of the SEC is to protect investors and maintain fair, orderly and efficient markets. The SEC helps you check an advisor’s background with search features on investor.gov.

If the financial planner claims to be a certified financial planner, take the extra step to verify their credentials by checking the CFP website. And you can also check for reviews of financial advisors at the Better Business Bureau.

Schedule a consultation

Don’t underestimate the importance of finding an advisor that fits your personality. An advisor may be smart and savvy, but if you don’t feel like they’re a partner who wants to take time to make sure you understand and feel good about your choices, the relationship could end badly.

Financial planning networks for millennials ditch the suit-and-tie meetings and offer a more relaxed way to interact and share ideas, via phone or web-based consultations.

“Since many planners provide complimentary getting-to-know-you-style consultations, take advantage of the offer to see whether they’re a good fit for you,” said Sarah L. Carlson, certified financial planner and founder of Fulcrum Financial Group in Spokane, Wash. “Do they talk to you or talk down to you? They need to speak in terms you understand.”

Carlson recommends looking for an advisor who has been in the business for at least five years. “Anyone who can pass the tests can come into the business,” she said. “Only advisors who are successful at helping people can stay in the business more than five years.”

Know the right questions to ask an advisor

Millennials should be asking the right questions, said Janice Cackowski, a certified financial planner with Providence Wealth Partners, in Rocky River, Ohio.

Cackowski suggests asking whether an advisor works with other people in your age bracket. Do they have account minimums or a minimum annual fee? How are they paid? Do they offer tax planning?

“In my opinion, [tax planning] is the most important part of planning for young people,” Cackowski said.

Kashif A. Ahmed, president of American Private Wealth in Bedford, Mass., adds two more questions: Is the planner a fiduciary? And can the planner be compensated by being paid for their time and advice instead of being required to purchase a product directly from them?

Advisors who are fiduciaries hold themselves to a standard where they put your financial interests above their own. “If they hesitate or say ‘no’ to either of these, run away,” Ahmed said.

Understand your advisor’s fee structure

Millennials are known to be impervious to sales pitches and are highly cognizant of hidden costs. They want to know exactly how much they’re paying and what they’re getting in return. For this reason, many find that they prefer a fee-only financial service. It’s important to understand the difference between fee-only and fee-based.

“‘Fee-only’ indicates the advisor does not sell products or work on commissions, so there are inherently fewer conflicts of interest,” said Martinez. “These folks have a fiduciary responsibility to act in their client’s best interest.”

Fee-based planners, however, collect money from clients as well as other sources, such as commissions from companies whose products they sell. Both fee-only and fee-based advisors can give a client investment and financial planning; however, the input you receive from a fee-based advisor might be different from a fee-only advisor due to how they get paid. In some cases, this can create a conflict of interest.

5 financial planning options for millennials

From networks to solo practitioners, financial planners designed specifically for millennials are making waves in the marketplace. These five financial planners and planning networks have business models geared to millennials. They offer digital platforms not tied to any one location, no minimum deposits and fee-only services.

XY Planning Network

XY Planning Network The  XY Planning Network includes more than 500 certified financial planners (CFPs) who specialize in financial planning for millennials. Advisors in the XY Planning Network are fee-only, which means they do not accept commissions, referral fees, or kickbacks. There are no minimums required to get started as a client.

These advisors offer comprehensive financial planning help, including debt management, estate, insurance and retirement planning, real estate analysis, and investment advice and management. Advisors are available to work with clients either in person or online.

Garrett Planning Network

Garrett Planning Network Garrett Planning Network is a network of nearly 300 financial planners who check many key boxes for millennials. Members charge for their services by the hour on a fee-only basis. It does not accept commissions, and clients pay only for the time spent working with their adviser.

Members of the Garrett Planning Network requires no income thresholds or investment account minimums to access its hourly services. Garrett Planning Network advisors help clients with cash flow issues, investment management questions, tax preparation, pensions and retirement plans, estate planning, insurance issues and savings opportunities. Members must either already have their CFP designation or agree to become certified within five years. Clients can set up an in-person meeting or work with a member by phone or online.

Millennial Wealth

Millennial Wealth Millennial Wealth is a small fee-only financial advising firm that specializes in planning and investing for millennials by millennials. Planners are not compensated with commissions or kickbacks. Located in Seattle, customers can also meet virtually via meeting software or other technology.

Millennial Wealth doesn’t have account minimums, and it has designed its fee structure to work primarily with young professionals just starting out and wanting to build a solid foundation to achieve financial goals.

Gen Y Planning

Gen Y Planning Gen Y Planning is run by certified financial planner Sophia Bera and specializes in clients in their 20s, 30s and 40s who have high incomes but haven’t had time to do proper financial planning. Gen Y Planning offers help and advice for the life stages millennials are likely facing, such as navigating new jobs, purchasing a first home, getting married and starting a family.

The team works with clients across the country online. Gen Y Planning offers fee-only services, with an up front planning fee followed by a monthly retainer. The CFP also offers a robo-advisor for investment advice as an add on service for 0.70% annual management fee. Gen Y Planning does not require account minimums.

Grow

Grow Grow is a millennial-owned service that focuses on serving other millennials. The company takes a holistic approach by offering solutions that improve its clients’ lives and finances with financial planning, investment management and personal growth coaching.

Grow is a fee-only advisor that receives no commissions. Clients do not have minimum account requirements, and Grow doesn’t charge a fee for managing assets under $10,000; instead the balance is left in cash or market ETFs until increases.

The bottom line on millennial financial planning

When you’re in your 20s or early 30s, long-term goals like retirement or purchasing a new home may feel far off. However, it’s never too soon to start working with a financial planner. When it comes to your money, take your time to find the right person to help you.

“I’ve found the millennials I work with to be hard-working and extremely conscientious about their finances,” Cackowski said. “They want to get set up to save appropriately and make better financial decisions than their parents’ generation.”

Finding a financial planner who can help meet all of your needs and work toward reaching your goals is an investment in yourself and your future. You want to hire someone who is not only knowledgeable; you want a coach and partner you can trust to grow along with you and your account balance.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here

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Thinkorswim Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Thinkorswim is a free trading platform available to TD Ameritrade customers. You must have a TD Ameritrade account to use thinkorswim, which is described as a “professional-level trading platform for serious traders.” It lives up to this promise, providing one of the most feature-rich trading platforms on the market, right up there with Interactive Brokers or TradeStation.

Users get a raft of premium features, including real-time data streaming, more than 400 technical studies and advanced charting tools. For this reason, thinkorswim can be complicated for those not used to navigating an advanced platform.

thinkorswim
Visit thinkorswimSecuredon thinkorswim’s secure site
The Bottom Line: A trading platform with everything a professional trader needs.

  • All TD Ameritrade customers can use thinkorswim for free.
  • Investors can use thinkorswim to trade a variety of assets, including options, futures and forex.
  • You can trade select securities 24 hours per day, five days per week (except holidays).

Who should consider thinkorswim?

If you’re a TD Ameritrade customer, consider using thinkorswim if you’re an active trader or you want to test out investing strategies risk-free. It’s available as a desktop platform or an app for iOS and Android devices.

If you don’t have an account with TD Ameritrade, it might be worth opening one to get access to this powerful trading platform, which includes its paperMoney stock market simulator. The simulator allows you to test trading strategies and monitor progress without putting real money at risk. Because no minimum deposit is required to open an account with TD Ameritrade and all account holders can access thinkorswim for no fee, you have little to lose by giving the platform a spin.

Although thinkorswim provides the data you want in an intuitive and easy-to-use platform, TD Ameritrade charges a high fee of $13.90 if you invest in commission-free exchange traded funds (ETFs) and don’t hold them for at least 30 days. If you’re a frequent ETF trader and want to make regular trades, you might pay more for the privilege through thinkorswim.

thinkorswim fees and features

Current promotions

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Option trading fees
  • $0.00 / trade + $0.65 / contract
Stock trading fees
  • $0.00 per trade
Amount minimum to open account
  • $0
Tradable securities
  • Options
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android
Customer supportPhone, 24/7 live support, Chat, Email, 364 branch locations
Research resources
  • Mutual fund reports

Trading commissions on thinkorswim

As with most online brokers, thinkorswim charges no trading commission for most services, including:

However, some fees are associated with thinkorswim. These include:

  • A $0.65 per contract fee for options trading
  • A $6.95 commission for trading stocks not listed on U.S. exchanges
  • A $25 fee for broker-assisted trades
  • A $5 fee for using the interactive voice-response phone system

Tradable asset classes on thinkorswim

Thinkorswim users can invest in a full array of investment products offered by TD Ameritrade. This includes:

  • U.S. and international stocks
  • Options
  • ETFs, including more than 2,300 commission-free funds
  • Futures
  • Forex

Trading tools on thinkorswim

All the data and charting tools an investor could hope for are available on thinkorswim. When analyzing markets, you’ll have access to more than 400,000 data points from the Federal Reserve. The accessible information covers six continents, which makes it easy to examine economic indicators from around the globe.

With so much data available, robust search features are essential, and thinkorswim delivers. Those who want to track data over time also can generate charts that include data points that span decades.

Traders also can make sure they never miss opportunities that all this data helps them to identify, because thinkorswim allows traders to set rules to trigger orders automatically. So, if you’re unavailable to enter a trade manually, you won’t miss out.

Trade 24 hours per day, 5 days per week

With thinkorswim‘s advanced charting tools and ample available data, investors might find trading opportunities outside of customary trading hours. Fortunately, thinkorswim makes that possible with 24/5 trading.

Thinkorswim’s 24/5 trading covers international markets as well as a list of securities in multiple sectors. Trades made outside of normal business hours become active immediately, which enables experienced investors to react to market moves immediately.

Investor education on thinkorswim

Because a TD Ameritrade account is required for access, thinkorswim users benefit from the robust educational resources that TD Ameritrade provides. This includes:

  • Real-time streaming of quotes
  • Financial news from third-party sources, such as CNBC, as well as market briefings that include commentary from in-house strategists
  • Courses on a wide range of subjects taught by investment coaches, which provide opportunities for new investors and seasoned traders to increase their knowledge
  • In-person educational seminars periodically throughout the year
  • More than 200 instructional videos and webcasts that appeal to investors at all levels

Strengths of thinkorswim

  • Professional level-trading tools, rich data sources: Thinkorswim provides access to advanced charting tools including visuals, Fibonacci tools, and a choice of 20 drawings. You also can use thinkorswim to analyze more than 400,000 economic data points and economic indicators across six continents, build algorithms through thinkScript. You even can access options statistics, such as the Sizzle Index, which allows you to compare current option volume with the five-day average.
  • Easy navigation and support: You can find the information you want quickly through a dedicated search engine. And if you run into trouble when you use the trading platform, a chat feature allows you to text with a trading specialist and even share your screen to get immediate assistance.
  • The paperMoney trading simulator: This stock market simulator is a great option for beginning traders and experienced investors who are more risk-averse and want to see real-world results before putting their hard-earned money to work.
  • 24/5 trading of a wide range of investments: You don’t have to limit your trading to standard market hours.

Drawbacks of thinkorswim

  • Expensive fees for active ETF traders: For traders who take advantage of commission-free ETFs, a $13.90 fee is charged if the fund is held for fewer than 30 days. This can make frequent ETF trading costly.
  • A steep learning curve: Mastering thinkorswim can be difficult for beginning investors who aren’t familiar with professional-level trading tools. A learning center is available, but it might take a lot of time to watch demos and read the training manual to learn how to navigate the platform.

Is thinkorswim safe?

Investing is never risk-free. When you buy stocks, ETFs or other investments, you assume the risk of losing money if the investments perform poorly.

However, the fact that thinkorswim is provided by TD Ameritrade should give you some peace of mind. TD Ameritrade has $1.3 trillion in assets under management and is a well-respected and well-established brokerage company.

TD Ameritrade is a member of the Federal Deposit Insurance Corp. (FDIC) and the Securities Investor Protection Corp. (SIPC), so cash that’s deposited into your account is federally insured against insolvency. And TD Ameritrade’s FINRA BrokerCheck listing attests to the fact that it’s in full compliance with regulatory requirements.

TD Ameritrade also aims to deliver the tightest security in the industry. It even promises to reimburse you for cash or shares lost from your account because of unauthorized activity that occurs through no fault of your own.

Final thoughts on thinkorswim

If you want a full-featured trading platform that provides round-the-clock trading, automatic orders and all the data you could want, thinkorswim is a great choice. The educational information and extensive data library alone make it well worth trying out this professional trading platform — particularly because it’s free to all TD Ameritrade customers.

Fees mentioned in the article are accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here