Advertiser Disclosure

Investing

Roth vs. Traditional 401(k): Which is Best?

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.

When it comes to saving for your future, 401(k) plans are a popular option—and for good reason. These retirement plans offer a convenient way to save and grow your money, with tax benefits to boot! If your employer offers a 401(k) plan, especially if they match contributions (hello, free money!), then there’s no question that it’s a great option to consider. A Roth 401(k), however, also comes with its own list of benefits. Here’s what you need to know about both retirement plans before making a choice.

401(k) basics

Not all employers offer 401(k) plans and they will vary by employer. They’re typically offered to employees who meet certain qualifications, such as employment status (e.g. full-time workers may be eligible, but not part-time workers) and length of employment.

Employees can choose to dedicate a portion of their salary (typically a set percentage deducted from each paycheck), up to a certain limit, to be contributed to their 401(k) account. That money is then invested in various types of funds and accounts, which are selected by the employee from the plan’s available options.

Ideally, the funds will grow over the years until they’re withdrawn during retirement. There are penalties for early withdrawal (see chart below), but there are also significant tax benefits if you leave the money in the account until it’s eligible for withdrawal.

401(k) vs Roth 401(k)

Some employers offer two types of 401(k) plans: a traditional 401(k) and a Roth 401(k). The plans are similar in nearly every aspect except for when you pay taxes on the funds you invest.

  • A traditional 401(k) allows you to make contributions on pre-tax income and defer paying taxes on that amount until you withdraw the funds in retirement.
  • A Roth 401(k), on the other hand, requires you to pay taxes on the funds you contribute up front, so that you can withdraw them tax-free in retirement.

Both allow your funds to grow without paying annual taxes (as you would with other investment accounts).

Roth 401(k) vs. Traditional 401(k): 2019 Rules
Roth 401(k)Traditional 401(k)

Contribution limits

$19,000 with an additional $6,000 “catch-up” contribution allowance for those over age 50

$19,000 with an additional $6,000 “catch-up” contribution allowance for those over age 50

Income limits

None

None

Who maintains plan

A provider selected by the employer

A provider selected by the employer

When are contributions taxed

The same year contributions are made

The same year funds are distributed.

Withdrawal penalties

10% penalty, plus taxes on the earnings (not the amount you contributed) if funds are withdrawn before the age of 59 and a half, and before the account is 5 years old. (Exceptions are made for death and disability).

10% penalty, plus applicable taxes on the funds withdrawn before the age of 59 and a half, and before the account is 5 years old. (Exceptions are made for death and disability).

Growth

Tax-free

Tax-deferred

Set-up costs

Set-up and annual fees vary by plan. In some cases, they’re paid for by the employer, while others deduct fees from the plan’s assets.

Set-up and annual fees vary by plan. In some cases, they’re paid for by the employer, while others deduct fees from the plan’s assets.

As you can see in the chart above, there are very few differences between the two 401(k) plans. As few as they may be, however, they can make a big difference in your bottom line.

When a Roth 401(k) makes sense

In general, most experts say it makes the most sense to go with a Roth 401(k) the earlier you are in your career.

“This option is a better fit for earners in a lower current income bracket who expect to be in a higher bracket when it comes time to withdraw the money,” said Elena Dixon, a Financial Advisor and 401(k) and 403(b) retirement plan specialist at Linden Wealth Advisors in New Haven, Conn.

There’s no hard-and-fast way to determine which tax bracket you’ll be in when you retire. However, the further you are from retirement, the more likely your income will increase as you progress in your career. Another factor making it difficult to determine your tax bracket are taxes, which will likely increase over the years.

A Roth 401(k) also makes sense if you like the idea of withdrawing funds tax-free during retirement (since you’ve already paid taxes on those funds). To avoid withdrawal penalties, however, you must be age 59 and a half or older, and have had the account for at least five years. There are exceptions to this rule, such as the account holder’s death or disability.

When a traditional 401(k) makes sense

The beauty of 401(k) plans lies in their ability to “snowball” your funds. With a traditional 401(k),100% of your contributions are invested for maximum snowballing, since the money comes from your pre-tax income. “The gains on that amount can then be reinvested, which amplifies the potential growth of your money,” said Dixon.

Of course, taxes are unavoidable, requiring you to pay taxes in retirement when you withdraw the funds (additional penalties may be assessed if you withdraw funds before age 59 and a half or if the account is less than five years old).

While it’s generally assumed that retirees will be in a lower tax bracket once they enter retirement, others find themselves in higher tax brackets due to income from other sources, such as part-time jobs, consulting work and other investment accounts.

Experts suggest looking at the difference between your marginal tax rate and your effective tax rate when considering your future tax bracket.

The best of both worlds

There is no single, perfect formula to choosing between a Roth 401(k) and a traditional 401(k), which is why it’s a good idea to diversify your retirement savings between the two (if possible).

“In a perfect world, having both a Roth account and a traditional 401(k) would be ideal,” said Dixon. “With everything in finance, diversification, even tax diversification, is a solid way to manage risk.”

The good news is that if your employer offers a Roth 401(k), you can split your contributions between that and a traditional 401(k). If you choose a Roth 401(k), any matching funds your employer provides will automatically be deposited into a traditional 401(k) plan. If your employer doesn’t offer a Roth 401(k), you can instead consider investing funds in a Roth IRA, which offers the same tax benefits.

There are unique cases in which there may be better investment options than investing in either type of 401(k) plan. If your employer offers matching funds in any form, then it’s almost always worth it to invest in their 401(k) up to the matching amount. If, however, they don’t offer to match funds (or if the fees are high), it may be wise to look at other options, including IRAs.

The bottom line on 401(k)s

The primary consideration when choosing between a traditional 401(k) and a Roth 401(k) comes down to when taxes are applied. However, predicting your future financial situation with 100% accuracy is impossible, which is why it’s important to diversify your investments. When all else fails, just be sure to do your research, weigh the pros and cons and enlist the help of a professional if needed.

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.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

Advertiser Disclosure

Investing

J.P. Morgan You Invest 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.

Chances are you’ve heard of J.P. Morgan Chase. It’s one of the major players in the financial space, and it’s long had a brokerage arm in addition to providing global banking services. Now, though, J.P. Morgan is getting into the online brokerage space with You Invest.

You Invest is an online trading platform that allows you to buy and sell individual stocks and exchange-traded funds (ETFs) without the need for a human broker. This review will look at what’s offered and provide you with the information you need to decide if it’s right for you.

You Invest offers a way for you to seamlessly connect your Chase bank account to your brokerage account. Additionally, you end up with access to plenty of educational materials and the ability to understand your total portfolio.

J.P. Morgan You Invest
Visit J.P. MorganSecuredon J.P. Morgan You Invest’s secure site
The bottom line: You Invest offers a fairly standard online brokerage experience with the perks of low-cost trading fees and a wealth of investor education.

  • Pay just $2.95 per trade after receiving 100 free trades.
  • Enjoy a large selection of investments, including stocks, bonds, mutual funds and ETFs.
  • Manage investments according to goals with the Portfolio Builder tool.

Who should consider You Invest

You Invest is ideal for beginning investors, especially those looking for education and assistance building a portfolio that will help them reach their goals. Intermediate and advanced investors also can benefit, but the educational tools and resources are especially helpful for novice investors.

Additionally, it connects to your other Chase accounts, making it easy for you to move money from your bank account to your brokerage account and vice versa. If you already bank with Chase, using You Invest to manage your portfolio might not be a bad choice.

While $2.95 per trade is a low cost, this product might not be the best choice for active traders. For traders who can keep their trade volume low, this can be an excellent brokerage since you receive 100 free trades in the first year after an account is opened — with the opportunity to qualify for more free trades in subsequent years.

J.P. Morgan You Invest fees and features

Current promotions

Up to 100 free trades

Stock trading fees
  • $2.95 per trade
  • $0 per trade for Chase Private Client, Chase Sapphire Banking, J.P. Morgan Private Bank and J.P. Morgan Securities clients
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $75 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
Ease of use
Mobile appiOS, Android
Customer supportPhone, Chat, 5,100 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • Earnings call recordings

Strengths of You Invest

The educational tools and insights provided by You Invest are where this offering shines. They help you find the right mutual funds and stocks, and get you to understand your investing needs.

  • Low trading fees: To start, you get 100 free trades from You Invest. After you use your allotment, trades cost only $2.95. Among online brokers that charge trading fees, this is one of the lowest. If you’re not an active trader, you might be able to avoid paying fees fairly easily. You can get more free trades each year if you use certain Chase banking products, such as Premier Plus Checking.
  • Educational resources: You Invest offers a number of helpful articles about investing, strategy and more. It’s possible for you to learn the basics and then apply them to your portfolio.
  • Portfolio Builder: If you have at least $2,500 in your account, you can take advantage of this tool designed to help you choose the right investments for your portfolio. You’ll receive guidance on putting together a portfolio based on your answers to questions designed to gauge your risk tolerance, investment goals and time horizon.
  • Powerful screening tools: You can use these tools to set parameters and then find assets that fit your requirements. A list of options appears, and when you’re looking at Mutual funds , You Invest also includes Morningstar ratings and analysis of where they might fit into your portfolio.

Drawbacks of You Invest

A review of You Invest wouldn’t be complete without a look at some of the downsides. In many ways, You Invest is a typical online brokerage option. Other than some of the educational and portfolio building tools, there’s not a lot to distinguish this from other brokers.

  • No standalone app: Rather than offering a standalone app, you access You Invest through J.P. Morgan Mobile. Until you get used to it, it can be somewhat disconcerting to navigate to your trading app within the regular app.
  • Limited account types: There are only two account options with You Invest: taxable and IRA. You can get a Joint taxable account as well as an individual account, and there is a Roth option with the IRA. However, if you’re hoping for a custodial account or 529, you won’t find it with You Invest.
  • No managed portfolios: Right now, you won’t find managed portfolios, but they are supposed to be coming in 2019. So if you’re more of a hands-off investor, you might want to wait until there are more options available.
Fees
$2.95 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Up to 100 free trades

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

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

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Cash bonuses are available for new accounts. Bonuses start at $50 if you deposit or transfer $10,000+.

Is You Invest safe?

Any investment comes with the risk of loss. However, You Invest is insured by the SIPC for up to $500,000. Additionally, J.P. Morgan is a member of FINRA. As a result, you’re reasonably protected — especially when you consider that this is a company with more than $1 trillion in assets under management. It’s not likely to fail.

Just make sure you understand your own risk tolerance before you invest. While insurance protects you from failure, you’re not protected from market losses.

Final thoughts

You Invest can be a great option for middle-of-the-road investors who want a little more flexibility in their portfolios but still need some guidance. There are a number of assets to choose from, and the educational tools and resources allow you to build a portfolio based on your long-term goals and expectations.

Depending on your goals, there might be other products that work for you. For those more interested in a hands-off approach, Betterment might be a more suitable choice. You also can make trades for less with a service like Robinhood. However, you might not get the same level of educational tools with Robinhood, and Betterment won’t let you personalize your portfolio to the same degree.

If you want a low-cost, personalized way to invest — learning as you go — and if you’re already a Chase customer, opening a You Invest account might be a good way to move forward.

Open a J.P. Morgan You Invest accountSecured
on J.P. Morgan You Invest’s secure website

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.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

Advertiser Disclosure

Investing

How to Make Money in Stocks

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.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

500 free trades with a qualifying net deposit of $100,000

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

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

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$500
Promotion
New accounts with a deposit of at least $5,000, may be eligible for a cash bonus, which can range from $100 to $2,500 depending on the amount deposited.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

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