What's the difference between a Traditional 401(k), a Roth 401(k), a Traditional IRA, and a Roth IRA? And did you know you may be able to use your retirement savings to help buy a house, or even invest in real estate? In this video, Katherine Brough with Seven Gables Real Estate breaks down how each account is taxed, how your tax bracket today and in retirement affects which one saves you more, and some lesser-known ways retirement savings connect to buying a home.
Traditional contributions may provide a tax benefit today, while Roth contributions are made with after-tax money and can provide tax-free qualified withdrawals in retirement. Which strategy actually saves you more depends on your income and tax bracket now versus later, and the video walks through real-world examples of both.
Topics covered
- Roth vs. Traditional. How contributions and withdrawals are taxed in each, and how your current and future tax brackets tilt the decision.
- 401(k) vs. IRA. The differences between an employer-sponsored plan and an individual retirement account, for both the Traditional and Roth versions.
- Borrowing from a 401(k) to buy a house. You may be able to borrow up to $50,000 from a 401(k), depending on your vested balance, any existing loans, and your employer's plan rules. The video covers how 401(k) loans work, borrowing from Roth versus Traditional balances, loan limits and repayment, why you pay interest to your own account, what happens if you leave your job or fail to repay, and the risks of using retirement savings for a down payment.
- Using an IRA for a first home. Certain IRA withdrawals may qualify for a first-time homebuyer exception to the 10% early withdrawal penalty, subject to a $10,000 lifetime limit, although income taxes may still apply depending on the account and the withdrawal.
- Self-directed IRAs and real estate. Some self-directed IRAs can invest directly in real estate, including rental property, and special rules apply.
- REITs. Real estate investment trusts are a way to invest in real estate without buying or managing a rental yourself.
Whether you are in your 20s and just starting to invest, saving for your first home, or working toward financial independence, understanding these accounts helps you plan for both your short-term goals and retirement. If a down payment is the goal, the Orange County affordability calculator on this site turns your income and savings into a price range, and the video on what first-time buyers actually put down shows how much, or how little, that can be.
Which retirement account are you contributing to, Roth or Traditional? And would you ever borrow from your 401(k) to buy a home? If you are thinking about buying in Orange County and want to talk through how your savings fit the plan, reach out — Katherine is happy to help.
Sources named in the video: IRS Retirement Plans and IRS Retirement Topics: Plan Loans (irs.gov), and Investor.gov. The $50,000 401(k) loan ceiling, the 10% early withdrawal penalty, and the $10,000 lifetime first-time homebuyer limit are as stated in the video. Disclaimer: this video is for educational purposes only and is not personalized financial, investment, tax, or legal advice. Retirement account rules, tax treatment, and loan availability vary with individual circumstances and plan provisions; consult a qualified financial or tax professional before making decisions involving retirement funds.