Originally Posted By: supton
Originally Posted By: ArrestMeRedZ
Originally Posted By: supton
My understanding about 401k vs Roth was if you were in a higher tax bracket in retirement then the Roth makes sense--but if you were going to be in a lower one, then just 401k was better. Pay taxes when it's lower.
What this does not take into account is the tax on gains from years of investment. What you put into a Roth or ordinary plan in the first year of a 30-year investment cycle may easily go up 10 times in investment gains before you withdraw. When you take it out of a Roth It's all tax free. It's all fully taxable as regular income when you take it out of a ordinary 401k or IRA. Even capital gains from those accounts are taxed at the higher ordinary income rate.
I see what you are saying, but most any internet advisor advice I've seen doesn't indicate that. I don't know if they assume one only has a certain dollar amount to put forward to savings; and as such, a 401k would be that full amount, but a Roth would be that amount minus their marginal tax rate? thus lowering what would be accumulating.
Everyone's situation is different, but running the numbers I would have been much better off putting as much as possible into the Roth, and rolling from regular to Roth when possible. Don't forget, financial advisors make money based upon the total amount in your account and it doesn't make a hill of beans difference to them if it's taxable or not. With time to grow, I'd prefer $80k in a Roth to $100k in a regular IRA. Even in a low cost index fund, they make more with the larger amount in the tax deferred regular IRA.
I did not believe this until about 2-3 years ago. A buddy of mine whose wife is a accountant and an Enrolled Agent makes him put his 401k money into a Roth 401k. His income puts him into the 28% bracket. His telling me that forced me to do some research.
In my case, with a 20 year career, and small investments for the first 5 years (paying off a divorce), moderate for the next 10 years, and close to max over the last 5 years, I would estimate my contributions and company match were maybe 35% of the total of my current account balance. My tax bracket while working would have to have been almost 3 times what it is now for a regular 401k to have been a better choice. Fortunately or unfortunately, my bracket hasn't changed much in retirement.
Of course, if you don't have enough available funds to contribute enough to get the maximum company match and pay the taxes, that changes the equation in favor of regular over Roth. Always always always contribute enough to get any available matching funds.
